Broker Check

Don’t Let Them Get in Your Head

March 08, 2024

The chart below compares the causes of death to what is most reported in the news1. Two observations stand out:

  1. Heart disease kills almost a third of all Americans but represents less than 3% of media coverage.
  2. Violent deaths (terrorism, homicide, and suicide) comprise more than two-thirds of the media coverage but account for less than 3% of deaths.

One of the most fundamental economic principles is that people are self-interested. We operate our lives and base decisions on what will best serve us and the people we love. Recognizing this principle is critical to understanding the motivations behind decisions by people and corporations.

Within this context, the media comprises for-profit institutions in business to make money. Most of their revenues come from advertising, so they are highly incentivized to attract as many eyeballs and website clicks as possible.

That’s why terrorist attacks get more airtime than heart disease. There are just not enough twists and turns to keep people tuned in when compared to the aftermath of a suicide bomber. Producers at large media companies know about our bias for single events, so they can use this to create narratives that keep viewers hooked to drive advertising dollars.

Recency bias

Reading this article reminded me of a flight in 2014 that encountered severe turbulence on its descent to LaGuardia Airport. Windy days are more the norm than the exception, but as the plane made its way to the gate, I noticed that the woman next to me was in tears and shaking uncontrollably.

After she calmed down, we began talking, and I learned she was just a nervous flyer. She even admitted that the odds of bad things happening were infinitesimally small, but the data provided no comfort because of what she had been watching on the news that week.

A few days prior, Malaysian Airlines Flight 370 disappeared over the Indian Ocean2. She had felt so badly for those families that her kids were the only thought in her mind as we were landing. My initial reaction was how irrational it was for her to panic simply because of what she had been watching on the news. But it didn’t take long to feel like a hypocrite once I remembered that my longstanding refusal to swim in the ocean began after watching Jaws as a kid.

Humans are emotional creatures, and no matter how hard we try at times, feelings get the best of us. It is why airline revenues drop precipitously after plane crashes and movie theaters have so many empty seats following terrorist attacks. Despite these events being incredibly rare, their impact can cause extreme responses.

Few areas of our lives are impacted more by emotions than our wallets. Take Bernie Madoff, who ran the largest Ponzi scheme in history. His clients were primarily institutions and ultra-wealthy families. Most Americans didn’t even know his name before the media coverage, but the size of the fraud and the airtime it received fueled extreme panic.

According to researchers at Cornell University, the aftershock of Madoff's crimes caused $363 billion in withdrawals from investment funds unrelated to him. The withdrawals were so hefty that some investment firms went out of business3.

This happened despite virtually zero impact on most investors and financial markets. He stole a few billion from the $40 trillion in investable assets in the U.S., barely a rounding error, and most of his investors were even made whole years later3. The sad irony is that while these investors sought safety and security, many almost certainly missed the early innings of what became the greatest equity bull market ever.

The bottom line

Evidence clearly suggests that events covered closely by the media can cause outsized responses, but ignoring these over-hyped stories is not the answer. Madoff forced investors to do better due diligence on advisors, and not a single U.S. commercial airline flight has been hijacked since September 11, 20014.

Like most things in life, measured responses tend to be best. The challenge is separating logic from emotion, which is far easier said than done. One effective tactic is to talk to a confidant who is not afraid to challenge you. The process of articulating feelings can often be enough to bring us back on the rails. It’s also better to have a close friend think you are overreacting than risking your financial future.

The bottom line is that the real risk in media hype tends to be the reaction to the event rather than the event itself. Emotions are viruses that infect investment strategies, so keep a cool head the next time some crook steals money or your favored presidential candidate loses.


 

 

Sources

1 https://ourworldindata.org/does-the-news-reflect-what-we-die-from

2 https://en.wikipedia.org/wiki/Malaysia_Airlines_Flight_370

3 https://www.businessinsider.com/bernie-madoff-ponzi-scheme-363-billion-dollar-exodus-investment-funds-2017-7/

4 Bloomberg


Disclosures

This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.