FEAR AND GREED
FEAR AND GREED
Financial planning, Investment by Robert Lockie
Whenever somebody asks me why the stock market fell in value, I have a simple response. On that day, there were more sellers than buyers. If they ask why there were more sellers than buyers, I respond that there was more fear than greed.
Fear and greed are the two competing emotions which govern the behaviour of market participants and this applies regardless of the economic fundamentals which underpin the long-term performance of any investment. Uncertainty, whether economic, political or stock market, has always been with us and always will be as the future is unknown.
Meanwhile, investors and other market participants are prone to various psychological biases and they must manage these in the context of such a background. The last couple of years remind us that even when the fundamentals look unfavourable, market prices can diverge significantly from this and produce strong returns.
In such circumstances, where substantial segments of the economy have effectively been shut down yet market returns have been positive, investors must have felt something of a conflict between their fear and greed. Failure to manage these forces effectively can have a material long-term impact on the decisions that they make and consequently their long-term financial security. A couple of examples may serve to illustrate this point.
Availability Bias
Availability bias is a phenomenon whereby people base their perception of risk on examples which they can easily recall when a subject is raised. For example, try asking someone how they would view the construction of a nuclear power plant near to their home. Most would recall one or more of the nuclear plant disasters of varying severity such as Fukushima, Chernobyl, Three Mile Island or Windscale.
The prospect of a radioactive leak occurring on the other side of their fence unsurprisingly is something which they prefer to avoid. Although (or maybe because) leaks of radioactive material are uncommon, when they do occur they feature as major news items and therefore attract a lot of attention.
Yet despite this nuclear power stations are generally reliable and produce no emissions of the greenhouse gases to which fossil fuel plants are prone. With the world moving towards greener sources of energy, a focus on such aspects might be thought to favour nuclear over traditional energy sources. However, the principal concern of many over nuclear energy is the safety aspect.
It may therefore come as a surprise to see that even with the fatalities from Fukushima and Chernobyl, as well as those from further upstream in the extraction and processing functions, the death rate from nuclear energy is among the lowest for power generation routes, being comparable with wind.
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