Framing a conversation matters. How you say things can make a big difference in how people react to information.
A study done a few years back gave information to doctors concerning a potential surgery. These doctors were fact-based individuals who use science to keep people healthy and alive. They split the doctors into two groups. Both groups were given information regarding the choice of surgery or radiation treatment for a particular cancer.
The information was exactly the same; however, one group got information based on the rate of mortality at certain time intervals, while the other had the same information framed by the rate of survival.
You would think that a group of doctors would be able to see through the framing of the information and that both groups would come up with a consistent opinion. You would be wrong.
Out of 167 doctors, the group that received the information based on mortality chose the surgical option 50 percent of the time. The group that received the information based on survival chose the surgical option 84 percent of the time.
Those reactions are extraordinary to me, and it gives me that “aha!” moment when thinking about investor response to news. The news services have learned to couch their stories in ways that sensationalize the information so you will continue to watch.
Think about this: Each year more people die from airplane parts falling from the sky than from shark bites. More people die from lightning strikes than tornados. More people die from stomach cancer than automobile accidents. When asked to pick between these different acts in a control group, the majority say just the opposite. Shark bites, tornados, and car wrecks make for more sensational news.
A few weeks ago I heard someone in the news say that the stock market had its biggest drop in almost three weeks. When you think about it, that just isn’t much news. Three weeks is a very short period of time that has almost no statistical significance. It’s about as significant as saying that I haven’t eaten any food at all since lunch.
If I told you that this past correction in the Dow Jones Industrial Average is the biggest drop in four years, then that sounds like some bad news. I can understand why people would get nervous. That news must be a big deal. The real story to me is that the stock market has corrections of 10 percent or more, according to a recent Associated Press article, about every 18 months. It is a very normal thing.
What is unusual is that it has been four years since the last one. According to JP Morgan Asset Management, it is the third-longest streak in the past 50 years. If you think about it that way it makes you think, “It’s about time”
I don’t look forward to seeing asset values drop, but these kinds of sell-offs in the past have been very good for the overall health of the markets. So for those of you that are invested for the longer-term, you may want to look at this recent downturn and say to yourselves, “It’s about time!”
Scott Reed is CEO of investment advisory firm Hardy Reed in Tupelo. Contact him at (662) 823-4722 or email@example.com.