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Volatility in world financial markets may not affect the Australian economy according to Reserve Bank head Glenn Stevens. Courtesy ABC News24.
Just look at the fortunes of our biggest export, iron ore. Its price last week jumped by nearly 20 per cent in a single day, and it was briefly trading 66 per cent higher than last year's lows, taking miners like Fortescue Metals Group for the wild ride along the way.
In such a turbulent world, it's lucky there is a non-stop stream of digital financial news allowing investors to stay on top of the latest trend, right? Surely this would make us better at managing all these risks?
Well, that's not really what economics tells us.
This is a bit awkward to write as a financial journalist, but there is a compelling argument that in volatile times like these, the constant stream of financial news and views can be a curse that leads to worse investment decisions. Here's how.
News that never sleeps
Smart phones, social media, and round-the-clock financial news mean there are now more opportunities than ever for people to keep track of their investments, or follow economic developments.
Banks and wealth managers are keenly aware of this. Expect more apps on smart phones to make it easier to trade shares, or even manage you super (where the banks also take a fee each trade, of course).
However, behavioural economics, which has borrowed from psychology, shows there are a bunch of good reasons why the explosion in financial news – and the ability to act on it instantly – is something investors should treat with care.
Indeed, the more obsessively investors look at information on how their investments are going, the greater the odds of them being spooked into making a dud decision.
Deluge breeds difficulties
AMP Capital chief economist Shane Oliver has long pointed out the growing perils of "too much information" in the age of round-the-clock media. He says this risk is even higher when conditions are volatile.
A note he published last year, which drew on work by US academic Shlomo Benartzi, highlights three good reasons why the deluge of financial news can actually make people worse at managing money.
The more obsessively investors look at information ... the greater the odds of being spooked into a dud decision.
One is that bad news inevitably gets a much bigger run than good news. Tens of billions being wiped off the share market will always get much more publicity – and attract more interest from the public – than a few days of moderate gains.
That's just how the media works, but it also means the stream of news and opinion flooding through news pages, screens and smart phones is often skewed towards negative stories, especially at a time of extra volatility.
The reverse also happened in the late 1990s tech boom, when investors were warned against getting swept up in endless positive stories about start-ups with huge prospects but little revenue.
Anyway, the tendency to emphasise bad news combines with another bias: humans feel the pain of a loss more acutely than the benefit of a gain. It's the idea, proven in research, that we're more unhappy about losing $10 than we are pleased about gaining $10.
Fresh memories burn brighter
A third behavioural quirk is our tendency to overstate the importance of recent events: what they call "recency bias." For example, investors might change their view on a firm's profit outlook based on one monthly statistic even though there is a chance the stats end up being revised at a later date.
Put these traits together at a time when markets are volatile and we're flooded with news and there's a greater risk of investors ditching their strategies.
Keen to minimise losses and under the impression that a market tremor could be something much more serious people are at greater risk of selling their assets when they probably shouldn't, the argument goes.
Studies have also suggested people who have more regular updates on how their investments are going tend to make lower returns because they favour safer assets.
People are too gloomy
Former Reserve Bank governor Ian Macfarlane has previously highlighted a similar issue, but across the entire population. He reckoned the sheer quantity and negativity of much economic news meant people were probably gloomier than they should be about the economy.
It's also true that if you check on your shares daily rather than monthly, you're more likely to find bad news. Over the last two decades the All Ordinaries index has closed higher than the day before 53 per cent of the time, and lower 47 per cent of the time.
However, if you look at the market month by month and factor in dividend payments, the percentage of times where you'll have made a monthly loss is 35 per cent, says Oliver – who, it must noted, works for a big manager of shares. This loss rate gets even smaller if the market is assessed year by year.
Now of course, that's not to say shares are always a safe long-term bet. Statistics about long-term average performance are of little use to someone who has suffered a big drop in the value of their shares when they'll soon need the assets – for instance when they are getting close to retirement.
Even so, behavioural economics makes a good case for trying to filter out the financial noise. Admittedly, this is easier said than done.