Anchoring, Negativity, Popularity, and Dow 5000

A wise and good friend recently commented that he did not read any blogs.  None!

He knows that I have a blog, and asked me if there were any (other than my own) that I would recommend.  That is a topic worth considering, and I shall return to it.  Meanwhile, I invite comment.  The problem, of course, is that there is too much information.  Those of us who read financial commentary all of the time are accustomed to absorbing many disparate sources and filtering the results.

Most readers cannot or will not do that, so what should I recommend?  My friend wants a (very) few sources that he can read like a newspaper.

What Not to Do

Financial media, whether televised, print, or pixel, have incentives that are not aligned with investors.  I realize that the readership of "A Dash" is sophisticated and includes many colleagues who are investment advisors.  For a moment I invite you to pretend that you know nothing about the markets and tuned into CNBC today for the first time.  Your TV dial strays to CNBC and you see a guest who says the following:

“The Dow 5,000 piece is very likely—that’s not
even the extreme low,” Hefty told CNBC. “It only takes a few hedge funds
to get that margin call."

"When they start to sell—and the fact that everyone’s
on pins and needles—that’s where the freefall starts to take place,
like oil back in 2008," he said.

This was actually a re-run from last week.  The Dow 5000 piece got a lot of buzz and good ratings, so CNBC went with it again.  They also did one of their silly "polls" of viewers.  These are not scientific, of course, as they always note.  The polls are popular methods of getting a lot of page views for the web site.  The results tell you more about the viewers (and those bothering to vote) than any real information.

The poll asked respondents to choose between Dow 12000 and Dow 5000.  The Dow was at (approximately) 10500 at the time.  This type of bet can be great fun if it is fair and balanced.  If the Dow is at 10500, you bet 11 versus 10 or 12 versus 9 — a balanced choice, bull versus bear.

The Dow 5000 question is intentionally provocative and biased.  Here's why.

Anchoring

There is a well-known behavioral psychology effect known as "anchoring."  If you start an audience with an idea — even a randomly chosen number — that number has a powerful effect on their estimates of reality.  It applies even in extreme cases.  A favorite example invited respondents to state when Einstein first visited the United States.  Several "anchors" were introduced including 1215, 1905, 1930, and 1992.  The extreme anchors attracted an anchoring effect equal to the more reasonable choices.  (from Heuristics and Biases, Gilovich, et. al.)  There are other good anchoring examples in the Wiki explanation, but I want to emphasize that the extreme and biased posing of the question.

And what of the CNBC viewer response?  As of my most recent check, 40% of respondents chose Dow 5000.

This may be an accurate reflection of the online community — a mindset that is ultra-bearish, highly political, anti-government, anti-Obama, and generally sour about everything.  It has little to do with rational investment decision-making.  Briefly put, the rational investor is politically agnostic and always looks for the best opportunities.  He/she is opportunistic, looking to buy when others are making foolish mistakes.

The CNBC spot does not help investors, but it might help their ratings.

Anchoring on Seeking Alpha

Regular readers know that I contribute to Seeking Alpha and find it to be a valuable source  in my own research.  My editor has made many valuable suggestions to improve my work.  Used properly, the site is an extremely valuable resource.  You can select certain people to "follow."  These can be writers or readers who comment regularly.  Everyone can get a thumbs up or thumbs down on comments.  When I notice intelligent reader comments, I often choose to "follow" that reader, leading me to other good articles.

Here is what typically happens.  Today there is a thoughtful article from a source with great credentials.  The author actually uses data to support arguments.  There is none of the profanity that seems so popular in online articles.  He is restrained and thoughtful.  As it happens, he arrives at a bullish conclusion.

The result?  The article becomes one of the most popular on Seeking Alpha, mostly because it is a target for the bearish community.  There are over 200 comments.  The article was read, no doubt, by several thousand readers.  Meanwhile, the comments are overwhelmingly bearish.  Here is an example from someone who regularly makes lightweight comments with no reasoning or evidence in support:

This guy is a flat out crazy
cheerleader. Someone get him a job on CNBC.

This "insightful" observation had 56 thumbs up and ten thumbs down.  You can check other entries to see the trend.

Does this make a difference?  I think that it does for the rookie online investor.  The behavioral psychology evidence is pretty clear.  No matter how stupid the comments are, no matter how few people are voting with the thumbs, it has an effect.

Investment Conclusion

There are many sentiment indicators and everyone wants to be a contrarian.  My own read on sentiment relates to what I hear from individual investors.  Most of them are paralyzed by fear.

Financial media of all types contribute to that fear.  The investor is not well-served.

Meanwhile, if I had to recommend a single investment blog to my friend, which should I choose?



You may also like

15 comments

  • Mike C May 17, 2010  

    Meanwhile, if I had to recommend a single investment blog to my friend, which should I choose?
    David Merkel at Aleph Blog. For my money, he brings the most balanced perspective out there to a variety of topics and his scope of knowledge across stock, fixed income, economics is both deep and broad.
    Second vote would be Random Roger. In my view, way, way, way too many people are obsessed with figuring exactly every last detail how the future will unfold and the truth is I don’t know, you don’t know, nobody knows but none of that matters to how to construct and manage a long-term portfolio and he does a great job of showing how one can manage a portfolio without getting paralyzed by the daily noise and gyrations.

  • vasra May 18, 2010  

    One blog?
    Bespoke
    Not too much stuff, as you friend doesn’t read that much blogs.
    Also, timely, useful and with the big picture in mind – skipping out the politics, fear rhetorics and noise.

  • Tamas May 18, 2010  

    Recommending a single investment blog is like recommending a single investment. All is dependent on the persons risk tolerance, investment goals, personality, etc…
    With this in mind, I would be split between Traderfeed for a more short-term trading style with plenty of self-development material supported by solid psychological, behavioral and quantitative background. The other pick would be Stocktwits, which is more like a free marketplace of investment ideas (caveat emptor cannot be emphasised enough though)

  • keithpiccirillo May 18, 2010  

    I like Humble Student of The Markets the best….it has a top notch blogger list that I select from (including yours) as well.
    Anchoring has a close cousin named confirmation bias, yet another peccadillo.

  • mike May 18, 2010  

    My favorites are Random Roger (Nusbaum), Richard Shaw (QVM Group), Jeffrey Saut (Raymond James), and Eddy Elfenbein at CrossingWallStreet.com.
    All are level-headed and objective, speak plainly, and are not given to tainting their investment advice with political biases.

  • Mark T May 18, 2010  

    also incidents where the blogger themeselves become “captured” by the commenters and lose balance (usually to the bear side). Just read the article on Seeking Alpha, noted that the frequent comment posters are almost all bearish (and of the ” we are bearish because we are so, so much cleverer than you” type) Interesting though that one high frequency guy (buzzer) seems to be trying to make your point that just because they are all negative doesn’t mean they are right. (Bit like the global warming consensus?)

  • tom brakke May 18, 2010  

    Never one. You constantly need to triangulate, and to force yourself to read points of view other than your own and fresh perspectives.
    A nice start on a recommended list in the responses to date, though, if you include “a dash.”

  • Mr. Bear May 18, 2010  

    You are an idiot. You are such a cheerleader, you should be hired for CNBC.

  • Paul Nunes May 18, 2010  

    Mr. Bear your opinion is worthless (in my humble opinion). seriously; no need for that; don’t read then. Roger; your links are more than adequate; although i recommend the sites real MOney Silver (long term subscriber) and Z man’s Alpha if you are interested in the energy markets. Dan Fitzpatrick’s Stock Market Mentor useful also; these sites all cost money but worth it.

  • Paul Nunes May 18, 2010  

    this is a good blog. Dave Merkel’s Aleph Blog plus the tech insider link on Roger’s list

  • Paul May 18, 2010  

    funny

  • piefarmer May 19, 2010  

    Jeff,
    Sadly, I think the financial media learned these tricks from the general media. Running polls as news is an old favorite of today’s lazy “journalists”.
    Also, I could not get the link to work for the Seeking Alpha story about stocks poised for a big rally. Can you check it?
    Thanks as always.

  • heywally May 19, 2010  

    I mostly don’t look at any of the mainstream ‘business’ media anymore because their revenue is anchored to advertising, which is much more profitable with ‘negative’ and easy to digest reporting. The Poll thing is a way to prove that people are still watching and garner viewer loyalty (I guess). It all feels like part of the dumbing down …
    The economic system has always been a big confidence game and all of the media and constant communication is a real negative when things turn South. Try finding the closest thing to ‘the truth’ now ….
    There’s several shorter term trading sites I like that might not be relevant here but I do like Bespoke (and ‘dash of …’).
    My main goal at this point is to bloat out (most) everything and just follow price.

  • Paul Novell May 22, 2010  

    One blog? I like Absolute Returns. They’re a content curator, not a blog per say. Its how I found out about Dash…