Is the glass half-full or is it half-empty? We have grown up with this question. It is said that an optimist sees the glass half-full, whereas a pessimist sees it otherwise.
However, look at the other way. Instead of just seeing the glass, what would happen if you have to explain about this point on optimism/pessimism to someone? Psychologists have done various experiments on questions similar to this and concluded that the way you present a message can change its interpretation.
Recently, I came across a couple of messages regarding comparison of current levels in the stock market to the one prevailing ten years ago.
Let me reproduce the two messages:
- On January 8 2008, Sensex was at all time high; on January 8 2018, it was at all time high. If you wait long enough, you make money in equities.
- Even over a ten year period, Sensex delivers less than bank fixed deposits
First of all, both the above statements are true and still they evoke very different (actually opposite) reactions from the readers.
Let us look at the numbers:
- 8-January-2008: 20,873.33 – this was all-time high till that day, and for a long time thereafter
- 8-January-2018: 34,352.79 – this was all-time high till that day
Let us go back to the two statements. The first statement gives a positive spin to the whole situation, whereas the second statement presents the negative. Taken in isolation, both the statements have power to influence the thinking and actions of the readers.
The first statement, the positive one, may strengthen one’s belief in equity as an asset class. Combine this with a few more positives such as reduction in interest rates and recent rally in equity markets and investors may be tempted to make an investment without considering the risks.
On the other hand, the second statement is likely to push investors away from equities.
What is the truth?
The way the statements are framed reveals only a partial truth. In the first case, it makes you feel that over a 10-year period, you would make money. The reality is that over this period, Sensex went up by a little more than 5% per year (excluding dividends).
Does this mean that the second statement is true? Yes, the second statement is true, but it conveys that one cannot expect good returns from equity despite high risk. The reality is: one has taken a single period of 10 years. It would make sense for one to look at different 10-year periods (non-overlapping periods, going back as long back as possible). Arriving at a conclusion on the basis of a single period is just not scientific. Incidentally, the meaning of the very word “risk” is that there are likely to be certain periods of very low and even negative returns.
Beware of framing, as it affects behavior – sometimes it could have damaging effect.
Amit Trivedi: These are the author’s personal views. Amit is a leading trainer in the investment markets and is the author of a book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”.
He can be reached at email@example.com.