What you’ve been feeling: If you were feeling deeply pessimistic about your investments in the spring, even after the market rallied, you were exhibiting signs of what the behavioral economists call “extrapolation bias.” But guess what. If you decided to become a day trader in April when the stock market rebounded, and you’re thrilled with the gains you’ve made, you are under the same effect now.
Keep up with Election 2020
Extrapolation bias occurs when people give added weight to current events in the belief that those events will continue. Stefano Giglio, a professor of finance at the Yale School of Management, conducted surveys of investors as the pandemic began. In February, as the coronavirus was just beginning its spread in the United States, investors expected a 6 percent return this year for the S&P 500. By mid-March, investors were expecting just a 1 percent return, and that expectation stayed there through April — even though stocks had begun to rebound.
“People across the board became more pessimistic,” Professor Giglio said.
Yet new investors who had little experience in investing have found themselves performing like hedge fund stars if they started investing in the spring, Mr. Maguire, of Boston Private, said. Since late March, stocks have generally gone up, although they’ve been more choppy recently. But if those investors think their returns are the result of immense skill and not a bit of good market timing, they could suffer mightily in a market correction.
“I fully intend people to keep doing this, but it could end badly for them,” Mr. Maguire said. “It’s a change in behavior that’s explained by the anticipation of gains, which triggers a dopamine response in the brain.”
Another contributor to anxiety about investing is the availability bias, which means the more you see information repeated, the more you think that information will be true in the long term — without examining other potential outcomes.
With the pandemic, many people could not help but draw lessons from them previous pandemics, said Michael Liersch, head of advice and planning for Wells Fargo’s wealth and investment management division. But, he said, that kind of thinking doesn’t work in the long run, even if it makes us feel better in the moment.