We spill a lot of ink around here (or at least move a lot of pixels around) encouraging people to think and act like long-term investors rather than short-term traders. No matter what’s happening in the market, it’s important to consider how you talk about it — to others and to yourself.
Explanatory style
In his book Learned Optimism, University of Pennsylvania psychologist Martin Seligman writes about the importance of understanding your “explanatory style.” That’s how you tend to explain bad events, and there’s a distinct difference between people who give up easily when times get tough and people who push through.
There are three aspects to a person’s explanatory style: permanence, pervasiveness, and personalization.
Seligman characterizes those who give up easily as pessimists because they tend to describe bad events as permanent (“I’ll never recover from this downturn”), make pervasive/universal statements (“It’s going to be a horrible year in the market”), and personalize/internalize the cause (“I’m a lousy investor”).
He identifies those who persevere as optimists because they tend to describe bad events as temporary (“Periodic downturns, corrections, and even bear markets come with the territory of being an investor”), make specific statements (“The first few days of this year have been rough”), and externalize the cause (“The war in the Middle East seems to be impacting global markets”).
Many applications
Seligman studied everyone from politicians to athletes and found a strong correlation between people’s explanatory style and their results.
In one study, he and a team of researchers combed through some 15,000 sports pages covering two baseball seasons, analyzing the quotes of various players. They found that the teams best able to overcome setbacks or to persist through difficulties were the ones whose players explained their challenges as temporary and cited external issues (“We lost because they made the plays tonight.”). Those who struggled explained their challenges as permanent and cited universal internal issues (“We can’t hit.”).
Is it better to be optimistic?
Seligman’s point was not to turn people into blind optimists, only to help save pessimists from acting on their worst instincts: “When bad events strike,” he wrote, “you don’t have to look at them in their most permanent, pervasive, and personal light, with the crippling results that pessimistic explanatory style entails.”
For investors, the most potentially “crippling results” during downturns usually result from making emotional, fear-based decisions, such as veering off plan.
Seligman’s antidote? Challenge your pessimistic beliefs and ask if they are really true.
Before you act on your most pessimistic investing instincts, it may help to reread the following articles:
How do you find yourself talking about the market these days?
