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Myopia in the stock market

We all know that private investors are typically scarred and scared out of owning equities by their aversion to incurring losses. Yet the scale of that aversion is staggering, according to some research recently reported by the Franklin Templeton fund management group.  Its annual survey of investor sentiment allows it to ask investors what they think has happened to the stock market each year, and then compare that perception to the reality.

So for example the proportion of the 1000-investor sample which thought stocks had fallen in 2009 was 66%. Yet the S&P 500 index in that year was actually up 26%. The comparable figures for 2010 were 48% (who thought the market had fallen) and 15% (the actual market rise). More than half the survey also thought stocks had fallen in 2011, when the market in practice was flat.

The fund manager’s theory is that these figures are testament to the behavioural bias which prompts humans to give undue importance to one bad experience – the 2008 crisis, which sent the S&P index down 40% – and ignore more favourable outcomes. Whatever the explanation, the data certainly helps to explain why so much money has flowed out of equity funds into bond funds since the crisis broke, in apparent contradicton to common sense and historical experience.

Written by Jonathan Davis

October 17, 2012 at 3:59 PM