Believe and Be Saved

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

December 2008

Naturally we are not preaching the Good Book here but are suggesting this: do NOT just shrug off a piece of bad news, projection, or opinion simply because it is so bad (in the degree sense and not in the quality of the news, projection, or opinion sense). Choose to believe if it has merits and this just might save you in terms of wealth, health, and well-being.

The reason is that we humans have a tendency to ignore, down play, and be indifferent to perceivably painful or unwelcome messages. For example, if A tells B that B is going to make 50% profit from his stock portfolio tomorrow, B is unlikely to believe such a quick return is possible yet harbors lower resistance to A’s projection of his fortune. On the other hand, if A tells B that B is going to lose 50% on his stock portfolio tomorrow, B is likely to disbelieve MORE and resist the idea MORE. The issue of which opinion of A contains more substance is not the point, and both optimistic and pessimistic opinion could be just as sound or as substandard.

The explanation for such a tendency could be psychological which in turn links to the fact that we like hearing good news more than bad news, even if sometimes the former is known to be untrue, or physiological-neurotic which is linked to the human brain structure. In short, this tendency is almost second nature and we cannot help it.

The foregoing helps explain why (non-linear like) crises tend to catch most people unprepared for them and unaware of them including the current global credit crunch. Yet, in many such instances, there have been warnings and signals here and there, it is just that they remain neglected or ignored by most.

The readers may say that there are literally tens of thousands of such signals at any given time, i.e. not that these signals are being ignored, there are just too many of them to handle. True yet it also seems that people pick and choose signals which confirm a ‘normal’ (linear) trend more than ones which skew a trend non-linearly.

For instance, let’s say there are now 2 separate studies on the USA home prices and prospects. One says another overall drop in prices of 20% while the other cites a 50% drop. Which one do you think people would tend to believe more and resist less, at least intuitively?

But aren’t non-linear events rare occurrences? Technically they should be but then again most seemingly non-linear events which had occurred in the past, counting from the 1970s Oil Crisis, through the 1987 World Stock Crash, the 1990s Japan Real Estate Bubble, the Asian Financial Crisis, and the 2000 High Tech Burst, all the way to the current Global Credit Crunch, which prior to their occurrences were all deemed highly improbable or unpredicted, did occur.

Now, do you still feel that they were really rare events? Say we deem each to have only a 1/1000 chance of happening, for all 6 to occur would be 1/1000 x 1/1000 x 1/1000 x 1/1000 x 1/1000 x 1/1000 = 1/1,000,000,000,000,000,000.

Yet, this popular notion of math may not be the proper way to comprehend the issue i.e. such a way of thinking actually leads us to grossly underestimate the possibility of occurrence of these events. For one, perhaps the chance for all 6 to take place is more like 1/1000 (versus 1/1,000,000,000,000,000,000) as they did not occur all at once. For another, maybe they were not so rare to begin with.

As to what are the better ways, if any? Your humble author has no solid answers here other than to suggest keeping a certain level of humility and controlling one’s excessive confidence i.e. maintaining a level head.  

Also, stop shooting the bad news messenger.  

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

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