Behavioral Finance

Let’s Talk About the Bubble in Catastrophizing

There’s a bubble in catastrophizing.  This is the tendency to always assume the worst.  Which is weird because the worst rarely plays out. In fact, even in worst case scenarios the financial markets have tended to stabilize fairly fast. Larry Swedroe had a good piece today on the trend in catastrophizing everything noting 3 particularly scary instances:

  • From 1973 through 1974, the S&P 500 Index lost a total of 37%. Over the next five years, it returned almost 15% per year. And over 25 years, it returned more than 17% per year.
  • From April 2000 through February 2003, the S&P 500 Index lost an even greater total—more than 41%. Then, from March 2003 through October 2007, the index returned more than 100%, providing an annualized return of more than 16%.
  • From November 2007 through February 2009, the S&P 500 Index lost a still-greater total— more than 46%. Then, from March 2009 through November 2015, the index returned 227%, or more than 19% per year.

There’s a huge bubble in doom saying. I don’t know if it’s the boom/bust cycle of the last 15 years irrationally impacting psychology or what, but these perennial predictors of doom seem to spend a lot more time being wrong than right, but disproportionately hog the airwaves.  It’s probably our tendency towards loss aversion, but despite vast evidence of this bias in the behavioral finance space on this topic¹, we just can’t seem to break free from our obsession with the end of the financial world….

NB – Am I the only one who isn’t too stupid to properly enunciate the word catastrophize?


¹ – Prospect Theory: An Analysis of Decision Under Risk, Kahneman and Tversky