Afford Anything - Mind Games: How Confidence Shapes our Financial Markets, with Economist Peter Atwater

Episode Date: July 20, 2023

#452: Peter Atwater, an economics professor at The College of William and Mary and author of “The Confidence Map,” joins us to discuss how confidence shapes our financial markets. He explains how The Hunger Games relates to the Lehman Brothers collapse. He describes why you should “Buy Adele and Sell Pharrell.” From the Panic of 1857 to the patterns behind modern media consumption, Peter talks us through the intricate web of behavioral oddities that extend beyond finance. He talks about the “K-shaped recovery” – how different segments of the population are experiencing different economic realities. He touches upon economic, political, and social trends, and the hidden dynamics that shape market behavior and reveal the profound impact of consumer confidence. Our conversation will leave you with a deeper understanding of how behavioral patterns shape the financial landscape – including your investments. Enjoy! For more information, visit the show notes at https://affordanything.com/episode452 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Imagine an X-axis, a horizontal line. That line represents certainty, and the further to the right that you move along that line, the higher your certainty is. Now imagine a Y-axis, a vertical line. The further up you go, the more control you have over a given situation. There are some situations for which we have

a high degree of control, but a very low amount of certainty, like when we're starting a business. There are other situations in which we have a high amount of certainty, but a very low degree of control, like a very secure job with a stable company. Then there are the times that we're in our total comfort zone, high certainty and high control. And there are times when we are panicking and feeling really terrible at our most vulnerable. And that's when we have low certainty and low control. Now, this framework comes

from an economics professor named Peter Atwater, who just wrote a brilliant book called The Confidence Map. And we are going to be speaking with Professor Atwater in today's episode. Welcome to the Afford Anything podcast, the show that understands that you can afford anything. You just can't afford everything. Every choice that you make carries with it a trade-off. And that doesn't just apply to your money. That applies to your time, your focus, your attention to any limited resource that you need to manage. So how do you get better at resource management and at capital allocation? How do you choose to distribute limited means across seemingly unlimited options?

That is what this podcast is here to explore and facilitate. My name is Paula Pant. I am the host of the Afford Anything podcast. And as I mentioned, Peter Atwater, a professor of economics at the College of William and Mary, pioneer in the field of behavioral economics is going to talk to us today about the hidden role of confidence in the choices that we make and how that affects prices, investments, career decisions, how that affects the entire world of economics and investing. Here he is,

economics professor and author of The Confidence Man, Peter Atwater. Hi, Peter. Hey, Paula, how are you? I'm great. How are you doing? I'm doing great. Well, fantastic. Thank you for spending this time with us. Happy to. There are several things I want to talk to you about today. I'd like to discuss the panic of 1857 and what we can learn from that when it comes to crashes that might happen, market crashes that might happen today. I want to talk about the Hunger Games and how it pertains to Lehman Brothers and why the Hunger Games did so well. And on top of all of that, I'd like to discuss. how Adele and Ferell are potentially market signals, as well as the relative performance of a company like Walmart versus a company like LVMH, which produces Louis Vuitton and all kinds of

luxury goods. So it sounds like we're going to wander all over the place. Exactly. This is good. Exactly. And, of course, then there's the broad overarching theme of what do all of those topics have in common? Let's start with the Telegraph and the panic of 1850.

Sure. So I'm a financial crisis nerd. And during the 2008 financial crisis, looked at a whole bunch of them. And what stood out to that single event was that it was completely different from any crisis we'd seen in the United States before. And it had to do everything with SPI. And you read these historical analysis. And that's what the historians all focus on is that versus the one, I think it was 20 years earlier, this one happened in days, maybe weeks compared to weeks and months. And you step back and you say, okay, so what was different? And they quickly point out that, by the way, the telegraph had been developed and introduced in between those two. And so what you start to see with crisis after crisis after crisis is the impact of changing communication technology. So we go from the telegraph to the telephone, to the radio, to television, to the internet, and now social media. And with every one of those, mood is translating into market behavior, an investor response,

faster and faster and faster. And we really witnessed that earlier this year with the bank deposit flood. from Silicon Valley Bank and the regional banks where within hours, banks were losing 10, 20, 50 percent of their deposit base. Right. And so I always tell investors, we need to be very aware that the speed at which impulsive and emotional feelings among investors can move into the markets is like never before. We have yet to have what I think of as a 21st century financial crisis. And if we do, it's going to move very, very quickly. What would a 21st century financial crisis look like?

What I would expect is that combination of social media and online trading tools coming together where there might be an exogenous event or an unexpected piece of data or something happens that. all knees jerk at once and people immediately reach to do the same thing. And I would not surprise me in that moment that you see all of the triggers that are in place for the financial markets be tripped. And so you should expect that the markets would be subject to some closure for some period of time until nerves calm down. Right. Like the algorithmic triggers would be tripped because the,

things are becoming so extreme that safeguards, automatic safeguards get put into place. So that's interesting. What I'm hearing then is that in the 1800s, there may have been fundamentally bad news about a company or about an industry, but because that news was so much slower to travel, people didn't have knee-jerk reactions or at least didn't have those reactions in mass simultaneously. And as a result, crashes were either less frequent or less severe or both? Well, they were, they were less compressed. The frequency of crashes probably isn't much different. You could argue that the changes in regulation since then have reduced the number of crashes in their frequency. But what can happen today is that we all

know the same information at once. And that's the difference between our response. And what it creates as a very powerful feedback loop where panic is visible immediate. You can watch a computer screen as prices plummet and that becomes data that's reinforcing. The price move becomes the news that then triggers continued selling or continued buying. I mean, you could argue that two years ago with the meme stock mania, we saw the same thing in the other direction. Right. Right. Now that information is so much more instantaneous and abundant to everyone.

Does that give the little guy more of a shot? Because the bigger fish no longer have so much of an informational advantage. It may give the little guy an advantage, but I think too often the reach. the retail investor is watching the crowd and tends to be inherently late. Right. And so they're seeing it and all of that information is powerful. But typically the retail investor doesn't act until two-thirds to three-quarters of the move is already done. And then they wait too long to sell. Right.

And so they're part of that exhaustive motion that we tend to see at the peak of manias and in panics. The retail investors sells out late and they buy late. And so they get caught watching the emotion and getting seduced by it. And what I try to recommend to investors is when you see panic, recognize is that it's telling you that the worst is likely to be behind you. That panic is a phenomenon that only happens between the 10-yard line and the goal. Right. And so it's something that if you can look at it objectively, rather than being discouraged

and selling out, you can get excited about a buying opportunity that's likely to be ahead. And don't try to time it. You know, panics are short-lived and exhaustive. It may be severe, it may be terrifying, but it likely won't last too long. And so wait a week, a month, and you're still probably going to be ahead of the game. Right. Does this apply only to individual stock picking or going into specialized assets such as commodities or crypto? Or does this apply even to a person's index fund strategy?

So it applies in all levels, index funds by their nature, tend to be more cushioned, so the mania doesn't get as expressed as intensely in an index fund versus what might be an individual stock. But one of the things I think index fund investors should be particularly sensitive to today, you know, we're talking about this in early July by 2023 is the degree to which there are a handful of largely large cap tech stocks that have been the recipient of all of this enthusiasm in AI that has pushed them to be a much bigger part of that index than they may appreciate. Right, right.

Invidia, Microsoft, Apple, I mean, they're called the Magnificent Seven. I think of them more as the Seven Wonders of the World at this point because their market It caps now dwarf many countries. So for investors today, just be sensitive to the fact that below the surface of your index fund, there's a lot of euphoria concentrated in your index fund's largest positions. Right. Now, when it comes to investor confidence and investor behavior, there seem to be wild swings between gloom and erroneous. rational exuberance, is there ever rational confidence? So I don't think investors are rational or irrational.

I think financial decisions are rationalized that when we make financial decisions, we imagine the future ahead. Right. And based on that imagination, we make choices that make perfect sense. but we fail to take into account a couple of things. One, any time we're talking about the future, it requires imagination. We're not forecasting. We're not projecting.

We're imagining. And so there's a creative element that we need to acknowledge good and bad. The other piece, and I think this is even more important, is our imagination of the future is entirely a reflection on how we feel. And so if I'm in a bad mood, my imagination of the future is likely to be very gloomy. It's going to reflect the hopelessness and vulnerability that I feel now. On the other hand, if I feel invincible, the world ahead looks like a straight highway on a clear day. There's nothing that's going to get in the way. So we need to be very careful not to allow our imagination of the future, which is driven by our own level of

confidence drive our financial decision-making because it's imagination-driven and we get ourselves in trouble at both extremes. We over-invest optimistically at the top and we under-invest at the bottom because we're gloomy. And so I always think step back from your investment decision before you make it and just consider what's what am I imagining as ahead. and to the extent that I am certain, good or bad, chances are I'm deceiving myself, that I should be as open to both possibilities of both good or bad.

And I also say to investors, and many investors laugh, buy things that you think are hopeless. Because chances are, you're probably not alone in those feelings and be less audacious and less daring with things that you're certain are going to go higher. You temper your decision making based on how you feel. What I'm hearing then is that the more certain you feel, the more you should doubt your uncertainty. Don't believe everything you think. Yeah. Yeah. You should look at every investment as having equal sides up or down. And if you can't, that inability is telling you something about your choice.

You've made the point that when people have a particular mood, they look for confirmation bias. They look for things that will reinforce that mood. And so the analogy or the example that really stood out to me was why the Hunger Games did so well. Can you tell us about that? Sure. So I teach a class on confidence and decision making and we look at all sorts of things, particularly in the media. because the media is much more of a mirror of our mood than we often appreciate. Art imitates life?

Art imitates life. And you can think of what you're watching and listening to as a reflection of how you feel. You've made the unconscious choice to partake. If you were to look at the books the teens read, I know this is going to sound like a funny metric to many investors, but it's one of my favorite barometers of how we the crowd feel. Teens are unfiltered. They read what they want. They listen to what they want.

And if you were to step back and look at Harry Potter, the arc of Harry Potter starts in a really positive, magical quality. Right. And then it gets darker and darker and darker. In fact, folks have looked at the films and you can actually see the gradations of color getting blacker and redder. What it does, though, interestingly, is it mirrors consumer confidence down from 2000 into 2005,

2000. If I watched what teens were reading, Harry Potter wasn't dark enough. And so then they moved on to the Twilight series and all of the vampire books that went along with that. And when that wasn't dark enough, they turned to the Hunger Games. And I'm convinced that the reason the Hunger Games came out, the reason it did so well is it came out the weekend Lehman Brothers collapsed, which if you were to look at consumer confidence numbers was the low in confidence in the fall of 2008. It was the perfect book for us in a really bad mood. And so books are one of those things that naturally appeal to us based on how we feel.

Right. And so at precisely the moment that everything felt like the world was falling apart, all right, let's go into a piece of art that also depicts a world in crisis. Yeah, and we do the same thing with music. You talk about Adele and Farrell. Right. Rolling in the Deep. Adel was incredibly popular when we were in a terrible mood. In fact, what I asked my students to pick, you know, what soundtrack would you play for, a movie about breakups, Adela is always at the top of the list. At the other extreme, you have Feral and happy. Right.

And so this very light bubble gummy, you know, very just happy song. If I put those on a chart of the stock market, what you'll see is, as an investor, you should buy Adele and sell Ferell. When we're rolling in the deep and things look hopeless, it gets express. in the markets in the same way with price. And that's a great time to buy, even though it feels counter to what our gut is telling us. So that's interesting. So in terms of some of the various pop culture or social cues, you know, I've heard of

the hemline theory in terms of economic forecasting. When hemlines get longer, that means we're probably headed for a recession. What else? There's the miniskirt, I mean, which was a great indicator. Some look at the skyline index. So those super-talls that we've seen in Midtown are an indicator of extreme confidence among the very wealthy. Skyscraper's are one of those that is right in front of you. The Empire State Building called the top of the crash in the 20s.

The World Trade Center is a similar phenomenon in the late 60s, early 70s. We build these very tall, highly inefficient monuments to ourselves. at peaks in confidence. Music then. Music and books could be another kind of a tongue-in-cheek indicator, but kind of a fun indicator. I don't think it's tongue-in-cheek at all. I think that we ignore those at our plate. And I give you a real life example in the world of politics.

You know, last fall, Liz Truss was prime minister in the UK for all of moments. 45 days, yes. 45 days, less than a head of lettuce. Her ouster, her resignation, marked a major low in confidence. Had you bought the British pound or bought stocks more broadly, you're up considerably. Occupy Wall Street marked a major low in the fall of 2011. So our mood transcends more than the markets. And if we stop to look at what's happening around us and what those events say about how we feel broadly, they're very useful indicators of sentiment.

If a person were to try to do this, if they were to try to gauge the national mood as an economic indicator while they're making investment decisions, what safeguards can they put in place, what can an ordinary individual put in place to make sure that they're not conflating their own mood? with the national mood, because it could be very easy for someone who is personally feeling pessimistic to seek reinforcement of that by cherry-picking data. Sure. So I always tell my students, what you think, what you feel isn't important. Right. Prices are determined by the behavior of the crowd. So it's their mood that matters.

You can use the widely available indices like Gallup or the University of Michigan or conference board measures. I think that you always want to be careful to size whatever you're doing, whatever your strategy, almost like a vineyard. You want vintages of investing. Not, you know, I'm all in this,

I'm all out in that. Recognize that your timing is going to be inherently wrong. So think about investing things over a, a long period of time so that you're not making a knee-jerk reaction. And I would also say fight your gut. The more your gut is telling you what to do or what not to do, the more likely you are to be wrong. We'll come back to this episode after this word from our sponsors. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your

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Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-Y-F-A-I-R.com. Sale ends December 7th. Now, so far, we've been talking about the national mood as though the nation was once monolith. But inside of the nation, there are different pockets of investors who may have very different moods. One thing that you've talked about is looking at Walmart stock versus LVMH stock. Maybe you can elaborate on that for a moment. And what other different pockets of investors should we be aware of or different pockets of not just investors, but pockets of people who may have different attitudes?

Yeah. So we rewind the tape a couple of years. One of the things that I noticed very quickly when COVID hit was within moments, it was a very different experience for individuals based on what they did. If you worked from home, your life quickly regained a sense of certainty and control the pandemic had upended. Your job went on. You were doing it by Zoom or by conference call, but there was a routine to it that was reestablished. If you were supermarket worker, a nurse, a teacher, a truck driver, folks who existed in the real world, as it were, their mood didn't improve. they were subject to an incredibly high level of certainty and powerlessness for a prolonged period of time.

I felt strongly then, and I still do today, that that resulted in a sharp divide in confidence. And I referred to it as the case-shaped recovery, that it wasn't an economic phenomenon as much as it was a confidence phenomenon. Those at the bottom of the economic pile, their confidence wasn't. getting better was getting worse while others' confidence was getting better. And I think that the last three years, we've seen that widen and widen and widen. That if I look at the confidence of those at the top, it's off the charts. And there, I use LVMH, Louis Vuitton, Moit Hennessy, as a great proxy for how those at the top feel. And if you step back and you look at that stock, it is the number one stock in Europe by market cap.

It's worth more than Mercedes. It's worth more than Unilever or Shell BP. You name the company. In fact, four of the top 10 companies in Europe are French luxury goods makers. So we had this small group of companies that service and serve the company. financial elite that is dwarfing everybody else. That says to me that those at the top feel great. They don't know how to spend it fast enough.

The sense of invulnerability that they're experiencing is intense these days. That's not the case for those at the bottom. Washington Post had an article this week on people who are using Buy Now, Pay Later, to make their food purchases. So while a small group of individuals has done exceptionally well in the last three years, there's a much larger population in the United States and across Europe feel like they've been left behind. And the data would support that, both the sentiment data and the economic data. I think it's why you're seeing a lot of unionization efforts and strikes,

because those who have really experienced the hardship of the pandemic, most are feeling enough is enough. So if I look at the relative performance of a Walmart versus a Nordstroms or an LVMH, what I see is that same case-shaped recovery. I also see it in some food stocks. I mean, Pepsi, McDonald's, Dominoes, we're not eating healthy today. And that's a reflection of our low mood. You know, when there's no tomorrow, there's no point in the eating.

like there's a tomorrow. And so that sort of hopelessness transcends our diets as well. Right. Exactly. When you're not thinking about the future, it's quite easy to eat as though today is your last day on the planet. You've made the point about watching the consumption of pizza versus watching the consumption of kale juice. Yeah. Yeah. We are our healthiest when we are most confident. We'll exercise. We'll eat right. We'll be very focused on being our best selves for tomorrow. And when we don't, we're wearing, you know, stretched pants and just anything that masks how poorly we feel. You know, the hemline. The maxi skirt is, it's part of just covering how poorly we feel about ourselves. Right. And what's interesting to me is that that's often

true at the individual level, sometimes if a person is feeling depressed, then they stop exercising, they stop taking care of themselves. And likewise, when a person starts pulling out of that depression, then they start taking greater care of. They clean their house. They go to the gym. They eat healthier. You can see that in terms of an individual mood.

And it's interesting to me that also as an aggregate, you can see that as a mood in different subsets of the population. What's interesting to me about the K-shaped is that, as you describe the case-shaped recovery from COVID, it isn't necessarily a socioeconomic divide. It's a divide based on the lifestyle that we experienced during a peak pandemic. Yeah, it's about our feelings of certainty and control. COVID created a level of vulnerability that was intense. And vulnerability is a big deal to me because when we are a vulnerable,

vulnerable, their scarcity in something that matters to us. It could be financial vulnerability. It could be health vulnerability, education or job or power or identity. And all of those vulnerabilities weigh on us. And they particularly weigh on us when they're stacked one on top of the other. And that stack gets heavy. And sadly, it impacts how we think. We're less smart when we feel vulnerable. We spend a lot of time thinking about confidence as being this highly expressive, you know, stand like Wonder Woman phenomenon. And it's a cognitive.

Power pose. Yeah, the power pose. Yeah. And it's much more about how we think. And when we feel vulnerable, unknowingly, so much of our intellectual bandwidth is being used to try to figure out how do I get out of this. and so it makes us have less available bandwidth for what we're doing on the job

or what we're doing in a relationship and that has a real impact on the choices we make. If a group of people in aggregate are experiencing that sense of powerlessness, that vulnerability, how does that ebb and flow over decades? Are there times when that group due to social or economic

or political circumstances may pull out of that? Is it cyclical or does it tend to be linear and stagnant? So it's cyclical but not in terms of a regular basis. Again, because these vulnerabilities ebb and flow, what matters is when they start to pile up. So I think of the fact that we have sort of three levels of confidence that matter. one is the broad measure of consumer confidence. And I think of that as how do America wake up this morning?

Were we on the right side of the bed or the wrong side of the bed? Then I can look at a group of individuals. It could be inside of a company. It could be a group by race, by gender, by some common characteristic. What's the vulnerability they feel? And then I need to look at circumstantial confidence. what happens when an exogenous event takes place? So let me give you a real example.

May 2020, America feels really bad. Who feels worse? Those that are disadvantaged financially, racially, often by gender. And then we have a spark. We have the killing of George Floyd. So now we have this group, this population who feels worse than the average, there's the sense of stacked inequity. And all it takes is a trigger. We've seen the same thing in France a few weeks ago, the shooting of the young individual.

Suddenly, that spark sets off the spontaneous wave of behavior. And this is something that happens over and over where you have a, group that feels vulnerable, that has a sense of scarcity. If we want to think of the Arab Spring, look at food inflation. And you suddenly see that the Arab Spring happened when food inflation in the Middle East was skyrocketing. And if I can't afford to eat, let alone find food to eat, I'm going to take to the streets. Right.

Well, and the Arab Spring was right around the time of the global Great Recession as well. Yeah. When worldwide we were in probably the toughest economic times of our generation. Yeah, I mean, we think of 9-11 as causing American confidence to fall. But if you look at it through the eyes of those who undertook it, their confidence was incredibly low at that moment in the Middle East. And so you can see that there are significant geopolitical issues. And this impacts policymakers, too. I mean, Russian confidence was collapsing before Russia invaded Crimea in 2014.

And so you could see policymakers too feel the same way that we as individuals do. We'll return to the show in just a moment. So I'm thinking about today's market, right? Today's economy. We've got a situation now where, as of the time that we're recording this, it is July 20, 23. yesterday, the inflation report for June just came out, and the inflation rate has reduced quite a lot. The annual rate is about 3% right now, which is pretty close to our target rate of 2%.

So it looks like there was a lot of liquidity that got flooded into the system during the pandemic. A lot of that excess liquidity has now gotten pulled out of the system and were left with what the system itself without all of that excess liquidity looks like, and it actually looks pretty healthy. There seems to be quite a lot of investor confidence in that regard. At the same time, however, you've got these strikes happening. Just today, I believe, this morning, the Actors Guild, the contract expired, and so it looks like they're going to go on strike. Writers have been on strike for months now, you know, so you've got all of this uncertainty, and among some groups a sense of hopelessness related to AI. And then you've also got the incident in France and then about six

months ago, Iran, we saw the same thing happen. As I'm thinking about what's happening today, you've got on one hand groups that feel uncertain or powerless or vulnerable and technologies that exacerbate that. But on the other hand, you've also got economic data that looks actually fairly robust. How do you square the circle? How do you make sense of what appear on the surface to be conflicting reports? Yeah, so the economic data between unemployment and inflation, which say Main Street should be just joyous. People have jobs. The inflation has come down. Prices at the pump are down 40 percent since last summer. I mean, the economic data is good. that is not translating for many Americans and many individuals globally into their mood.

I think the disconnect is a statement on outlook. So confidence is inherently forward-looking. When I say that I am confident or not confident, I'm speaking about the certainty of the future I imagine, and how prepared and able I am to handle that future ahead. And I think that the data, the sentiment data is saying individuals are not sure about what's coming. And in many ways, you can't blame them because every time you turn around, somebody is reminding us that things are uncertain. That, again, is the reflection of a mood that is widely accepted.

If we were in a good mood, statements about uncertainty would be laughed at. We would go, no, no, I have a good sense of what's coming. So all those ads and headlines about uncertainty are mirroring the fact that people don't have a clear view of what's coming. Economically, politically, socially, some would add the climate. There are a number of abstract dimensions where there's a sense of vulnerability. vulnerability to them. The concern that I have is that many individuals are exaggerating the hopelessness versus the reality. So we talk a lot about overconfidence. Right.

Where I exaggerate the certainty relative to the reality that is likely to be ahead. I think for many individuals, there's this phenomenon of underconfidence. there's a tentativeness and unwillingness to consider that things could get better, that things are better than I'm making them out to be. And I describe this as sort of a phenomenon we experience in an airplane when there's turbulence. We forget that the odds of the plane crashing are very low. Right. I mean, statistically really low.

But in that moment, people who've never prayed before are holding their hands. So we need to be very careful with underconfidence in the same way we are with overconfidence, to not fall into the trap of believing things are more hopeless than they are. And I think socially, that's very difficult today because you have social media, you have traditional media, all reinforcing this sense of uncertainty. and the world is no more nor no less uncertain than it's ever been. What's changed is our outlook. And if we can step back from that, what our outlook is saying is telling us we're not in a good mood.

We're the ones who are uncertain, not the future. But to what extent then does our outlook impact the future? To what extent does it become that self-fulfilling prophecy? Yeah, so there is the risk that our stories and our stories, and our feelings start to translate into action. That gloomy outlook impacts the decision managers making in terms of hiring, or a company is making in terms of increasing prices. And so there is that feedback loop.

And I think that this feedback loop has been going on for a long time, that there is increasing likelihood that we're creating the seeds, We're sowing the seeds for our own self-fulfilled recession. If a recession does come, what will it look like? This is where I'm less concerned about the economic characteristics of what could happen, that I am the social and political aspects. As I said, we have this K in place already. So our starting point in terms of sentiment isn't especially good. and so whether it's a soft or hard landing, I think it's likely that we're going to see much more social activism accompany it.

I think we're getting a taste of that in the business environment with strikes and work stoppages. But I think if sentiment falls, we should realize that they are going to be social and political decisions made that reflect. that we're likely to become more extreme politically. The center will move to one side or the other. And here, I know a lot of political pundits spend a lot of time talking about left versus right. I think the divide that honestly matters most right now is up and down, that where we are most divided is not ideologically, but it is economically. And I can envision a very charismatic leader who can unite those at the bottom, left or right, in opposition to those of the top. The notion of bifurcated outcomes has existed for quite some time.

Were you actually the one who coined the letter K? So I have to give credit to Ivan the K. I've in the K. If you go to Twitter, you'll see in the spring of 2020, there seemed to be this mad rush for letters among economists. It's going to be an L-shaped recovery.

It's never going to get better. It's going to be a U-shaped recovery. It's going to get better, but it's going to take a while. It's going to be a V-shaped recovery. You know, brace yourself. W-shaped. Yeah, yeah. It was going to double dip. Or a j. Yeah. So there was a scramble.

You know, what letters would you like? And I had already been thinking about this divide. In fact, I wrote something called the work for home confidence divide. Not exactly catchy. Yeah. And Ivan McKay put it on Twitter the K-shaped recovery almost as a joke. And I was like, that's it.

That's brilliant. And so I reached out to it and I said, you know, would it be okay if I borrow this? Because it's just that was what I was, the term I was looking for and hadn't found. And he was like, yeah, go for it. And so it's his term that he coined that I, with his grace have used. Wow. I'm right now trying to imagine what a cursive capital Q would look like. Yeah, it was crazy.

I mean, people were just grabbing whatever letter hadn't been taken. Right. With regard to a K-shaped future, if the divide that matters is up and down, the two ends of that K, and that is based on your hope for your own financial future, is there something to break that or will that only become exacerbated over time? And where my mind is going with it right now. And actually, I wrote a paper when I was at Columbia called the future is K-shaped. It was based on your K-shaped theory.

What I brought into it was, you know, with longevity and biohacking, you know, there's a possibility that we may have bifurcated, we already have bifurcated health outcomes, but right now those bifurcated health outcomes don't significantly contribute to longevity. What if in the future that were to happen? And then you had a segment of the population that's living to 150 and then another segment that continues to die at 70 or 80. Do we only become more K-shaped as a society over time? I think that possibility exists. But I would say I don't think it happens until we see some closing of the current enormous gap between the arm and the leg of the K.

What's happened with LVMH and its dominance and its dominance and. terms of market cap suggests that we are reaching a point of invulnerability for those at the very top that is notable. And I think suggests a level of fragility to that population and that population thinks as likely. There's another phenomenon, and these are related. The problem with the case-shaped recovery is it grows so wide that those of the bottom don't believe they can ever get to the top. And so that you have this recurring and reinforcing

sense of hopelessness. And I think we're approaching that point. But with that comes zero-sum thinking. Those at the bottom will quickly identify how those at the top put them there. That when we're vulnerable, we need something to blame. And so I think that there, there's a high likelihood that those at the bottom ultimately start to identify their plight with the actions taken by those at the top, that they somehow enabled my failure. They contributed to it, you know, if not for them. And so that then creates this need for revenge for a counter move where if it won't be given to me, I will take it.

And so I do think that there's a leveling that we're approaching that benefits those at the bottom. And I think we're seeing this in the workforce with workers feeling empowered to strike. And here, the consumer is especially vulnerable. I mean, we're weeks away from a, from a UPS strike. Right. That could quickly create havoc in the delivery of lots of things. the financial elite were able to navigate the pandemic thanks to a delivery system of food and goods and education and all of this technology that enabled work from home to succeed. I don't think many of them appreciate how vulnerable they now are to the backlash of those who were providing it.

Is what you're saying that the K-shaped distribution cannot get too wide because when there is sufficient unrest from the people on the leg of the K, that will create some type of social disruption, which will then cause the gulf of that K to narrow? Yeah. Yeah, I mean, French history would provide a great example. I was just thinking French Revolution, like this sounds like Les Merserables. Yeah. And that is what happens. And it can happen in an orderly fashion. If you look in the 1930s, changes in taxation and changes in benefits. I mean, there are ways of redistribution that do not involve, you know, barricades and people with flags. But given the wide disparity, it is likely that what now look like alligator jaws, you know, start to. to snap close. And that will happen far faster and likely triggered by a relatively insignificant event. I mean, I think we fail to appreciate that social change doesn't require a mammoth exogenous event.

It was a single man who lit himself on fire that triggered the Arab Spring. So we need to realize that it's not the spark, but the dry. the dry timber. The dry tinder that's what creates the environment of radical and dramatic and immediate social change. And to sort of circle back to what we're talking about at the beginning of the conversation, social media and technology will enable social movements to move far faster than I think policymakers more globally anticipate. Right.

Yeah, to go back to that, this isn't 1857. the invention of the telegraph. So word travels quite a bit faster. Does that also mean it dies out faster? Like faster to start, faster to end? Depends on mood. All panics and mania exhaust, and they exhaust quickly. Those are sort of a knee-jerk kind of response.

But if mood remains low, it is likely to manifest in ongoing behaviors. But here's where I think we get things, little wrong. If you look at civil wars, our gut responses to say, well, that made things really bad. In fact, it's the mood before the civil war happens that puts the civil war in motion. Civil wars tend to be an indicator that the worst in sentiment is behind us. We're now acting on that mood and those events tend to take time to play out. Right. Yeah, there was a civil insurrection in Nepal. that took place technically over the span of 10 years, but the last two years, really, the peak years.

And you could see it building over time. So, yeah, you could certainly see everything getting worse, and then it snapped. For the average ordinary investor, what we've covered is that public sentiment, public confidence is incredibly meaningful when it comes to predicting future market behavior. We've also covered that different segments of the public feel differently and that that

divide may not be as simple as left right or even socioeconomic or rich, poor. It might be a divide based on other factors, including the type of occupation that you have, not in a socioeconomic sense, but in a what was your 2020 like sense. Given all of that, what can the average individual, the average investor, do with this information as you're looking at your portfolio ahead and trying to make decisions about how you think and how you take in economic news. Yeah, so I think first of all to remember that we act as we feel, that there are lots of reasons that we give, particularly in financial television these days. You know, there's this economic data or that economic data. And I remind people that if I tell you at 65 degrees, I give you a single piece of economic data,

you now have to decide is that temperature warm or cool. If you decide it's warm, you're going to put on shorts. If you decide it's cool, you're going to grab a sweater. So it's not the data, it's not the economic data earnings, CPI, all of that stuff that's driving what we do. It's our feelings about it. And so don't focus on the numbers as much as focus on the feelings. focus on how do people react to bits of news. When they act all at once and in an extreme way, be careful.

Because crowd behavior tends to be highly emotional and highly impulsive. Don't fall victim to that. Because if you do, you're going to buy at the top and sell at the bottom. Panics and manias. are conditions that only happen at the respective ends of the spectrum. And our confidence is on a trolley track. It goes back and forth and back and forth. And so we appreciate that it's a finite, it's only so far we can go.

And panic is telling us we're approaching one terminus. Manny is telling us we're approaching the other. And those are really useful indicators to avoid making poor choices particularly poor choices that were likely to make in too large a size. So appreciate that you can be smarter than the market by watching the market. And recognizing that what you're seeing on television is simply mirroring back what feels right that day. And not to get caught up in it. Right, because what you watch on television, even if it's not the hunger game,

even if it's the nightly news is still, in some ways, art imitating life. It's art imitating life. Yeah. The media is in the business of selling us what we want to buy. And sometimes we forget that. Well, thank you for spending this time with us. Are there any final thoughts that we haven't discussed that you want to bring up or want to emphasize?

Yeah, I guess I would just go back to the whole question of underconfidence. And to remind individuals that we are as prone to that as we are overconfidence and not to lose sight of the fact that we routinely over-exaggerate the bad that can happen. We catastrophes. And that is a clear sign that we're the ones who aren't confident, who are uncertain, not the future that's ahead. So our sense of hopelessness, the feeling of hopelessness might be greater than the actual reality. Yeah. And we live that, I think, all of us to some degree live that with COVID. The projections of deaths and devastation and we're just extraordinary at its worse. I tell my students, you've survived your worst days of your life so far and you're likely

to as well going forward. Excellent. Well, thank you so much. I enjoyed it, Paula. Thank you. Thank you, Peter. What are three key takeaways that we got from this conversation? Number one, our financial decisions are influenced by how we imagine our future and how we feel about ourselves. I don't think investors are irrational or irrational. I think financial decisions are rationalized that when we make financial decisions, we imagine the future ahead. And based on that imagination, we make choices that make perfect. sense. But we fail to take into account a couple of things. One, anytime we're talking about the

future, it requires imagination. We're not forecasting. We're not projecting. We're imagining. And so there's a creative element that we need to acknowledge good and bad. The other piece, and I think this is even more important, is our imagination of the future is entirely a reflection on how we feel. And so if I'm in a bad mood, my imagination of the future is likely to be very gloomy. It's going to reflect the hopelessness and vulnerability that I feel now. On the other hand, if I feel invincible, the world ahead looks like a straight highway on a clear day.

There's nothing that's going to get in the way. So we need to be very careful not to allow our imagination of the future, which is driven by our own level of confidence, drive our financial decision-making. This can help you understand that some of the factors that influence your decision-making are not necessarily factors you're even conscious of. Your decisions might be influenced by an underlying pervasive sense of either hopelessness or invincibility, under-confidence or over-confidence. And what you may think is a rational choice is actually a rationalized choice, that you believe to be logical, but is actually more emotional than you have allowed yourself to recognize.

So don't believe everything you think. That is key takeaway number one. Key takeaway number two, how we feel impacts our lifestyle choices, which then impacts our financial choices. You can think of what you're watching and listening to as a reflection of how you feel. You've made the unconscious choice to partake. If you were to look at the books the teens read, I know this is going to sound like a funny metric to many investors, but it's one of my favorite barometers of how we the crowd feel. Teens are unfiltered.

They read what they want. They listen to what they want. And if you were to step back and look at Harry Potter, the arc of Harry Potter starts in a really positive magical quality. Right. And then it gets darker and darker and darker. In fact, folks have looked at the films and you can actually see the gradations of color getting blacker and redder. What it does, though, interestingly, is it mirrors consumer confidence down from 2000. to 2005, 2005,

if I watched what teens were reading, Harry Potter wasn't dark enough. And so then they moved on to the Twilight series and all of the vampire books that went along with that. And when that wasn't dark enough,

they turned to the Hunger Games. And I'm convinced that the reason the Hunger Games came out, the reason it did so well is it came out the weekend Lehman Brothers collapsed, which if you were to look at consumer and confidence numbers was the low in confidence in the fall of 2008. It was the perfect book for us in a really bad mood.

And so books are one of those things that naturally appeal to us based on how we feel. Something as seemingly benign as the entertainment, the movies that you watch, right? Harry Potter, that impacts how we think, how we feel, how we perceive. the world and the choices that we make, including the spending choices, the investing choices, that we make accordingly. So in the same way that you are hopefully careful about what foods you consume, you know, you're careful about your nutritional diet, make sure that you are also incredibly careful about your content diet. And that is true not only for your sources of and information, not only for the accounts that you follow on social media, but even for the

movies you watch, the music you listen to. I'm not saying pass up your favorite movies and music. I'm just saying recognize how the tone, the mood, the emotion of what you watch might both reflect how you feel as well as intensify that feeling. And be aware that feeling often translates into action in ways that impact our money. And so that is key takeaway number two. Finally, key takeaway number three, crowd behavior drives the markets. Pay attention to all of the ways in which we try to measure

and quantify how the crowd feels. Because how you feel is not necessarily how the crowd feels, and it is that crowd behavior that influences big, major market factors. I tell my students, you know, what you think, what you feel isn't important. Prices are determined by the behavior of the crowd. So it's their mood that matters. You can use the widely available indices like Gallup or the University of Michigan or

the conference board measures. I think that you always want to be careful to size whatever you're doing, whatever your strategy, almost like a vineyard. You want vintages of investing, not, you know, I'm all in this, I'm all out in that. Recognize that your timing is going to be inherently wrong. So think about investing things over a long period of time so that you're not making a knee-jerk reaction. And I would also say fight your gut. The more your gut is telling you, what to do or what not to do, the more likely you are to be wrong. National sentiment can drive the markets.

And so if you understand how to gauge sentiment, you will be able to make smarter financial decisions. Those are three key takeaways from this conversation with economics professor Peter Atwater, the author of a fantastic book called The Confidence Map. Thank you so much for tuning in. If you enjoyed today's episode, please do three things. Subscribe to the show notes, afford anything.com slash show notes. They are free synopsies of every single episode, including timestamps of some of the most potent moments.

Number two, please open up whatever podcast playing app you are using and hit the follow button so that you don't miss any of our amazing upcoming episodes. And if you're using Stitcher, if you use the Stitcher app, be aware, Stitcher. is shutting down on August 29, 2023. So please download a different app. And make sure you're following us there, my Stitcher friends. Finally, number three,

please leave us a review on your favorite app, unless it's Stitcher, in which case, switch for a different app, and leave us a review there. Because these reviews are incredibly helpful at helping us book fantastic guests. Thank you so much for tuning in. My name is Paula Pant.

You can find me on Instagram at Paula Pant, P-A-U-L-A, P-A-N-T. Thank you so much for being part of this community. And I will catch you in the next episode.