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The "Negative Bias"

During the recent dip in the equity market , the "doomers" were in full bloom as article after article abounded explaining to us all how the dip/correction will be destructive , causing "pain" and how we are now ready to embark into a new "bear" market ...

Ever wonder why they all come out when there is increased volatility , with a wild swing to the downside as their pulpit to warn us all that the market is about to crater.. ? at times its Fascinating to watch.....

I've stated this comment a few times here on SA and in my blog. " Pessimism is intellectually seductive and the arguments always sound smarter, especially when they dovetail with our own worries. " Maybe its time to take a closer look at that ...

Investors are quite fickle. If there's one thing you can pretty much count on from many, it's that things are never really good enough. Many by default seem to focus excessively on the negatives in our lives at all times. Yes how many times have they said "the economy is terrible, how we're in a "recession/depression" or how we're right on the verge of sinking into the abyss that we came close to falling into in 2008. The compulsion by many to focus on the negative seems to be the result of a natural bias of human behavior - negativity basis. Most Psychologists will explain that it can be extremely destructive if it's not understood and dealt with properly.

A few thoughts that I gleaned from a recent report that was presented to me by Pragma Capital.

Negativity bias is the tendency to emphasize and recall negative events relative to positive events. That is, fear of bad events plays a much more substantial role in our thought processes than positive events. It's a natural evolutionary bias - we fear that which can harm us. And when it comes to financial markets and economics we tend to see this bias in spades. Just look at the last 5 years of economic recovery during which negativity seems to have swept over the economic outlook with alarming regularity.

We surely have been in a slow growth , muddle through recovery.. But it's also not the nightmare that the mainstream media and doom and gloomers sometimes imply. In fact, there's a fair amount of good stuff that's gone on in the last 5 years.

The point is, it's a good thing that we often focus on the negatives in our world. That makes us more likely to make improvements, resolve problems and avoid the same problems in the future. But when we analyze the current state of affairs we have to also avoid falling victim to our negativity bias.

An excessive focus on the negatives in our financial markets will generally lead one to fall into the trap of believing that things are actually much worse than they really are. And that can lead to very bad decisions. Instead, it's better to understand this bias and try to analyze the economy and the financial markets with a more balanced and pragmatic perspective. For example I have suggested numerous times to watch "price action" . Also commenting that if I had only one metric to choose to make my decisions it would be EARNINGS ... These are examples of looking at things in a fair and balanced way. That will help you understand the problems we face without falling into the trap of focusing so much on the negatives where many wind up thinking that the end of the world is always around the corner.

This negativity bias is pervasive in the community of naysayers that have held the belief that the next crash is around the corner from S & P 1300 to the present and it has cost them dearly ..

One can "talk" themselves into buying a bunker , or telling us all how & when the market will crater because of THEIR data.. While remarkably, for all to see, Mr Market is using another set of facts and showing them a different result.. a result that they are still disputing.....

Instead, why not be primarily concerned about things within our control. Markets correct, volatility happens. The key takeaway is to stay focused on what is within your ability to manage - portfolio allocation, how much we contribute toward retirement, how much debt we accumulate. Time spent on things beyond our control is wasted.

Entertaining the thoughts of those that are clearly in a negative basis mindset and continue to repeatedly demonstrate that mindset, is also time wasted..