This Is Why Taking Risks Terrifies You
How negativity bias impacts your finances and how to overcome it
"Dwelling on the negative simply contributes to its power."
—Shirley MacLaine
Welcome to another installment in my ongoing series called “Money On My Mind,” where I publish articles to help you deal with the psychological aspects of managing money. Check out past editions of the series here.
We continue our exploration of cognitive biases by unpacking the most human bias of all; negativity bias.
Continue reading to learn:
What negativity bias is
Where it comes from
How it warps your perception of risk
How to overcome negativity bias
What is negativity bias?
Negativity bias describes the fact that humans focus more on negative events than positive events. Even if there are many more positive events in your life, you’ll focus on the one negative thing that’s happened recently.
As a writer, I struggle with negativity bias whenever I hit “publish” on a piece of writing. I might get 10 comments or emails from readers telling me how much my writing has positively impacted them, but that anonymous troll telling me how stupid I am sticks with me for the rest of the day.
Negativity bias is like adding motor oil to drinking water.
One gallon of oil can contaminate one million gallons of water, which is equal to 1.5 Olympic size swimming pools.1 Negativity spreads similarly in our minds; it only takes a drop of negativity to contaminate our minds and impact our well-being.
A 1998 paper appropriately titled “Negative information weighs more heavily on the brain” found that the brain’s electrical activity spiked when people were shown negative images compared to positive images.2
Why are we so negative?
A 2001 study titled “Negativity Bias, Negativity Dominance, and Contagion” looked at how negativity bias manifests in our behavior and what might cause this. The simple answer is that there does not appear to be a simple answer as to why we are so prone to negativity. The researcher’s best guess is that it comes down to evolution.
To quote the paper:
“We believe that organisms have evolved to deal with both the most frequent and the most important events in their lives; when frequency and importance are negatively correlated, as we believe is generally the case for negative and positive events, there are likely to be complexities in systems that deal with appraisal or response to negative and positive events.”
Translation: The brain processes frequent but unimportant events (like walking up stairs) differently than infrequent but important events (like whether you’re going to get eaten by a predator.)
Research has shown that negativity bias is present in babies as young as three.3 Whatever the exact reason it occurs, there's little doubt that negativity bias is hardwired into us.
How it impacts your finances
An important question to answer is, “so what?”
We are prone to focus on negative events, but is that such a bad thing? Isn’t being aware of what could go wrong part of sound risk management? Yes, taking all possibilities—including negative ones—is important when making decisions, but focusing too much on positive or negative distorts your decision-making.
A 2018 study titled “Negativity Bias in Attention Allocation” found that investors pay much closer attention to their portfolios when things are going bad than when things are going good.4
In chapter 34 of my book, The Rational Investor, I explain why checking your portfolio too often is bad for your investment returns.
Negativity bias is closely related to another cognitive bias called loss aversion; people hate losing more than they like winning. So, what happens when someone constantly checks their portfolio balance when the stock market is going to hell?
They get scared, and they make stupid decisions like selling at the worst possible time and potentially undoing years of hard work building wealth.
The impacts of negativity bias go beyond investment returns
Since every crucial financial decision involves risk, focusing on the negative outcomes causes you to play it safe too often.
Think about the decision of whether or not you or your kid should go to college. Odds are you’ll focus more on the high cost of tuition and student loan debt and less on the fact that a 4-year degree adds $600,000-$900,000 to career earnings.
Speaking of career earnings, think about how focusing on negative outcomes can hold you back from advancing in your career. If you play it too safe, you’re less likely to speak up in meetings, pitch your boss new ideas, negotiate your salary or apply for a promotion.
The same is true for starting a business. We know two things to be true about business owners.
Most businesses fail
The wealthiest people in society are business owners
Yes, you must weigh the possibility of a business failing. But allowing these risks to prevent you from ever starting a business severely limits what’s possible for your life.
If you let it, negativity bias can cause you to make less money and lower your investment returns, a double whammy on your finances.