The good old days are gone: The normalcy bias and procrastinationArticle added by Karl Schilling on February 13, 2013
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Gone are the days of happily reminiscing for a return of the good old days of the past. We have recycled into a global economic trend and investors need to start embracing the way opportunity will present itself in this type of environment. Of course, it will look, feel and be abundantly different. Old trends have become meaningless and provide no benefit for any forethought into smart decisions about money.
Presently, there exists a uniquely positioned psychological dilemma in our financial markets. For private businesses and small cap public entities, the capital markets have come to a standstill. There are no banking opportunities and now the investor side of the equation has all but dried up completely.
The major causative factor in this phenomenon is the normalcy bias. The following best describes the normalcy bias:
"A quirk of the human condition is for the mind to desire normalcy so intensely as to consciously or subconsciously disregard knowledge that is disruptive to a pre-conditioned reality. This phenomenon is an important part of crisis management and market psychology. The consequence of a normalcy bias is that warning signs of a potential crisis go unnoticed or are interpreted optimistically. When a crisis occurs, people are so overwhelmed by events inconsistent with a desired reality they lose their ability to make decisions. Researchers believe when the mind encounters an entirely new experience or event it attempts to match that reality to relevant experiences of the past. If there are no matching experiences the mind enters into a kind of feedback loop resulting in passivity. This lack of action as a response to risk is called negative panic and it culminates in a dangerous inability to act assertively in crisis. In essence, the psyche struggles to come to terms with what is really happening, paralysis follows."
The aforementioned paralysis exists in the form of procrastination, which is always a negative factor for any financial decision making process. One can always measure their loss in both the present and the future based upon procrastination. Nothing good ever comes from procrastination; it is a no-decision which is in itself a very discernible decision.
Investors of all types are suffering this malaise. Once they understand and become aware of it, they can be awakened and the ability to make smart decisions about money will return like fresh meat after a thaw.
We now have many people who are stuck in the paralysis by analysis cycle. This is why so much money is on the sidelines and people believe they want to stay in cash. By treating the symptom, we will not cure the disease. The core of the procrastination is the normalcy bias, which is being promulgated in a continuous state of unawareness.
The initial step in correcting this psychologically driven procrastination cycle is to overcome the fear of change. Just as the normalcy bias overcomes individuals in disaster-based crises, it now exists due to the ineffective awareness of a permanent changing economic environment. Everything old will not be new again. Gone are the days of happily reminiscing for a return of the good old days of the past. We have recycled into a global economic trend and investors need to start embracing the way opportunity will present itself in this type of environment. Of course, it will look, feel and be abundantly different. Old trends have become meaningless and provide no benefit for any forethought into smart decisions about money.
Not only do investors have to make this leap, but investment advisors, financial planners, family and business advisors such as CPAs all need to make the leap as well. To sit around and wait until things return to normal is a sure-fire failure-driven approach.
The second step, once fear is lifted, is to practice a counter-intuitive approach to investment observation. Plain vanilla investment approaches will not keep you above water in the present financial environment. The need to embrace alternative investment opportunities is paramount to financial survival. Understanding the motivation of Wall Street institutions and their direct connection with the government's impact on the economy becomes more necessary than ever before. Your investment success is now mandated upon several additional factors, including geo-political factors that impact the entire universe of industries and investment sectors. How taxation, regulation and government oversight impact the entire industrial universe has to be taken into account when looking at any single business entity within that specific universe.
These are big changes and they are difficult adjustments for investors and consumers alike. By embracing these changes and fearlessly diving into the new financial marketplace, you can master the oncoming surge of great opportunity and successfully overcome all obstacles in making smart decisions about money. What you cannot afford is the infinite losses assured through procrastination.
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