Dow’s ups and downs fuel fear, anxiety
TEXT OF STORY
Kai Ryssdal: The Dow Jones Industrial Average was up more than 200 points yesterday. It was up/down a hair today. The past week or so have been more hair-raising than anything else. Swings of a couple hundred points in either direction. The general trend has been positive. The blue chips are up 50 percent from their lows back in March. All of which is making our own Rico Gagliano surprisingly anxious. We asked him to figure out why.
RICO GAGLIANO: Last winter was a dark time for my investments. But years of working on Marketplace at least meant I knew what to do as the market plunged: Nothing. You don’t sell at the bottom, right? Problem is, now the market’s coming back. And things aren’t so clear. Is this the top of the market? Is now the time to sell?
JENNIFER LERNER: Fear and anxiety are a natural response to a lack of predictability.
That’s Jennifer Lerner, director of the Harvard Lab for Decision Sciences.
LERNER: When the market shifts and things become less predictable, less knowable, fear and anxiety are more likely to occur.
And not knowing how high the market could rise can be as scary as not knowing how low it will go. Now, that fear can be good, it makes me less likely to take my market gains and bet ’em all on a hand of blackjack. But it can be bad, if it keeps me from taking well-calculated risks.
LERNER: What most of us do is we focus on “This is how much I could gain,” or “This is how much I could lose,” and we’re overly influenced by that, but what we need to do is instead multiply that loss or gain by the probability that it occurs.
In other words, yeah I could lose my retirement fund if the market implodes but how likely is that to happen? There’re actually formulas called “Expected Utility Calculations” you can use to figure this out. Or, you could take the standard investment advice to avoid risk: diversify.
Richard Thayer is at the University of Chicago.
RICHARD THAYER: Stick to a sensible asset allocation, be internationally diversified, and then read the sports section.
Unless you’re a Cleveland Browns fan, in which case that’s not gonna mellow you out at all.
In Los Angeles, I’m Rico Gagliano for Marketplace.
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