The Economy Is Stronger Than You Think

My wife and I got together with friends two weekends ago. The husband works for a startup but has been looking for a new job at a more established and mature business. His wife said, “In this economy, we need something stable.”

I certainly understand the need for stable income. But I was a little confused about what she meant when she said “in this economy.”

I can’t remember the last time I had an open seat next to me on a flight – and it’s not like flights are cheap. There are no discounts to be found at hotels either, but they’re crowded too.

And popular restaurants in most cities are booming despite high prices. February restaurant sales were up 6.3% year over year.

That same weekend, I was at the Hard Rock Hotel & Casino in Hollywood, Florida, for an event. I’ve been there many times before, and it’s usually busy.

But this time, it was more packed than I’d ever seen it. Every bar, restaurant, club and store (most of them very high-end) was mobbed. Many places had lines to get in.

You could hardly find an open slot machine or a seat at a blackjack table anywhere in the casino.

Jobs are plentiful right now, with unemployment hovering near all-time lows. And corporate profits are up – S&P 500 earnings grew 2% in 2023 but are forecast to soar 10% this year and 13% in 2025.

For many people, the higher costs of food, energy and especially housing are a real hardship. But many others are continuing to spend despite higher prices, and that’s what’s helping businesses grow and keeping the jobs picture so robust.

So if the economy is thriving… why doesn’t it feel like it?

I believe it has to do with anchoring bias, a psychological bias toward previous information.

For example, a person may decide they dislike a political candidate because of something they said or did. Going forward, no matter what that politician does, the person will continue to dislike them because of their previous bias – even if the politician does something very positive. (I know a politician doing something positive is very unlikely… but you get the idea.)

This happens all the time in financial markets. Suppose you buy a stock at $50, and then the stock falls to $25 because of a decline in the company’s business. You might continue to believe the stock is worth at least $50 despite the evidence to the contrary.

We’re also seeing anchoring bias in the economy right now when it comes to inflation and interest rates. For over a decade, we had rock-bottom interest rates and barely any inflation. So we got very accustomed to 3% mortgages and prices not moving much.

Then, suddenly, inflation spiked to nearly double digits, making everything in our lives much more expensive and pinching household budgets.

Inflation has since fallen back to 3.2%, which is actually slightly below the long-term average of 3.3%. But due to anchoring bias, it still feels like prices are out of control. We think that burger at our favorite restaurant should still cost $12 rather than the $16 it costs now.

Also, keep in mind that falling inflation doesn’t mean prices have come down. It just means they’re rising more slowly.

Even though I’ve studied anchoring bias in numerous classes on behavioral finance and technical analysis, I still fall into old patterns too.

When filling out my March Madness bracket this year, I picked the top-seeded University of Houston to win the championship. I couldn’t name one player on Houston’s team, but I remembered the great “Phi Slama Jama” Houston teams that featured Clyde Drexler and Hakeem Olajuwon when I was a kid.

(My bracket fell apart when Houston ended up losing in the Sweet Sixteen last week – another sobering lesson for me about the pitfalls of anchoring bias.)

Here are a few ways to get past anchoring bias. These may or may not help you get over the higher-priced burger, but they will definitely make you a better investor and give you a more realistic perspective on the economy.

1. Acknowledge the bias.

The best way to start solving a problem is admitting that there is a problem. When you acknowledge that you may have a bias, that can sometimes instantly help you see things more clearly.

2. Embrace the discomfort.

It doesn’t feel good when we’re presented with information that goes against our thinking. Let’s go back to the example of a political candidate. If you have an opinion about a particular candidate and then you read details that go completely against what you think, your immediate reaction might be to suspect the information is false. After all, no one wants to admit that they’re wrong.

But that’s how we get smarter: by taking in more information and having to think critically about it.

When I’ve had to completely change my opinion on something – especially a view that was deeply entrenched – it was almost like I could feel new synapses forming in my brain.

That’s why I actively seek out perspectives that are different from mine. At a minimum, it helps me understand the other side of the argument – and sometimes it also teaches me something that changes my mind and helps me grow.

This is a very useful task when it comes to investing. You should always be willing to take in new information that will help you decide whether to buy, hold or sell.

This one skill has improved my life dramatically. Choosing not to automatically dismiss things I disagree with has improved my relationships, sharpened my problem-solving abilities and made me a better analyst.

3. Use anchoring to your advantage.

There’s a common negotiating technique that suggests you should never make the first offer. But if you do, that number becomes the anchor. The negotiation starts from your number, not the other person’s. All counteroffers will be viewed in relation to your initial offer.

When you buy a house, you negotiate down from the listed price. Even if the house is overpriced, that listing price becomes the anchor that helps you determine what you’re willing to offer. If the house is listed at $500,000 and you think it’s worth $450,000, you may think, “They’ll never accept an offer 10% lower than the listing price.” So you might offer $460,000 instead.

In This Economy…

Be aware of anchoring bias and how it affects your emotions and decision making. Don’t let the past shape your thoughts on what’s happening right in front of you.

In this economy, you might miss some good investment opportunities.