EMT and the Sabertooth Syndrome

EMT and the Sabertooth Syndrome

We thought we’d take a break from the scary market action of the past week and talk about EMT.  And no, that doesn’t stand for Emergency Medical Technician, notwithstanding any heart palpitations you may be feeling.  The EMT we’re going to discuss stands for Error Management Theory.  EMT is one theory that helps explain the emergence of cognitive biases, including the well-documented propensity of human beings to put more attention on bad news than good.  One set of researchers noted, “We have found bad to be stronger than good in a disappointingly relentless pattern . . . this difference may be one of the most basic and far-reaching psychological principles.” *

Error Management Theory explains this negative attention bias in terms of relative risks and rewards and the evolutionary pressures they can create. Specifically, EMT says that when we’re forced to make decisions in the face of uncertainty, there are two ways to make a mistake: false positives, deciding that a risk exists when it doesn’t, and false negatives, deciding that a risk doesn’t exist when it does.  If the cost of false negatives is higher than the cost of false positives, evolutionary pressures will tend to bias us toward focusing more on the negative than the positive.

We have lived in modern societies with complex economies and financial markets for the blink of an eye compared to the millions of years of evolution that made us who we are. During much of that time (42 million years, more or less), our ancestors had to decide every day as they left their caves whether or not there would be a sabertooth tiger waiting for them outside.  Whatever the real probability, the cost of assuming the tiger wasn’t there when it was greatly exceeded the cost of assuming it was there every time, even if that was only true one time in a thousand.  Thus, a bias toward the negative kept our ancestors alive and left us with a cognitive inheritance that is more appropriate to a world filled with tigers than one filled with bulls and bears.

As we write this, the Dow is trading at a level we last saw in November, less than a year ago.  Our sabertooth-molded brains, however, don’t care about the amazing rise that preceded recent declines, nor the fact that we’ve simply returned to where we were nine months ago.  Instead, we’re evolved to avoid that “false negative” of assuming that our financial world isn’t coming to an end, when it just might be.

In the end, it’s better by far to turn off the TV and walk the dog.  And if you must check in with the cable news networks, at least stick to CNN, which we’ve noted for its measured approach during the recent rise in volatility.  Then again, maybe you should just walk the dog.

Have a great weekend!

The Yeske Buie Team

*Baumeister, R. F., Bratslavsky, E., Finkenauer, C., & Vohs, K. D. (2001).
Bad is stronger than good. Review of General Psychology, 5, 323–370.

Sabertooth Syndrome

Dave Yeske