What Investors Might Learn From Nuclear Panic

Regardless of how Japan's nuclear accident unfolds, one thing is clear: It's already inflicted mass damage on the psyche of citizens living in countries with nuclear energy -- which is to say, most of the developed world.

The fear of nuclear fallout that Japan must be facing is unspeakable, and it shouldn't be trivialized. But when small boxes of potassium iodide are being hawked on eBay for $5,000 half a world away in the United States, you know we're knee-deep in sheer panic.

The media has spent the better part of last week fanatically calculating the odds of a nuclear accident in the U.S. and vividly imagining the fallout. Maps showing nuclear locations around the U.S. have been plastered on news sites, just in case you suddenly became curious.                   

This isn't surprising. The media specializes in fear. But the most reasonable response to this panic may resemble what Wall Street Journal columnist Matt Ridley pointed out this week:

however high the death toll at Fukushima climbs, it is unlikely to match the casualties in the fossil-fuel industry. In the last year alone, 29 people died in a New Zealand coal mine, 11 on a Gulf oil rig and 27 in a Mexican pipeline explosion. A human-rights activist has estimated that as many as 20,000 people die in Chinese coal mines every year.

You can take this a step further. The most notable nuclear accident, Chernobyl, killed 9,000 people according to official UN estimates (other estimates put it closer to 100,000). Yet in the U.S. alone, an estimated 13,000-24,000 people die every year from the effects of coal-burning power plants. On average, 170 die annually from accidental carbon monoxide poisoning linked to non-automotive appliances. In his book The Science of Fear, Daniel Gardner notes:

People tremble at the sight of a nuclear reactor but shrug at the thought of having an X-ray -- even though X-rays expose them to the radiation they are terrified might leak from a nuclear plant. Stranger still, they pay thousands of dollars for the opportunity to fly somewhere distant, lie on a beach, and soak up the radiation emitted by the sun -- even though the estimated death toll from the Chernobyl meltdown (9,000) is actually quite modest compared to the number of Americans diagnosed with skin cancer each year (more than one million) and the number killed (more than 10,000).

The argument doesn't have to be that nuclear power is safe. That's clearly not always the case. But the safety record of nuclear energy isn't half bad when weighed against the alternatives, let alone our common lifestyle choices.

Why, then, does it cause so much fear?

Paul Slovic began asking that question decades ago. Slovic, who runs the Decision Research institute, has spent his career studying how we judge risk. His research shows that people overestimate risk when a danger has a handful of qualities, including:

  1. Catastrophic potential: Lots of people dying at once, rather than in small numbers over time
  2. Familiarity: A risk that isn't common knowledge.
  3. Understanding: A sense that something isn't well understood by experts.
  4. Personal control: A sense that harm is outside our control.
  5. Voluntariness: Can do harm even when you don't voluntarily put yourself in danger.
  6. Children: Mention the word children, and panic multiplies.
  7. Victim identity: As Stalin said. "One death is a tragedy; 1 million is a statistic."
  8. Origin: Manmade risks are viewed as more dangerous than natural disasters.

The opposite of this list cause people to underestimate risk. When a well-known natural hazard kills a small number of people over time -- say, poor diets or sun exposure -- it's unlikely to cause much hype, even if in total it ends up harming far more people than, say, nuclear accidents.

So what does this have to do with investing?

Many of the characteristics on Slovic's list also fit overhyped risks of investing. Too much focus is placed on investment "risks" that pose little to no threat but are perceived as dangerous because they (1) erase lots of wealth suddenly, rather than slowly over time, (2) aren't understood by experts, and (3) sit outside investors' control. On the other hand, many serious financial risks are ignored because they accrue slowly, are well documented, and in our control.

Here's an example. Consider last year's May 6 Flash Crash and management fees on mutual funds.

The Flash Crash has been the subject of an untold number of fear-based news, SEC investigations, and the force behind hordes of investors fleeing the market. It scared investors clueless. It was fast, furious, and mysterious. It will be given a place in history as an example of market risk. Yet it harmed very few people. The entire ordeal was over in a few minutes. Most didn't learn of the Flash Crash until after the fact and would be better off having never heard about it at all.

Then there are mutual fund fees. Many mutual funds charge annual fees of 2%, 3%, 4%, or more for investment products that are essentially market-tracking index funds. These fees can rob tens, even hundreds, of thousands of dollars out from a fairly modest account over the course of a lifetime. They're a serious risk to your financial health. Yet they're almost never discussed in the media-- certainly not in a fear-striking way -- and overlooked even by investors capable of understanding their wrath.

And how many of us pore obsessively over every market tick, yet rarely think about issues like whether our stocks would be better off in a tax-saving IRA -- something that really matters?

You can go on and on. Just as the remote risk of nuclear harm blinds the very real threat of other dangers, what we tend to worry about in investing is trivial compared with risks that actually merits our attention.

Daniel Gardner starts his book quoting F.D.R.'s famous speech: "Let me assert my firm belief that the only thing we have to fear is fear itself -- nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance."

Look around, and you can see a lot of that in today's nuclear scare -- and investing scares, too.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own any shares mentioned in this article. eBay is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (34)

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  • Report this Comment On March 22, 2011, at 5:39 PM, xetn wrote:

    But nobody thinks about the 40000 traffic deaths each year, and the estimated nearly 200000 annual "accidental" hospital deaths.

  • Report this Comment On March 22, 2011, at 8:02 PM, WhidbeyIsland wrote:

    Somebody put a lot of time and effort into posting the spam for the last two comments. How can I invest in this person?

  • Report this Comment On March 22, 2011, at 8:25 PM, Kiffit wrote:

    This is a very good exposition on the relationship between fear and reason and how fear can distort reason.

    However 'can' is the operative word.

    Sometimes fear is a reasonable and appropriate survival mechanism against real threats.

    The reason that that 20000 coal miners died in China is because health and safety is almost non existent there, and, there are a huge number of miners. That terrible figure could be cut to a fraction of that if the Party made it a priority. It is a discretionary number.

    If there were a Chernobyl type accident in Japan it would cause an unheard of non war catastrophe. Chernobyl was not in a major population center. In Japan, millions of people would never be able to go home, even to recover possessions. Parts of NE Japan would have to be written off completely, forever. And then of course, there would be the casualties, that would keep on coming in for the next 50 to 60 years.

    There are some elements in reactors that have a half life that will keep them dangerous to life for over a hundred thousand years.

    And then of course besides natural disaster, reactors are a very tempting target for terrorists wanting to inflict maximum damage either directly as a result of destroying a reactor, or indirectly by using material stolen from one to use in a weapon of mass destruction. The latter has likely already happened in Russian reactors in the early post-Soviet period.

    Not frightened of reactors and the nuke industry. De dee dee dee dee dee.....whistle, whistle, whistle.....No worries mate..... She'll be right......

  • Report this Comment On March 22, 2011, at 8:34 PM, BruceHBi wrote:

    You can always count on Morgan to bring a fresh perspective to things.

  • Report this Comment On March 22, 2011, at 8:55 PM, ynotc wrote:

    Morgan,

    I am always quick to point out my disagreements with your articles so please accept my congratulations on a sound article.

  • Report this Comment On March 22, 2011, at 8:57 PM, TMFHousel wrote:

    ^ Ha, thank you. I figured I've been controversial enough lately ... wanted to tone it down for this piece. More flame-throwing later this week I promise.

  • Report this Comment On March 23, 2011, at 4:38 PM, Darwood11 wrote:

    Psychologists are well aware of the fact that most of us worry about the wrong things.

    For the same reasons, we'll flush money on a lottery ticket, that has a lower chance of "making me rich" than getting struck by a car while crossing the street.

    The bottom line: that's why many people "buy high" and "sell low." The moral, if there is one, is "use your brain" and "avoid the herd."

  • Report this Comment On March 24, 2011, at 10:49 AM, ETFsRule wrote:

    "But nobody thinks about the 40000 traffic deaths each year, and the estimated nearly 200000 annual "accidental" hospital deaths."

    Are you saying that 200,000 annual deaths are caused by accidents made by the hospital? If so, there is no way that number is correct.

  • Report this Comment On March 25, 2011, at 12:49 PM, buddylee59 wrote:

    Morgan,

    Thanks for the observations. I rarely agree with you, but I always enjoy reading. Congratulations on your award, and keep churning 'em out.

    By the way, the world is not going to stop building nuclear plants, and most solar technology is not feasibly applied unless electricity rates keep increasing, and government subsidies persist.

    I'm bearish on increased government 'investment' in the near term, and bullish long term on the best-run uranium miners and some nuclear infrastructure companies.

    Be greedy when they're fearful, and fearful when they're greedy....did I read that in one of your columns?

    Have a great weekend!

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