It's March 2009. The economy is as ugly as it's been since the 1930s. The nation's largest banks are on the brink of nationalization. Hundreds of thousands of jobs are vanishing every month. The stock market is at its lowest level since the mid-1990s.
But I'm sitting in a mall in Los Angeles and I can't believe my eyes. The place is packed. It hardly looks different from two years before, when the economy peaked. And people weren't just looking. They were buying. More than that, they looked confident. It was visibly different from the weeks and months prior when even Los Angeles' consumers, practically allergic to not spending money, went into hibernation.
True story: I asked a store clerk whether she noticed a change. "Yes," she said. "I think people just got tired of worrying all the time. They want to get on with it."
That was a really smart observation, I remember thinking. In hindsight it was brilliant -- for several key variables, March 2009 marked the bottom of the Great Recession.
I didn't think about it again until I came across this quote in the book Only Yesterday, describing the recovery from the wretched depression of the early 1920s:
Like an overworked businessman beginning his vacation, the country had had to go through a period of restlessness and irritability, but was finally learning how to relax and amuse itself once more. A sense of disillusionment remained; like the suddenly liberated vacationist, the country felt that it ought to be enjoying itself more than it was, and that life was futile and nothing mattered much. But in the meantime it might as well play -- following the crowd, take up the new toys that were amusing the crowd, go in for the new fads, savor the amusing scandals and trivialities of life. By 1921 the new toys and fads and scandals were forthcoming, and the country seized upon them feverishly.
People grew tired of worrying, in other words. They wanted to get on with it.
When I looked into this more, I realized how common the "sick of worrying" theme occurs during recessions. In 1962, one newspaper pushed that "it's about time you stopped worrying about layoffs and start thinking about security and the future." In 1983, another wrote about a rise in consumer confidence: "The nuclear threat still looms. Reports come in every week of further destruction of forests by acid rain. Unemployment is at a record high. But people seem to be tired of worrying." Then again in 1992: "People are saying, 'I'm tired of this recession,' and they are spending" again, wrote the Dallas Morning News.
It turns out there's more to this than anecdotes. There's a theory in behavioral psychology called the fading affect bias. In simple terms, it states that negative emotions leave our memories much faster than positive ones -- a sort of natural aversion to unpleasant thoughts.
In 1948, psychologist Sam Waldfogel gave a group of participants 85 minutes to write down every event they could remember from the first eight years of their life, and rank them as pleasant, unpleasant, or neutral. Logically, events should have been spread evenly between the three. But they weren't. Pleasant memories outweighed negative ones by almost twofold. People had a distinct positive bias when recalling their past.
And it only grew stronger with time. "For example, as people get older, they rate their childhood as happier," write psychologists Richard Walker and John Skowronski. It's not that people forgot negative events; just that the emotions of the experiences tended to shift. "In one study in which participants recalled positive, negative and neutral autobiographical memories, older adults were more likely than younger adults to reappraise negative events in ways that made the events seem more positive," the pair wrote. Other studies showed the phenomenon scaled cleanly over time. Participants recalled events as less negative after three months, less so after nine months, even less so after two years, three years, four years, and so on.
"I think it's tough to worry for a very long time," Dan Ariely, a behavioral economist at Duke University told me. "It's exhausting. It diminishes the capacity of all kinds of things."
So, what's this mean for your investments? People worry and the economy slows down. Then they get over it and it recovers. Same story again and again. John Maynard Keynes called these shifts animal spirits -- "a spontaneous urge to action rather than inaction." The important thing is that they happen consistently and predictably. You get to choose whether you want to stop worrying before the crowd, or wait and follow the crowd. It's the epitome of being fearful when others are greedy, and greedy when others are fearful. And it may be the single largest factor in determining whether you'll be a successful investor or not.
"If you wait for the robins," Warren Buffett wrote in 2008, "spring will be over." Your choice.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.
