Investors love good news. Why is that bad news for their portfolio?

We can all be guilty of seeking out what we want to hear or ignoring situations that we think may not be good news.

It’s why we have pictures on our desks or walls of things that we associate with good memories, whether that’s family members, holidays, or places that represent significant events from our lives. They make us feel happy when we look at them.

It’s also why we put off going to see the doctor, dentist or bank manager, or put bills we don’t want to open in the drawer and forget about them.

The same logic also applies to investors, who pay a disproportionate amount of attention to already-known positive information when it comes to stocks, and disengage when they encounter less favourable news.

In turn, this selective attention impacts investment engagement and trading activity, potentially exposing investors to overtrading and reducing the likelihood of making sound choices.

This was the focus for a paper I worked on, with Edika Quispe Torreblanca, of the University of Leeds, John Gathergood, of the University of Nottingham, and George Loewenstein, of Carnegie Mellon University. It draws on an analysis of when investors choose to log into their accounts.

The research looked at the concept known as 'attention utility', defined as “the hedonistic pleasure or pain derived purely from paying attention to information”.

In other words, people look at information they already know, but only when it is good news.

This differs to 'news utility', which arises more from gaining fresh information.

How 'attention utility' leads to negative behaviour

The study examined a large dataset of historic and anonymised records from people who used a large stockbroking platform to make trades in a portfolio.

It monitored when they logged in, as well as how investments had performed.

For example, we identified a behavioural trend among people who looked at their investments on a Saturday, when they could see how much money they had made up to the close of play on Friday.

We found that those who received good news on the Saturday, as their holdings had increased in value, were more likely to log in again on Sunday.

That is despite the fact that the market is closed over the weekend, so investors know there will be no change in their holdings from Saturday to Sunday.

Conversely, those who received bad news on Saturday tended not to log in on Sunday because they didn’t want to see it again.

The former is akin to keeping that photograph of your kids on your desk to evoke feelings of happiness. The latter is the equivalent of putting that unwanted bill in the drawer to ignore.

We found that those who logged in and saw bad news made fewer trades, resulting from the fact that they were less likely to log in again.

This suggests that savouring good outcomes – or fearing negative events – is itself a factor in how and why people engage. We should not assume that someone would log in purely to find out a fact, such as how much money they have, as might be expected with news utility.

Another behavioural implication, which was explored in a subsequent paper using the same data, is the idea that even a small amount of bad news can deter people.

If people make an investment which makes money but then falls back slightly at the end, that tiny drop is enough to wipe out all the positive feeling they had about that stock.

People’s behaviour is quite powerfully driven by losses, and this can deter them from making sensible decisions.

Overcoming our aversion to bad news

Even one tiny cockroach in a lovely bowl of cherries renders the whole bowl horrible. With this in mind, it’s generally a good idea not to check an investment portfolio too often, as there will inevitably be periods of small losses, which could put people off investing.

It may be that they should sell an investment, because in the grand scheme of things the loss is not that bad. But if a stock drops in value, people will tend to hang on to it in the hope it will come good. This is the classic disposition effect.

The same sentiment also applies to institutional investors, encouraging them to identify innovative methods to counter the disposition effect.

Firms even have rules to prevent this, insisting people can’t just hold on to their losses - instead they must either sell the stock, or buy more of it, forcing a decision. What they don’t want is procrastination, with investors holding positions hoping that they’ll somehow come good again.

This kind of insight also has implications for future investment activity.

If someone is deciding whether to buy more of an asset or sell it, all that should matter is what they believe will happen in the future. It doesn’t matter if it’s recently gone down in value, especially in the short term.

While our studies focused on investor behaviour, our findings also yielded a wider message about the need for people to engage with finances and confront other difficult issues.

People shouldn’t ignore debt, even if paying attention to it is painful. There might be actions they can take, such as using savings to pay down debt, rather than simply hoping for a fortuitous improvement in their financial situation.

Psychologists see similar patterns in health behaviour, such as putting off seeing the doctor or going for medical tests for fear of bad news, and even for life in general.

Don’t bury your head in the sand in the face of bad news. Face up to it. Doing so could prove to be a sound investment in your future.

Further reading:

Is your credit card nudging you into more debt?

How to stop actively managed funds underperforming

Why are ambitious female founders punished by investors?

The Consistency Trap: How to make better decisions

Neil Stewart is Professor of Behavioural Science and Pro-Dean for Research, Engagement, and Impact at Warwick Business School.

He was named runner-up for the Outstanding Business and Enterprise Impact award at the Economic and Social Research Council's (ESRC) Celebrating Impact Prize for his work on credit card statements nudging borrowers into debt, which saved customers £1.3 billion.

Learn to leverage better behaviour and decision-making in your organisations with the three-day Executive Education programme Behavioural Science in Practice at WBS London at The Shard.

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