It is getting to be too easy to transact. Advances in technology are reducing the amount of effort needed to buy goods and services, transfer cash and sell securities. An updated Apple Pay may even figure out which card gives you the best reward at a given store or restaurant, according to NPR’s Marketplace. For those familiar with behavioral finance, this evolution is worrisome.
A recent shopping experience at Trader Joe’s sheds light on my concern. As the cashier was ringing up my goods, I noticed that the store was now accepting Apple Pay. So, I placed my iPhone above the cash register’s touch screen, scanned my finger, selected pay by credit card and walked out with my groceries. The entire process was far simpler than I can could ever explain. It also took less time than it would have had I reached for my wallet, grabbed a credit card and physically swiped the card. Paying by cash or check would have also taken longer.
I didn’t buy anything on impulse, just bananas, apples and yogurt. Okay, the peanut butter and jelly yogurt was impulsive, but I would have bought a different flavor anyway. (And the PB&J yogurt was surprisingly delicious.) It’s a good thing that I stuck to my shopping list, because when the process is painless, it’s easy to transact—and that’s really bad for a person’s finances (checking accounts, credit cards and portfolios alike).
Consider the Apple Watch. Fidelity and E*Trade have already released apps for the device that integrate with a person’s iPhone. Brokerage startup Robinhood lists “buy and sell stocks” among its Apple Watch app’s features. I expect that it is just a matter of time before other brokerage firms follow suit.
Think about this for a second. An alert pops up on your wrist. You tap a button on your wrist and sell (or perhaps buy). Then you go back to what you were doing with a barely a blink of the eye. No time spent thinking about the actual transaction; just a quick reaction to an alert from your watch.
If transacting by merely touching your wrist sounds convenient, it is—and that’s why it is dangerous! Nobel laureate Daniel Kahneman theorized that our brains operate with two systems. System 1 is reactive and intuitive. System 2 is thoughtful and deliberate. When we pause to consider our actions, we are operating in System 2. Econs, as Richard Thaler likes to call people who always act rationally and in their financial interests, tend to spend more time in System 2.
Whenever you react immediately to an alert on your wrist and then quickly then go back to doing whatever you were doing before the alert, you are operating in System 1. You made a quick decision and moved on. The easier it is to transact, the more likely you are to make financial decisions with System 1 and less likely you are to act like one of Thaler’s econs. Given that numerous studies have shown that humans often make reactive and emotional financial decisions, as opposed to rational decisions aligned with their long-term financial interests, making transacting easier may lead to even more bad decisions.
This is not the fault of technology; it’s how our minds are programmed. We humans evolved to cope with a very different environment than one with smart watches and digital transactions. As such, we need to adapt our behaviors accordingly. A simple, but very effective, step is to take a deep breath before every transaction and ask yourself “why I am about to buy or sell this?” Just doing this should trigger your System 2 and help you make better decisions.
- Behavioral Errors Could Hurt Your Returns – Daniel Kahneman discussed the various behavioral errors that lead to worse portfolio performance.
- The Case for Systematic Decision-Making – Wesley Gray explains why having a systematic approach can prevent System 1-type errors.
- Do You Use Your Smartphone to Trade Stocks and Funds? – Tell us on the AAII.com Discussion Boards.
We’ll get our first look at second-quarter earnings as a group of seven early reporters within the S&P 500 announce their results. Those companies are: Adobe Systems (ADBE) on Tuesday; FedEx Corp. (FDX) and Oracle Corp. (ORCL) on Wednesday; Kroger Co. (KR) and Red Hat (RHT) on Thursday; and CarMax (KMX) and Darden Restaurants (DRI) on Friday.
The Federal Open Market Committee will hold a two-day meeting, starting on Tuesday. The meeting statement will be released at 2 p.m. ET on Wednesday, followed by updated committee member forecasts and a press conference with Fed Chair Janet Yellen at 2:30. A rate hike is not expected to be announced at this meeting. San Francisco president John Williams and Cleveland president Loretta Mester will speak at separate events on Friday.
Elsewhere on the economic calendar, May industrial production and capacity utilization, the June Empire State manufacturing survey and the National Association of Home Builders June housing market index will be released on Monday. Tuesday will feature May housing starts and building permits. The May Consumer Price Index (CPI) and the Philadelphia Fed’s June manufacturing survey will be released on Thursday.
The Treasury Department will auction $7 billion of 30-year inflation-protected securities (TIPS) on Wednesday.
Friday will be a quadruple witching day, meaning both options and futures contracts will expire.
- Building a Balanced Portfolio: An Unconventional Allocation
- The Power of Compounded Growth and Reinvested Dividends
- Calculating Intrinsic Value With the Dividend Growth Model
Optimism plunged to a two-year low as pessimism surged to its highest level in nine months, according to the latest AAII Sentiment Survey. Neutral sentiment continued its streak of unusually high readings.
Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 7.3 percentage points to 20.0%. Optimism was last lower on April 11, 2013 (19.3%). The drop puts bullish sentiment below its historical average of 39.0% for the 14th consecutive week. Optimism is also below 30% for a sixth consecutive week, the longest such streak since a seven-week stretch between January 16 and February 27, 2003.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined by 0.7 percentage points to 47.4%. The minor change keeps neutral sentiment at or above 45% for a record 10th consecutive week. This week is also the 23rd consecutive week with a neutral sentiment reading above its historical average of 31.0%.
Bearish sentiment, expectations that stock prices will fall over the next six months, surged 8.0 percentage points to 32.6%. Pessimism was last higher on October 16, 2014 (33.7%). The jump puts bearish sentiment above its historical average of 30.0% for just the fifth time this year and for the first time since April 2, 2015.
Bullish sentiment readings below 28.6% are unusually low, and unusually low levels of optimism have typically been followed by better-than-average six- and 12-month returns for the S&P 500. Similarly, the S&P 500 has realized better-than-average returns when neutral sentiment is at an unusually high level, as it currently remains. For more information, see my May 21 AAII Investor Update, Unusually High Neutral Sentiment Often Followed by Good Returns. (There is no guarantee, however, that history will repeat.)
It’s worth noting that the S&P 500 declined throughout most of the survey period, before rebounding yesterday. This decline may have contributed to concerns about the stock market having established a short-term top or being close to doing so. In addition to nervousness about the recent price volatility and the possibility of a notable decline in stock prices occurring, some AAII members are also concerned about the pace of economic growth, the impact of the stronger dollar on earnings growth and geopolitical events. Keeping other AAII members encouraged are the ongoing bull market, sustained economic expansion, earnings growth and still-accommodative monetary policy.
This week’s special question asked AAII members what they think about this year’s relatively high level of merger and acquisition (M&A) activity. Responses varied. The largest group of respondents (17%) said the elevated level of activity was a reflection of low interest rates and an attempt to close to deals before rates rise. About 13% of respondents described the deal-making activity as a positive for the market, with an additional 5% saying the mergers reflected improved economic and market conditions. A nearly equal number of respondents said this year’s jump in M&A activity is a sign of a market top, is concerning, or that corporations are sitting on too much cash (8% for each group). Many of those who thought corporations are sitting on too much cash wanted more money returned to shareholders instead. More than 11% of respondents said they do not have an opinion or haven’t given much thought to the higher level of deal-making.
Here is a sampling of the responses:
- “Interest rates remain at historical lows, which makes now a good time to finance acquisitions.”
- “It indicates that stocks may not be overvalued at still low interest rates.”
- “A lack of profitable opportunities is causing firms to consolidate and seek enhanced profitability.”
- “Companies have too much cash…they should buy back stock or declare a special dividend.”
- “I think companies are taking advantage of cheap money because they know it won’t last much longer.”
- “More or less expected…I think the end results could be detrimental to the acquiring company.”
Bullish: 20%, down 7.3 points
Neutral: 47.4%, down 0.7 points
Bearish: 32.6%, up 8.0 points
Bullish: 39.0%
Neutral: 31.0%
Bearish: 30.0%
Local Chapter Meetings
June 4, 2015 Signs of a Sequel Playing Out for the Bond Market
May 28, 2015 Making Buy and Hold Work
May 21, 2015 Unusually High Neutral Sentiment Often Followed by Good Returns
May 14, 2015 Measuring Pain Relative to Gain
