In our previous Field Note, Skyline introduced several cognitive biases and explained how they cause poor financial decisions. While research on the financial effects of cognitive biases is still lacking, we can use the Consumer Confidence Index (CCI) and the Michigan Consumer Sentiment Index (MCSI) to compare investor sentiment to real economic conditions.
The CCI and MSCI poll Americans on a monthly basis and ask numerous questions regarding consumer’s attitudes on business climate and the economy. Generally, the two measures track with the general trends of the markets; however, there are periods that display little correlation (e.g. 1984-1986). Periods of inverse relationship among the S&P 500, CCI, and MSCI demonstrate how cognitive biases can get the better of us; framing and recency bias may lead us to believe that current economic conditions will continue indefinitely (i.e. 1991-1995 decreased consumer confidence following a brief bear market), while the bandwagon effect may cause us to adopt the anxiety and fear of others (i.e. the steep, predictive downward trend that occurs circa 2008-2009). Skyline has graphed the S&P 500’s variance (in percent over or under its trend line) and compared it to the CCI and MSCI below. Although causal relationships are purely speculative, pockets of inverse relationships demonstrate illogical investor sentiment.