This week’s alternative look at the investment world from the team at 7IM
We’re obsessed with round numbers – and we don’t have a choice.
Some specialists say we’re wired to see them as special because they’re easier to memorise than their uglier counterparts… less mental effort!
We reflect this in our daily lives. We exercise by running 5km, we like to have lunch at 12.30pm, dinner at 7pm, and many of us hate turning ‘The Big’ [40, 50, 60…]!
This is also used to take advantage of us as consumers. That bottle of Pinot Grigio at your local pub costs £11.99, which is not quite twelve pounds. Or that fish and chips at your local chippy for £9.95 — “not even a tenner… bargain!”
So psychologically, round numbers matter.
And we see this also manifest itself in the world of investment.
Take this (non-)event on 8 February that proves just that:
5,000 is a round number and easy on the eye, but does it matter? It’s not indicative of anything, nor is it any more special than the index hitting the number above or below.
But the moment it happened, people anchored on it as a “milestone” – analysts even started forecasting when the S&P 500 might hit 6,000!
At the time of writing, the S&P is at 5,106. No headlines for that less round number, but will it shock you as to how neat and tidy analyst forecasts for the year-end look…?
Source: Yahoo Finance
Our desire to see patterns in the world around us has been well documented. Analysts also know round numbers are easier to memorise (and perhaps, that hitting something specific like “5,163” is a feat of precision beyond even the greatest brains in investment).
But as the data shows, it hardly screams “accuracy” and “consensus”, does it? There is a 1,200-point spread between the lowest and highest forecasts. Eight analysts are forecasting a decline, and six are forecasting growth at the end of the year.
We might be obsessed with round numbers and their associated narratives, but as seductive as they are, they shouldn’t dictate our investment decisions.
See you next week!
