The Business of Fear: "Bear Porn" and Finfluence

I’ve taken a bit of a break from FinTwit for a week or so, depending on when the muses call me back/I get bored enough to start posting again. I tend to go through these cycles, often triggered by one of two reasons:

1) Drama/”politics” avoidance - As noted by the ever-salient @NotQuiteMidlife to me before, the reason egos tend to be so large on financial social media is precisely because the stakes are so small. While many in the asset management industry use financial Twitter both as a learning and a marketing tool, in general being wrong or publishing extraordinarily terrible takes has minimal cost, especially if you’re anonymous (as I’ve talked about before, the liar’s poker of social media). This tends to be an ever-present minefield, especially for a “public” person account (aka using your real name) - you have much to lose from engaging, while your anonymous opponent does not.

2) Mental health/threats/miscellanea - I’ve noted publicly that in April 2021, I received multiple ambiguous and unambiguous death threats, sent from ProtonMail accounts to my personal email address. This sounds fictional because it’s just so far out of the normal Overton window of discourse — sending death threats to a marginally popular influencer in a Twitter niche seems insane, but is a common refrain from many women I’ve discussed this with (who, in cases, have shared it publicly as well). The amount of toxicity, especially in volatile periods, tends to be high. There’s a notable cost of being an influencer/public persona on mental health, and my hunch it has to do with the parasociality of it - I can receive tens to hundreds of messages per day, and in the beginning I responded to each one carefully. Now I barely respond to any (and it isn’t out of haughtiness - I have neither the time nor the energy).

I do find value in interacting on Twitter, and there’s some amazing people (I will not use the word accounts - the amazingness comes from the people, not the account) who have taught me immense amounts. It’s undeniable that when I started on Twitter in October 2020, my takes were fairly bad, but the speed of level of interaction taught me way faster than I could ever learn otherwise, especially outside a trading desk position.

That said, this isn’t some philosophic waxing on my own experiences (although I love to do that). This is a segue into an interesting phenomenon in financial media — the bearposter.

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One of the most interesting phenomena to me is the prevalence of bearish takes and doomsayers you will find in popular financial media. Most folks call it “bear porn”:

HOZ @MFHoz

This game sells you the illusion that the market is connected to the economy, but in reality it is not. They want as many people on the wrong side before they pull the plug. Satanism.

Perhaps the most infamous of doomposters in financial media is the Boogeyman called ZeroHedge, which many have accused of being tied to Russian intelligence services (aka an actual psy-op):

zerohedge @zerohedge

The problem: consumers hear inflation is "transitory" and are about to stop buying anything waiting for lower prices, as record low spending intensions show. But if inflation isn't transitory, there will be an epic buying spree to lock in $ purch. power, leading to hyperinflation

In many cases, bearish posting continues not for days or months, but years. The cause of an impending market decline always changes, but the sentiment behind it does not — the bearish thesis tends to revolve around themes of fragility, unbridled fiscal spending, international relations and “black swan” events, etc. In the aftermath of the Great Recession, one of the most common refrains was the idea of hyperinflation — due to the expansion of the Federal Reserve balance sheet coupled with stimulus and other forms of increased government spending, the purchasing power of the dollar would be decimated, and we’d become Weimar Germany. Never mind of course the myriad of later studies which indicated, if anything, quantitative easing had a mildly disinflationary effect. Or the real analysis of metrics like the Consumer Price Index (CPI) which showed less inflation from about 2009 to 2020 than the period before:

Source: https://www.statista.com/statistics/191077/inflation-rate-in-the-usa-since-1990/

Interestingly, belief in bearishness, or we can call it “bearism” seems to follow nearly identical evolution to the same psychological journey noted by Leon Festinger in his seminal book on doomsday cults, “When Prophecy Fails: A Social and Psychological Study of a Modern Group That Predicted the Destruction of the World”. I’ve previously noted you see almost identical behavior from those invested in the meme stock narratives of Gamestop and AMC.

In both cases the key features tend to be obsession with dates/catalyst events, as well as the most salient feature - by and large, these prognostications tend to be wrong consistently. It isn’t to say in either case there’s no chance of “finally being proven right” (e.g. the Michael Burry-esque hero’s journey), but it tends to be a long, painful, and usually unprofitable road to take (unless you make money selling seminars or books, of course).

But as Festinger noted in his book as well, the major reason for the season tends to be cognitive dissonance, or the psychological mechanism that allows fully rational people to hold logically exclusive views. In the case of doomsday bearism, this dissonance leads to two processes:

1) Rationalization - When prophecy fails (this is especially notable around binary catalyst events, whatever flavor they may be), to reduce the internal discomfort of listening to a doomsayer while being fully aware of their incorrect prediction, followers will strive to find some actor or aspect which justifies “why” the prophecy was wrong. This largely for bearish doomsayers tends to lead to scapegoatism (e.g. retail, the Federal Reserve, “the algos”, option flows).

2) Confirmation bias - One of the most natural human behaviors all of us fall prey to is confirmation bias, or looking for evidence to support our pre-existing views (and the converse — ignoring evidence against our views). This tends to go hand in hand with rationalization for the bearposter or ape—when a binary catalyst or predicted event fails to pan out, they will often search for some niche evidence to justify their views, or retroactively reason that perhaps the dates were wrong but the event will still occur (akin to normal doomsday prophecy).

What’s interesting to note is that in many cases, failed prophecy is more effective at audience building/getting followers than actual correct predictions. Festinger notes that in cases of historical doomsday cults or religious movements, there were a few common threads that led followers to increase commitment after a failed prediction, rather than decrease. These included:

1. A belief must be held with deep conviction and it must have some relevance to action, that is, to what the believer does or how he or she behaves.

2. The person holding the belief must have committed himself to it; that is, for the sake of his belief, he must have taken some important action that is difficult to undo. In general, the more important such actions are, and the more difficult they are to undo, the greater is the individual's commitment to the belief.

3. The belief must be sufficiently specific and sufficiently concerned with the real world so that events may unequivocally refute the belief.

4. Such undeniable disconfirmatory evidence must occur and must be recognized by the individual holding the belief.

5. The individual believer must have social support.

A familiar reader to my blog might see strong parallels between discussion of the Regret Principle and the second of Festinger’s precepts. This shouldn’t be a surprise (in fact, views on doomsday cults have inspired much of my views on meme stocks and cult assets). But in general, it makes immediate sense for the bearish poster and his or her (let’s be real, it tends to be overwhelmingly male) followers:

1. For the poster — Once you establish yourself as a “contrarian”, it becomes difficult in an iterated social setting to both admit past mistakes (for fear of weakness and/or losing social credibility) and/or change one’s views.

2. For the follower — Depending on level of investment in the poster’s views (e.g. buying puts or missing out on stock market performance), there is a level of in-built regret that encourages confirmation bias and rationalization. This of course is a function of #2 — the more investment made, the harder it will be to detach from said views.

Perhaps though, the last bullet point (social support) is the most important in the modern era. As I’ve mentioned before in Trading Salience, the internet has created new dimensions of hyper-connectivity and much larger social networks than doable in traditional social structures. The famous adage called Dunbar’s Number suggests that the biggest natural social group a human can have is about 150, which relates to simply connected networks (networks in which every person knows everyone else). This is perhaps the “natural” order of human society, and historically, few folks were able to exert much influence on others above that number. The domain of influence over public opinion was essentially the role of the kingmaker, reserved for the celebrity and political upper crust of society.

But then social media came and the game inverted. As I understand myself through rise on Twitter, the rise of social media has made the game much more meritocratic. Much as Warhol predicted, Twitter and TikTok have fundamentally changed the nature of the influence game—instead of a select few (technocrats, for example) being able to dictate taste through traditional media and power vehicles, individuals themselves now dictate taste through choice of follows and content propagation.

In the social media paradigm, individuals have free rein to listen to ideas and sources they directly curate, which leads to niche communities taking rise often modeled on the traditional madness of crowds. While in the ancien régime potentially noxious or terrible ideas would often be stifled by the tastemakers (this was a massive double-edged sword, given its natural role in suppressing freedom of assembly and speech), in social media the very structure of content delivery and networks actively encourages the propagation of terrible ideas.

As I’ve mentioned before, one of the strongest drivers of memes (of all flavors) is simplicity in the realm of Kolmogorov complexity. Ideas that are popular tend to be simple; ideas that are complex that become more popular will simplify over time.

But what does simplicity mean? Many if not most successful memes tend to be routed in basal human emotions, given the role emotion plays in memory:

Emotion also facilitates encoding and helps retrieval of information efficiently.

Memes in the online sense compete economically with one another over a field of limited attention. The memes that tend to win tend to demonstrate the highest degree of topical homophily, or memes with content that resonate with the highest number of individuals. This makes sense given the nature of a meme — by in large, we do consume memes for our own enjoyment, but we propagate them based on our expectation of other’s enjoyment.

Bearish views and the perennial doomposters will never need to look far for social support. Despite all contrary evidence, one of the most basal human emotions is fear, and the implications of fear and risk aversion tend to be well understood. As behavioral economists would say, loss aversion tends to be a powerful motivator in economic transactions. However, it is not the end-all-be-all in understanding human behavior — humans will show varying degrees of loss aversion, with others being substantially risk-loving. Of course, it’s not hard to argue that bearishness during bull markets is largely driven by loss aversion. As Bordley and Tibiletti note, emotions tend to override reasons — the loss averse investor will demonstrate bearishness and caution during a bull market, and greed and risk-on appetite during a bear market.

Historically, these tend to be rather terrible and unprofitable positions, given the market’s proclivity to trend. As a recent popular Twitter thread noted, there is a stark differential in returns just by exposure to the best and worst few days of market returns. In general, the market largely does nothing for long periods of time, and shows strong movements occasionally:

David Taggart-PDMacro.com @DavidTaggart

An update to the classic "what happens if you miss the 10 best days in the market" where advisors tell you that "it is not timing the market but time IN the market that matters" But here we show the other side where you can also miss the 10 WORST days in the market.

Looking at this chart prima facie, we might be inclined to support the bearish view — of course, there are investors who lost immense sums of money timing the market wrong. There are substantial warning signs too that the fundamentals of equities have dislocated from current spot prices, which historically shows a “reversion to the mean” effect (aka you lose money). But — this intuitive explanation falls flat.

Unsurprisingly:

David Taggart-PDMacro.com @DavidTaggart

and as some have commented there is a LOT of clustering of best/worst days. 11 of the 20 best/worst days came in the 08-09 period 6 from 2020 1 from 2002 1 from 1998 1 from 1997

It’s a commonly understood stylized fact of the markets that real assets show clustering of volatility, or in English, the magnitude of market movements tends to cluster. Quiet periods show small up and down movements, while volatile periods show large up and down movements. This is fine because in the end, most of these movements cancel, save the normal upward drift of the markets.

However, for the market timer — this can be brutal. In general, those with bearish inclinations tend to fall prey to view that they can time the market, spotting the impending disaster a mile away and being supported by the camaraderie of their followers. However, it is very difficult to actually time a crash. In general, most traders with bearish views will wait for true confirmation of a “market bottom” being reached, often to the detriment of missing several days of massive positive returns (due to volatility clustering). This is insidiously due to the phenomenon of a dead cat bounce — actual market recoveries can look nearly identical to fake-out periods.

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So given bearishness tends to be highly unprofitable (especially active bearish bets against the market — a paper from 2003 studying the pricing of put options noted that the average excess negative return for buying at-the-money long put options against the S&P 500 returned around -40% per month, and as low as -95% per month for out-of-the-money put options. While this is undoubtably out-of-date (being almost 20 years old), it’s quite well understood that betting against the market actively tends to be a poor man’s game. Clever investors can surely benefit from tail hedging strategies, but none of them would go so far as to recommend the tail hedge be the main portfolio strategy, rather than a small percentage of an existing portfolio.

Despite significant evidence to the contrary and financial punition for those involved, why is bearishness such a mainstay of popular financial media and thought? I’d argue several factors seem to correlate with its pervasiveness:

1) Bad news sells — If you ask the average person on the street what they enjoy reading, few will admit to being drawn to horrifying and depressing news. Conversely, it’s quite well understood that news tends to have a bad news bias — bad news dominates headlines, while good news gets barely a whisper. All of us are familiar with climate change, income inequality, racism, COVID-19, but few of us take the time to register world progress. Psychologists call this a ‘negativity bias’

2) Minimal punishment/regret when incorrect (for the poster) — While it’s quite likely many of those who follow perennial economic bears suffer true regret (in terms of missed opportunity or worse, active bearish bets), in general people tend to have very short attention spans for missed predictions or poor behavior. This is amplified by the 24/7 nature of modern news cycles and social media — bad predictions fall by the wayside, and good predictions are remembered and amplified (especially by the poster in question). This is doubly salient for anonymous accounts or accounts known for bearish views on social media — it isn’t an exception to dismiss rubbish, it becomes the norm. We tend to remember the successes of “market augurs”, and fail to recollect on missed predictions or the earliness of bearish calls.

3) Basal human emotion — As previously mentioned, fear is a massive sales pitch. This can be written off by many as “being well informed”, but our negativity bias coupled with loss aversion means bombastic threads and posts about impending doom tend to grab higher engagement and recollection than more useful or actionable info.

4) Hyperconnectivity — The design of social media and its focus on addictiveness means we tend to often reside in our own curated echo chambers, seeking to rationalize our existing views and explain away evidence to the contrary. This feedback loop tends to amplify the extremeness and simplicity of views, leading to centralization around characters who tend to get more extreme in views over time (both due to feedback and as a means to differentiate/engage with audiences). This can be remarkably dangerous outside of the financial sphere, and lead to what we politically call radicalization.

5) Loci of control — in general, stock markets and investing provide profound discomfort to many in their stochastic nature. When a trade or investment is made by most of us, there are factors we can control (our entry, our exit, our information/belief in the trade) and factors we cannot (random market movements, order flow, black swan events). Unsurprisingly, individuals who feel less control over their own economic life in general tend to be more averse to holding risky investments. Bearish media tends to feed into our (limited) perceptions of reality — it is much easier to withhold investment and potential future returns to feel more in control over our own destinies. It is hard to convince an individual who sees the market as rigged that it is in their best interest to participate.

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To summate, I want to clarify this post isn’t a knock on proper risk management or even on bearish views. It’s undeniable as a trader or investor risk management is the single most critical skill that will differentiate a success from a horror story. However, perma-bearishness tends to be an extreme manifestation of loss aversion, which uncoincidentally leads to significant loss or ruin in many cases. This isn’t unique to the phenomenon of being bearish at all (as mentioned by parallels with meme stock investing). However, what separates bearism from more traditional communities is the consistent devotion needed in the face of continuous contrarian feedback. It becomes painful, especially in periods of market outperformance, to simultaneously admit you were wrong and grapple with the fallout of missed opportunity (or worse, speculative bearish bets).

While there is a time and a place for all views, it is our job as investors and stewards of our own financial destiny to grapple with uncertainty and produce returns. There will always be a “next black swan”, and our world gives us no comfort or shortage of reasons to believe the collapse is around the corner. If you view social media often, you may be inclined to believe the world is ending next Tuesday.

I say this with some level of ironic expectation, but it probably isn’t. At least not this Tuesday.