How to Read Financial News: Home Country, Confirmation, and Racial Bias
I occasionally join a video discussion call with institutional investor friends in Europe at 3:30 am. Getting up in the middle of the night to talk about investments makes me either crazy or passionately committed, or a little of both.
By early June, one topic dominated these conversations: the death of George Floyd and the marches and protests that followed. COVID-19 had been almost driven off the front pages by what, according to one estimate, were the largest demonstrations in US history and a national conversation on race and racism had begun.
Naturally, my peers overseas wanted to know what it all meant: the unrest, the racial tension, the White House response, and the outlook for the 2020 elections this fall. Often I was the sole American on the call, and it sometimes felt as if I had to defend my country’s actions at one of its worst moments.
Nevertheless, I did my best to stay objective and concentrated on how events were affecting political polls and capital markets. That’s my job as a portfolio manager regardless of how I feel personally about the issues. And it isn’t easy, especially in times like these.
But the questions from Europe were a wake-up call. These investors have a different perspective on the markets and the United States and they helped correct one of my major biases.
Home Country Bias
Like many investors, I have a home country bias. I tend to favor the United States when making investment decisions. Investors often prefer their home country because it is familiar and comfortable. We tend to overlook the domestic risks even as we exaggerate those elsewhere.
My clients might put it this way:
“I live in the United States, I understand the country, and I’m going to retire here. Our stock market gives me great returns and the bonds are safe. Why should I invest my money in places that I don’t even know?”
This approach worked during the last 30 years, but that is no guarantee that it will work for the next 30. Overseas investors cannot ignore civil unrest and racial strife in the United States. All else being equal, it may make sense for them to put their money somewhere else. Investment capital is free to go where the risk and returns are most attractive, and that may not always include the United States. Money goes where it’s treated best.
That is not easy for Americans to hear. The United States has the largest stock market and many of the most successful companies in the world. The US dollar is the dominant reserve currency across the globe, and financial theory treats US Treasuries as risk-free. Many institutions buy US assets precisely because they have few other choices for large-scale capital flows.
But investors, US and otherwise, cannot assume that the United States will remain the center of the investment universe forever. Economic activity and investment opportunity is gradually moving east, and global capital will follow. How will it play out? I have no idea. But I do know that the tone has shifted among my institutional investor friends in Europe just as it has in the news coverage of the protests.
Controlling for Bias
At times like this, when the news is disturbing, the atmosphere charged and uncertain, it helps to have a framework for reading financial news. Like everyone else, my emotions and biases affect how I think, especially in this case, because for me the news has hit very close to home just as it did back in April amid the coronavirus crisis:
“She has worked 84 hours during the last eight nights.”
This quote is from my last article, which described how to manage our biases and emotions while working in the shadow of COVID-19. It is not easy to be objective when your wife works on the front lines of a pandemic.
What I did not mention then is that my wife is Black. So in addition to the pressures she faces at work, she is no stranger to racism. And we have a three-year-old son, Joshua. Obviously, I worry how racism will impact his future.
It has been hard for me to read about the George Floyd protests day after day. And when investors overseas asked me what was going on in the United States, a whirlwind of emotions swirled through me, especially as I thought of my wife and son. I try to do my job and maintain a professional demeanor about issues that are hard to be dispassionate about. Reading the news is part of my job and when my emotions run high, it helps to remember that I have the same challenges and biases as anyone else. And home country bias is just one among many.
Confirmation Bias
When I mow the lawn in the summer, I wear earmuffs to block the noise and a floppy hat to block the sun. I look just as goofy as you might imagine.
The earmuffs limit my hearing and the hat limits my peripheral vision. I am in my own little world, so I often stop and look around to make sure that I don’t bump into someone on the sidewalk. When my wife wants my attention, she waves her arms to flag me down.
In a sense, confirmation bias is like mowing the lawn with earplugs and a floppy hat: Our vision is limited and so is our hearing.
Indeed, home country bias is a form of confirmation bias: We filter out unwelcome news about where we live or the assets in our portfolio and seek out news that confirms what we already believe. We see what we want to see and we hear what we want to hear. We prefer flattery to reality. This can be dangerous and counterproductive.
Confirmation bias creates blind spots and one of these is racial bias.
My Blind Spots about Race
I do not have firsthand experience of what it’s like to be Black in the United States. My wife is Black and my younger son is mixed race, but that’s not the same.
What about the news I read? Does this reduce my blind spots about race or does it reinforce them? In the United States, the finance sector and the financial news media are not especially diverse. So that would seem to reinforce them.
But maybe financial news is colorblind. Finance is all about hard data, cold mathematics, and relentless computer algorithms. Prices and markets are indifferent to race.
Except they aren’t and colorblindness is still blindness. After all, we didn’t know that COVID-19 was disproportionately impacting certain demographics until we started collecting data about race.
If you can’t see race, you can’t see racism.
I suspect that many other investment professionals also have that blind spot when it comes to race just as they do when it comes to their home country. Confirmation bias is real. We all have it, and it can make our blind spots even bigger, since we refuse to consider new information that contradicts our long-held beliefs. We think that we know it all already.
Even after we recognize that we have confirmation bias, we still need to create a process to address it. Likewise, even after we recognize that we have racial blind spots, we still need to create a process that addresses racial bias and racism.
The first step to reducing our biases and blind spots is to acknowledge them. The second step is to read a variety of perspectives.
A Systematic Process
I use the steps outlined below to form my opinion about financial news and to limit my biases and blind spots. I have covered these in painstaking detail for Enterprising Investor where I have devoted an absurd amount of time to describing my process. This approach works for me. Yours may differ based on your job, your clients, and your goals.
Seven Steps for Reading Financial News
The following chart shows how I apply this framework when reading media coverage of the recent protests. For simplicity, I use The New York Times as the more liberal news source and the Wall Street Journal as the more conservative.
Applying the Process to the George Floyd Protests
| Steps in the Process | Questions | Initial Observations |
| Be Practical | How does this issue affect my clients? How much time can I spend on it? Will reading help me make better decisions? Or is it just a feel-good exercise? | Clients react to the 2020 protests based mainly on their political views. So define the terms clearly and keep the discussion focused. |
| Understand Consensus | How is the issue covered by reliable media sources, both conservative and liberal? | Coverage has shifted from the specifics of the case to broader social issues. On 3 June, Epsilon Theory described how the narratives rapidly evolved during the first week. |
| Study Story Framing and Frequency | Are events described as riots or protests? Are the issues framed as justice or “law and order”? How frequently are these issues covered? | The Wall Street Journal and New York Times have both given sustained front-page coverage to the protests, and the framing of events is becoming broader. |
| Separate the Narratives from the Noise | How will these events influence society, markets, and the 2020 election? | Some stories show a shift in the usual editorial bias. This may signal an important change. |
| Ask Open-Ended Questions | Why did the death of George Floyd trigger such a massive, prolonged response? | The video is graphic. The recession and lockdowns created anxiety. COVID-19 has impacted certain demographics more than others. |
| Go Deep | Which topics matter most to investors? Which books and sources should I read? What ideas should I explore in depth? | Does racial unrest make the United States less attractive for investors? Should the investment process include more information about race? |
| Avoid Memory Contamination | How do I listen to alternative views without exposing my mind to nonsense? | Start with credible sources. Form an independent opinion. Stress-test ideas with peers. |
The Framing and Frequency of Stories
In covering the protests, conservative media tend to place the emphasis on law and order. Their liberal counterparts often focus more on police brutality. Same protest, different narratives.
Beyond framing the narrative, editors also choose which stories to cover. What angles will engage their readers? (Or, more cynically, appeal to their confirmation biases?) What stories will conservatives want to read? And liberals? What stories will go viral on social media? (Hint: Usually those that trigger fear, anger, and outrage. Sorry about that.)
As I read about the George Floyd protests, I expected liberal and conservative media to cover stories in a manner that fit their established political views. Historically this means:
- Conservative sources tend to cover positive stories about police, and favor narratives that show how the criminal justice system protects society.
- Liberal sources lean toward stories that challenge the actions of police, and favor narratives that show how the criminal justice system produces racist outcomes.
As an investor, I am particularly interested in change, and I am looking for inflection points. I don’t really consider it “news” when trends continue, since this would not necessarily affect my investment outlook. But if there is change in the narratives, it may be worthy of attention.
Therefore, I am particularly interested when media sources deviate from their usual editorial bias, regardless of whether the source is liberal or conservative. When conservative sources frame a story in a liberal manner, or vice versa, something important may be happening. This is one reason why reading multiple viewpoints and drawing our own conclusions is critical. (When it comes to media bias, I rely on the expertise of Vanessa Otero, founder of Ad Fontes Media and the creator of the Media Bias Chart®.)
In June, I noticed that the Wall Street Journal was covering aspects of the protests that I would not expect from a conservative source. Here are some examples where its coverage seemed to deviate from its usual ideological frame:
- “The Problem with Police Union”
- “Black Lives Matter Protests Spread Quickly to White, Rural Areas”
- “Clout of Minneapolis Police Union Boss Reflects National Trend”
At the same time, I noticed sympathetic coverage of the police and the pressures they face from The New York Times. These are tough times to be a cop, and The New York Times reported on it.
- “How Black NYPD Officers Really Feel About the Floyd Protesters”
- “For Police Officers, Demonstrations Take a Toll”
- “4 Officer Suicides in 3 Week”
This coverage may represent a reshuffling of the deck, just as the shift in perspective among my European colleagues may forecast a realignment of investment capital. Time will tell.
But how well we see and how well we prepare our clients for what’s to come is a function of how well we absorb and process information and how well we address our biases. And that includes our racial blind spots.
Closing Thoughts
In 2020, we need to be able to discuss racial and political issues candidly and professionally, without feeling a need to shut down the conversation when it gets uncomfortable (and it will).
We all have biases and blind spots, and it helps to listen to people who see things differently. Regardless of whether we agree, we may discover insights that help us do our jobs and better serve our clients.
I do not expect to win the war against my emotions or my biases, whether it is confirmation bias or racial bias. Winning is not the point. Fighting bias is like fighting disease: We may never win, but we never give up.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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As I wrote to you when you told me you wrote another article. Of course I’ll read it you have a way of brining things down to earth and bringing them home. First you need to know your biases before you can mitigate them. Overcoming them, well that’s another story. Excellent work.
Dan,
Thanks–hope you like it.
Rob
What a nonsense article. What has race and racism got to do with investing? The author admits to being biased, but he’s also confused, rambling and incoherent. Hopefully he was not paid anything by CFA Institute to write this. That would not be a good use of our dues.
John – I have to say that I’m a bit disappointed on your comment. The CFA is one of the most highly regarded designations in the industry and one that prides itself on integrity and ethics. In fact, one of the professional standards of the CFA is Independence and Objectivity. Part of being objective is realizing your biases and adjusting your processes accordingly. It’s impossible to be objective if you can’t admit to your biases. To believe that outside forces like racism don’t have any impact on investing is quite frankly upsetting for me to hear and speaks to the larger issues in this country. I would urge you to reread the article with your own biases in mind and think about how they may impact your investing processes.
Owen,
I agree, and I thank you.
Rob
John,
Thank for your comment.
I can assure you that I was not compensated in any way for this article.
You said that I am “confused, rambling, and incoherent.” If you give an example I would be happy to clarify.
Sincerely,
Rob
Rob
Thank you for the article Rob! 2 quick points…
1. “I do not have firsthand experience of what it’s like to be Black in the United States.” In a 1961 radio interview James Baldwin provided the perfect explanation – “ To be (black) in this country and to be relatively conscious is to be in a state of rage almost, almost all of the time.” I do not claim to speak for every black person in America but personally it has become impossible for me to look at our history (a country that was founded on the genocide of one race, and enslavement and rape of another) and not look at the US flag with feelings of anger and disgust.
2. What’s next? You have a bi-racial son, i have a son that is black from both sides. However, as you know society will not say “well Rob’s son is half-white therefore we will give him half of the privilege and well treatment that is accorded to his father’s side.” Your son and my son are lumped together, and they are equally (mis)treated. I’m sure the thought of that could be my son being shot in the back 7 times (SEVEN TIMES) at point blank range as my grandchildren sit inches away has crossed your mind and must terrify you as it does me. You want change, I want change, but how do we go about creating that change????
I am hurt, I am angry, I am tired, and I have no clue as to what do next. Long winded of saying I appreciate your article and please continue to use your platform to bring awareness. I am starting to lose hope that I will see change in my lifetime, but perhaps your son and mine will.
Fran,
Thank you so much for your comment.
I am in the hospital getting chemo and I have to type on my phone, so please pardon me if I cannot respond as fully as I would like.
1) I remember hearing the interview with James Baldwin, and I recall similar comments in “The Fire Next Time.”
How can I answer for the failures of my country? And how can I defend the original sin of slavery, followed by Jim Crow, Black Codes, mass incarceration, etc.?
I surely cannot. Perhaps we can talk offline if you like.
2) I am so sorry to hear your pain, which I can only partially share. I know how I would feel if the police laid hands on my wife or my boys (my baby is mixed race and my adult son is white). I watched the George Floyd video and my baby boy toddled over, and I melted down inside. You’re right, people see my younger son as Black, because that’s just the way it is.
For any person reading this, regardless of your ethnicity, background, or country of origin, just imagine how you’d feel if the police acted brutally against your family and there was nothing you could do about it. How would you feel? What would you do?
Don’t get me wrong: I respect the police and my dad was a probation officer in NYC for 35 years. But the pain is real and the need for change is urgent.
Fran, your son and mine are WORTH THE EFFORT. There is hope, and I pray we connect offline.
Sincerely,
Rob
Mr. Martorana,
Thank you for this timely article on recognizing our own biases and interpreting information and news. Timely because these uncertain and emotionally charged times probably exacerbate the degree to which emotions and bias influence people’s decision making and investing. That influence is always there. A couple of centuries ago David Hume pointed out that reason is a slave to the passions, and recent experimental evidence appears to confirm this. Even if we understand and accept this principle on an intellectual level, we can still fool ourselves into thinking that we are above the influences of emotion or limited knowledge. In 1974, the physicist and Nobel laureate Richard Feynman recognized the propensity of scientists to jump to incorrect conclusions from experimental data and proposed the first principle of scientific inquiry is that you must not fool yourself — and you are the easiest person to fool. The ongoing success of conmen and conwomen relies on their ability to fool people. So there seems to be a perpetual need to recognize the limitations of our knowledge relative to the complexity of the world, as well as the limitations of our abilities to apply reason to solve problems and make good investments. Your article provides some practical steps that advisors might employ to recognize their own biases as well as the biases in the news they and their clients read.
In my mind, the discussion about investors shifting away from the US because of unrest and instability also brings up the issue of investor goals. If an investor’s primary goal is to maximize return at reasonable risk, then the unrest and instability in the US may discourage investing in US ventures, as you point out. On the other hand, if an investor wants to use some or all their investment to bring about positive social changes in the US, they want to learn about opportunities to do so. Of course that is a very complex topic and perhaps the focus of a future set of articles, but I think it speaks to the importance of understanding the investor’s goals.
Thanks again,
Gregory McIsaac, PhD
Greg,
Thank you for an eloquent and thoughtful response.
“Reason is a slave to passions.” How true!
As you note at the end, the investor goal matters a great deal. If the investor wants to maximize returns, then social unrest is merely a risk to avoid. Alternatively, if the investor also desires social change, then they would want to learn about opportunities to do so.
I hope the CFA Institute considers your suggestion and does consider a series of articles–it’s a complex topic.
Who knows? Maybe a book…
Sincerely,
Rob
Rob, thank you (and the CFA) for your article.
It has caused me a great deal of thought and introspection. Very few pieces get under my skin in such a way.
You may not reach everybody but then that’s the nature of investment and investors. We’re all too human.
Jim,
Thank you, that is kind of you to say and it means a lot to me. More than you know.
I join you in thanking the CFA Institute, particularly my editor Paul McCaffrey.
Other investors may listen or they may not. As for me, I am greatly encouraged that you have ears to hear.
Sincerely,
Rob
Rob, Thank you for this great article.
For me, the main point you are making is not about beeing black, race or racisim but how to analyse events, press coverage and home country biases. Being in Europe, it is amazing how it does play here regarding equity investing even if our market has not been by far the best in the world for a long time.
I would also add to your analysis that one event does very rarely change the world by itself, it is often a conjunction of events. Adding them all together provoque changes and that what we should as advisors be watchful of.
Thanks again Rob
Charles Nourissat, Wealth advisor and Professor at AUREP
Charles,
Thank you.
I agree, market prices often move because of a conjunction of events. For example, oil prices move due to a variety of overlapping causes, and it isn’t easy to untangle cause and effect.
On a related note, I believe we each build a mosaic in our minds, a mental model of market behavior, and we revise the mosaic as we receive new information. Corporate profits are now recovering, and we update our expectations as new information arrives. This information includes earnings surprises and estimate revisions, and it also includes economic forecasts, industry data, etc.
It all forms a mosaic.
Nevertheless, sometimes one event CAN change the world, especially when the event is related to other events. I’m thinking of 9/11, the financial crisis, and the Coronavirus. It may just be semantics, however, and I imagine that our investment process is more similar than different.
Thanks again,
Rob
Wow, in this age of having to say (and publish) the “right thing” for fear of causing offence or “causing people to ask questions of themselves they don’t like quasi-offence”, big respect to Rob and his publisher for putting this article out there.
These are the questions that need to be debated with calm and sane voices otherwise they are left simply to the under-informed to make assumptions.
Over nearly 30 years of investing, I came to recognise some of my own bias towards my home market and this caused me to look for it in my news sources…
Rob is right to be asking these questions of himself and others. Kudos to the CFA for giving him the platform to do so.
Rick,
Thank you.
It is encouraging to know that I’m not the only investor who wrestles with my own bias AND with the bias inherent to our media sources.
“…debated with calm and sane voices” Exactly — this is what principled disagreement is all about. I respect the other side of the trade because their money is as good as mine.
As editor, Paul McCaffrey of the CFA Institute gets major props for this article. It really struck a chord.
Thanks Rick!
Rob