At the same time, media uses of positive words (such as “advance” or “boom”) had no impact on people’s estimates. And institutional investors were largely immune to negative media stories, which didn't have a statistically significant impact on their estimate of the likelihood of a crash.
A tempting objection to this research is that whenever words like “crash” appear on the front page of a newspaper, it’s pretty rational to increase your estimate of a crash. Where’s the bias there?
But behavioral scientists do not contend that use of the availability heuristic is irrational. Sensible people should and do update their beliefs on the basis of recent events -- they just tend to overdo it. When people base their probability judgments on such events, those judgments often reflect a bias, in the form of an exaggeration of the statistical reality.
In this regard, the researchers’ best finding -- their smoking gun -- is that the estimates of institutional investors are impervious to negative news stories. Individual investors beware: If you’re constantly worried about a crash, you’re probably making some big mistakes, and losing a lot of money in the process.
Cass R. Sunstein, the former administrator of the White House Office of Information and Regulatory Affairs, is the Robert Walmsley university professor at Harvard Law School.