Varied Views on the Economy

The question posed by financial journalist Jean Chatzky C’86 seemed simple at its core. “Where are we,” she asked, “in terms of our financial well-being?”

The participants in “From Wall Street to your Wallet” had varying answers.

Binyamin Appelbaum C’01, a New York Times reporter and former executive editor of The Daily Pennsylvanian, began the discussion by painting a foreboding picture. Appelbaum, who used to work at the Charlotte Observer, where he was a finalist for the Pulitzer Prize in public service for his coverage of the foreclosure crisis, pointed to his former city as proof of a stunning economic decline and a far slower recovery. Charlotte circa 2006, he said, “had more money than they knew what to do with”—so much, in fact, that the city built a manmade river for whitewater rafting. In the wake of the financial crisis, though, that all changed. “One of the [big] banks has completely disappeared. The other is struggling badly. Home prices have fallen dramatically. Unemployment has shot through the roof. Even though the economy has begun to recover, life there has not returned to anything like normal. People have jobs that pay less than the jobs they had previously, they don’t get the same bonuses, they can’t buy the same things, and they don’t have the same kind of certainty that comes when things are on the upswing.”

Karen Finerman W’87, a hedge fund manager and “The Chairwoman” on CNBC’S Fast Money, offered a less gloomy outlook. “The Wall Street recovery, in so many areas, has been nothing short of astounding if you think about what happened in 2008 as one company after the other, in domino fashion, was going under. The debt market is completely revived. Deals are getting done that would have been unthinkable in 2008 both in numbers and scale. The stock market has also rebounded. There’s so much money on company balance sheets and so much money available to borrow. It’s extraordinary.”

Sigal Barsade, the Joseph Frank Bernstein Professor of Management, described the mood of consumers as “lightly bipolar.”

“A lot is about perception,” she explained. “People right now are in the middle. They’re not in the depths of despair and they’re not completely giddy. I think they’re cautious.”

Barsade, who spends much of her time researching emotional intelligence and emotions in the workplace, also discussed “threat rigidity” as it relates to investors reverting to what they know best when times are tough, as well as the concept of “high-trait negative affectivity vs. low-trait negative affectivity”—how investors are either psychologically prone to panic or remain calm when unforeseen risks like natural disasters and wars affect the market. (Hint: calm is better.)

Views of the economy’s health are also affected by “emotional contagion,” Barsade added. “When someone may have been marginally worried, they see the TV and it’s amplified,” she said. “Then what do you do? You don’t buy that refrigerator you were going to buy. Then, if you cut back on spending, what have you just done to the economy? So the TV, justifiably, reports that the economy is getting worse—and that of course makes you feel worse. And then you cut back more. You can get into a cycle. And what the media did is amplify it. They have the ability to do that.”

Finerman, who referred to her Fast Money show as the one “a lot of you have on mute in your office,” agreed. On most days, in reality there is little change in the economy or the value of companies, “but we need there to be a story,” she said. “Our ratings went through the roof [during the recession]. You could see people being sucked into that.”

While admitting that the financial crisis had benefited his own career as a reporter, Appelbaum shed a more positive light on the news industry’s role. “The better you understand the situation, the less likely you are to react to new developments,” he said. “That’s the good thing the media does—it helps you understand the fundamentals.”

After other economic issues ranging from the debt ceiling to gas prices to inflation to housing were discussed, Chatzky asked each panelist to give advice for those concerned about their own finances. (As Chatzky noted in her opening remarks, even the mostly “successful, affluent, educated, employed” audience they were addressing “worry about money more than any other aspect of their lives—more than jobs, kids, health, marriages, and even more than their weight and appearance.”)

Barsade’s advice: Be self-aware. Understand that the phenomenon of emotional contagion exists and try to avoid doing things your friends or the media tell you to do. Use your emotional intelligence to invest rationally—namely, by trading less and diversifying more. “It’s not sexy advice,” she said, “but studies show people who are better at regulating their emotions tend to stay more solidly in the middle. You won’t get huge returns but you also won’t get huge losses either.”

Finerman, the CEO of Metropolitan Capital Advisors and the mother of two sets of twins, agreed with Barsade that being a smart investor means diversifying—not just among your investments but also among financial managers, asset classes, and even types of currency. “Diversification,” Finerman said, “will serve you well so you can be rational in your decisions.”

Appelbaum, as he did throughout the session, reminded those in attendance just how badly broken things had become and noted that even some of the most sophisticated investors got battered during the recession. His advice? Lower your expectations, which may mean not getting that mortgage you can only barely afford. “There’s an increment of wealth that is never coming back. That part of the economy is gone,” Appelbaum said. “If you’re thinking about the future, I guess adjusting expectations is the thing to do. It’s not the most pleasant message. But we lost something that we’re not getting back.”

Chatzky, who’s authored seven books and is the financial editor for The Today Show, chimed in with her own answer, reminding people to save money. And research shows that the best way to save is by doing it automatically through retirement funds. “Whatever you can do,” Chatzky said, “whatever mind games you can do to psyche yourself into saving more money, they’re all really, really important things.” —Dave Zeitlin C’03
 


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