As in previous posts featuring on this blog, I will first outline a cognitive bias drawing from the relevant psychological literature and then describe how that plays out in financial markets. My basic point throughout is that it is critical for market participants to know about these unavoidable biases for two reasons. Firstly, knowing about them is the first step to being able to recognise when they are operative and assessing whether they have resulted in an optimal decision, with specific relevance here to trading decisions. Secondly, since no-one is free of these biases, traders can expect that other market players will be influenced by them and trade accordingly.
The Picture Superiority Effect is relatively straightforward. What psychologists have found is that people find it easier to remember images than words. There are different opinions in the literature as to why this might be. In my view, the effect is likely to be explained by our preference for the vivid and concrete over the dull and abstract; but in fact, the causation is not that important for our purposes here. We just need to know that everyone remembers imagery more than text. This is probably no surprise; in particular in the age of social media, as pictures are shared more widely on social media than text (and so we might surmise that there is also a Video Superiority Effect which is even stronger).
There is some discussion as to how age interacts with the Picture Superiority Effect. Early researchers found that younger people recalled more pictures than words while older subjects did not, suggesting that the Picture Superiority Effect exists only in younger people. More recent work, however, appears to find the exact opposite. Given the general improvement in experimental methodologies that occurs over time and the parallel increase in knowledge, I would say that the more recent studies are more likely to be correct. But that observation remains subject to further confirmation/disconfirmation.
As a result, there have been some suggestions that what is happening is that images work as a compensation mechanism for older adults who are experiencing memory deficits. So the overall story may be that younger people are prone to the Picture Superiority Effect, middle age adults are less prone to it, and then older people embrace the effect for compensation purposes. This would mean something like older people are deliberately relying more on pictures to assist them in remembering things. There is also advice from the intelligence community (!) to the effect that the way to remember a lot of items without writing them down is to modify a visual memory of a very familiar location, such as one’s home, and add to it strange and striking items which represent the data one wishes to remember.
All of this means that everyone who is involved in financial markets can expect that the Picture Superiority Effect will play a role in their thinking to a differing extent at various life stages. How would this work?
This type of point — how do cognitive biases affect our performance in financial markets — is one I discuss at length in my book:
One example I give there is related to imagery, although I am actually discussing a different cognitive bias called the Availability Heuristic. The example is the photos and video with which we are all familiar of people who had been fired from Lehman Bros. after it collapsed in the crisis. These pictures and ones like them are extremely easy to remember. In fact, they are difficult to forget. This sort of thing might make you unreasonably averse to buying bank shares. Similarly, pictures of Elon Musk looking depressed might make you avoid TSLA stock. There may or may not be good reasons for
avoiding such stocks (my view is the opposite at present) — but what is 100% clear is that if you read a story about banks or TSLA and only recall a picture of a fired banker or a sad Elon Musk, you have not retained very much which is useful in terms of making a market decision. Even if you give equal weight to the picture and the words, you are probably still weighting the evidential value of the total information value available to you wrongly.
It is probably wise to set aside the limited information value represented by imagery and focus on the data — which may of course be presented graphically without being just a photo.