The Nocebo Effect And How It Could Harm Your Wealth

The Nocebo Effect And How It Could Harm Your Wealth

Photo credit: klestaaaaaa on / CC BY-ND

A few months ago, Joe Wiggins wrote a post about the placebo effect in investing.

I think we’re all pretty familiar with the placebo effect. Joe quotes its definition from Google:

“A beneficial effect produced by a placebo drug or treatment, which cannot be attributed to the properties of the placebo itself and must, therefore, be due to the patient’s belief in that treatment”.

What many people are unaware of though is the placebo’s evil twin – the nocebo.

Google defines the nocebo as follows:

“A detrimental effect on health produced by psychological or psychosomatic factors such as negative expectations of treatment or prognosis.”

In the same way that patients can experience positive results from taking sugar pills which they believe are real drugs and hence become healthier because they believed the pills would make them healthier, patients who are told the potential negative side effects of a drug are significantly more likely to suffer those side effects than patients who aren’t told about them.

A paper published in the American Journal of Bioethics in 2012 set out the problems of ‘informed consent’. To tell patients the truth may cause them harm.

In a study of 96 men taking beta-blockers, 3.1% of the group who had no idea what the drug was experienced erectile dysfunction. That rose to 15.6% of the group who were told the name of the drug and to 31.2% of the group who were told that erectile dysfunction was a possible side effect of the drug. With the knowledge of the potential side effect, ten times more people experienced it than those without that knowledge.

The power of the mind is amazing.

So, how might this affect us when we are investing? Well, while it’s highly unlikely that anyone seeking advice is going to be presented with an Armageddon scenario at the time they invest, the subsequent drip, drip, drip of negative ‘news’ can lead to poor investor behaviour. Whether that’s as a result of downbeat ‘forecasts’ accompanying regular valuations, or constant exposure to the ‘financial porn’ that pervades the financial media.

If you’re constantly being told the market is going to tank, you might end up believing it and making financial decisions that are detrimental to your financial health.

While in medical terms the nocebo effect is a result of being informed of the potential negative effects of a drug, in investment terms the nocebo effect is a result of being fed conjecture, opinion and speculation, not valid information. Medical professionals know the potential, proven, side effects of the drugs they prescribe. Investment ‘pundits’ are just punting largely worthless opinions.

We can’t control our brains from acting on what we believe to be true, but we can refuse to expose our brains to speculative nonsense. Our future selves will thank us.