Remember those optical illusions that used to tease you as akid? Is it an old woman or a young woman? Is it a vase or twofaces? Or anything by Escher?

In each of these cases, we have two contraries existingsimultaneously. The one you see depends on the one you’re lookingfor. There’s no way to empirically prove the existence of one whiledenying the other. It all depends on how you frame the picture.

What works in art also works in finance. We think Modern Portfolio Theory tellsus there’s a relationship between risk and return. That’s how many see it.

In fact, while this relationship might exist on the blackboard,it doesn’t exist in the real world.

The real world tells us that it is “perceived” risk that’srelated to “expected” return. These qualitative factors havegreater influence than the quantitative figures we falsely imaginerule our lives.

For example, you might think the market falling 1,175 points on Monday, February5, 2018 might have offered an excellent lecture in classiceconomics. Okay, maybe it did. Or did it?

Sure, a rising economy begets inflation which begets higherinterest rates which increase the cost of capital which changesvaluation parameters on equities. This is, after all, classiceconomic theory.

This, however, is not what happened on Monday, February 5, 2018.What changed was our expectation that this will all happen verysoon, (see “AFundamental Economic Fact Fiduciaries Use to Fight Fear of FallingMarkets,” FiduciaryNews.com, February 8, 2018).

The more compelling teachable moment, on the other hand, liesnot in classic economics but in behavioral economics.

No sooner had the market closed than it was “Let the lessonbegin!” The mass media trumpeted the free falling market like theWeather Channel hypes winter storms. Only, instead of highlightingpotential snowfall numbers, we had the actual points lost on theDow.

Reporters framed the story to extract the maximum emotionalresponse from their audience. Did you see them?

They accurately declared the 1,175 point drop at the biggestpoint loss in the history of the Dow Jones. It far surpassed theprevious record – the TARP inspired 777 point loss on September 29,2008.

If you recall that time period, it represented the onset of thecredit crisis that virtually froze our economy.

This is the kind of imagery editors love. You’ve goteasy-to-understand numbers packaged in a blaring headline thatimplies a catastrophic event. It’s got click-bait written all overit. Almost every media outlet chose to frame the day’s events inthis manner. And it worked.

Except it didn’t.

You see, this was only one side of a prototypical opticalillusion. The opposite frame ignored the points and focused on thepercentage drop. The market lost a total of 4.6% on February 5,2018. Compare that to the 7% drop on that fateful September day in2008.

In fact, according to the Wall Street Journal, the 4.6% fallmanaged to merit only the 99^th worst single day fall inDow history.

Number 99. That’s not a headline-grabbing number.

That’s why editors didn’t run with it. Who reads that story? Whofreaks out reading that number?

Who’s going to make a rash knee-jerk decision based on the“99^th worst” day on Wall Street?

Oops. It’s that last question that suggests the meaning of thislesson in behavioral economics.

The same data can be presented in two equally opposing ways,much like an optical illusion. Which view we see can determine ouremotional response. This, in turn, can influence ourdecision-making process.

If we want people to get upset and potentially take actions thatmight harm them, print the headline that trumpets the “worst pointdrop in history.”

If we want people to ignore what amounts to nothing more than astandard “blip” in the market, then we lead with the“99^th worst percentage loss” headline.

Performance reporting is rife with optical illusions like this.Short-term numbers that emphasize volatility scare investors intomaking improper long-term investments. Benartzi and Thaler showedthis in their research two decades ago.

Why is it so hard to learn this lesson?