New research illustrates how strongly the recent past influences investor expectations, as Wall Street Journal columnist Jason Zweig notes. Research by Professors William Goetzman, Robert Shiller, and Dasol Kim concluded, in Zweig’s words, “that investors’ forecasts regularly look more like aftercasts – projections of the recent past into the future.” The research drew on data from Yale School of Management surveys conducted by Professor Shiller that have collected individual and professional investor forecasts since 1989. These show, for example, not only that both types of investors significantly overestimate the probability of a 12% crash in one day (which has only happened twice in 87 years), but also that the inaccuracy is greater after a sharp market drop. Zweig explains that “is partly because a sharp recent drop makes future declines seem more probable, and partly because the news media uses words like ‘crash’ much more often after the market falls sharply.” Further, words charged with negative emotion not only darken your view of the future, but they may make you feel that riskier investments have a lower – rather than a higher – potential return.” Professor Goetzmann of Yale explains that the dates of major crashes “evoke a sense of doom” and that “crashes have a remarkably long life in the public imagination. Their echoes can last for decades.” The survey data show how recent market events affect investor sentiment. On March 4, 2009, just three trading days before the end of a bear market, an institutional investor predicted “we will be at the bottom for six to twelve months.” Similarly, on the very day that a bubble peaked, March 10, 2000, an individual investor wrote, “The market today is not comparable to October 19, 1987 [when the Dow Jones Industrial Average fell 23%]. WHOLE DIFFERENT WORLD.” Zweig notes that, in the words of Benjamin Graham, “The investor’s chief problem – and even his worst enemy – is likely to be himself.”