U.S. Markets open in 4 hrs 17 mins

Obama uttered a single word that explains so much about America today

Sam Ro
Managing Editor

By most measures, the economy is doing great. The US labor market is creating around 200,000 jobs a month, which has brought the unemployment rate tumbling to 5%. Meanwhile, home prices are up and stock prices (GSPC) are near all-time highs.

So, why are there so many people so reluctant to acknowledge how good things are today?

One word: trauma.

“Some people are still recovering from the trauma of what happened in 2007-2008,” President Barack Obama said in an interview with Yahoo Finance’s Nicole Sinclair. “You know, we went through a really scary time.”

Trauma has the ability to distort how we perceive our present reality.

Consider the joy that comes from jumping on a trampoline or the thrill one gets from speeding downhill on a bicycle. For many folks, the unexpected and painful reality of a nasty spill and a couple of fractured bones will forever take away the bliss that once came from those activities. The trampoline and bicycle will continue to offer the same experience, but the trauma can be so intense that it can force many to keep their feet on the ground.

Losing your job, getting evicted from your home, and watching the value of your retirement savings crash can be deeply distressing. And so even when you get a new job, move into a new home, and recoup all of your investment losses, that new persistent feeling of uncertainty that followed the traumatic will discount everything you have.

"We had a great recession, which disappointed people," JPMorgan CEO Jamie Dimon said to Yahoo Finance's Andy Serwer.

Today, people may have just as much, if not more, than what they had during their best times. But many don't actually perceive that, and so they'll buy into the campaigns of presidential candidates like Donald Trump and Bernie Sanders, whose platforms are based on convincing Americans that things have been terrible.

“I think there’s still an insecurity there,” Obama said.

This is not to dismiss the Americans who are in fact struggling. As Yahoo Finance's Rick Newman pointed out, many are living their own personal recessions.

"A lot of Americans haven’t seen the benefits of [the recovery] yet," Dimon said.

Trauma intensifies our behavioral biases

People are irrational. No matter how hard we try to be rational, we often don’t act in the most rational ways because those ways often don’t feel like the right or best decisions.

In the field of behavioral finance, one behavioral bias that is studied extensively is regret aversion. Regret aversion occurs when the unpleasant memory of bad decisions in the past puts undue and irrational influence on future decisions. For example, you lose 20% in the stock market in a very short period of time, so you decide never to buy stocks again because of your perpetual expectation that the market will soon crash again.

There’s no easy way to deal with this, especially since there is a very real chance that something bad will indeed happen again. Indeed, when it comes to the markets and economy, it’s always something.

Perhaps the first step is to acknowledge the possibility that it is our biases that are causing us to be so bummed out about the markets and economy all the time. Maybe then you’ll begin to think like folks like Warren Buffett who can simultaneously appreciate that terrible things are always happening while acknowledging that things have never been better than they are today.

Sam Ro is managing editor at Yahoo Finance

Read more:

JPMorgan's Jamie Dimon tells Yahoo Finance what he's seeing in the economy

Wall Street bull emerges, makes bold call on stocks

Earnings season will be awful — Here are 2 reasons why you shouldn’t panic

Here’s brand new proof the US economy is stronger than you think

Merrill Lynch chief economist nails the truth about risk in a perfect 3-word sentence