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Don’t Let Your Emotions Invest Without You
By Danielle Labotka, Behavioural Researcher
Our financial plans may be crafted carefully, but when emotions run high—either because of events in the market or changes in our own situations—something inside us screams to act now.
Suddenly, that financial plan is but a distant memory, and we’re posed to make a thoughtless decision that could cost us money. What happened? Why has our thought process changed?
Some call it the lizard brain. It’s a part of our brain that oversees the choices that were necessary to keep ancient humans (and ancient lizards) alive—like the fight or flight response. Conscious thought is slow, and because the “lizard” part of our brain is concerned with survival, it kicks in to help us take quick action without consciously thinking about it first. It’s that part of your brain that can lead you to scurry away like a gecko trying not to become a bird’s lunch, or to feel like Godzilla stomping through a city.
Given the proliferation of the lizard brain across many species, you can probably guess that it is very good at what it does. But it isn’t good at investing. So let’s talk about a few ways to regain control of your decisions.
We Can’t Let Our Lizard Brain Invest for Us
Investing requires you to work in a different state of mind than the lizard brain specialises in.
To invest well, you have to make a plan, pay attention to the long haul, and stay the course even when things get rocky. Your lizard brain, though, wants to you react quickly to whatever immediate threat you are facing.
In the abstract, you might not think about financial issues like losses to your portfolio as a threat; after all, it isn’t the kind of life-or-death threat the lizard brain was developed to handle. However, losses are often experienced in a physiological way, as if they actually are a physical threat.
Because our body gets hyped up, we might find it difficult to stick with conscious thought and not let our emotions make decisions for us, which can lead to investing errors when left unchecked.
How to Regain Control of Your Decisions
Fortunately, we’re not helpless against the tyranny of the lizard brain. Research suggests we can effectively regulate our emotions through cognitive change. Cognitive change is when we adjust how we think about the situation (or ourselves) to help alter our emotional response to it.
The next time you see investment news that gets your heart pounding, take a step back and try one (or all) of these approaches to reframing the situation to ensure your emotions aren’t making decisions for you.
- Reframe the emotion. When you’re experiencing a negative emotion, it can help to see the emotion from a different angle. This can be as simple as reminding yourself that what you’re feeling is normal. If your retirement accounts aren’t on track, you might think, “This is so stressful!” But instead of leaving that feeling there, you can go further to reframe it. Remind yourself: “It’s normal to feel stressed when I don’t think I’m on track for retirement.”
- Reframe the problem. If a particular issue has your emotions heightened, you can also reframe the problem itself. What if, instead of just being a problem, there’s a silver lining that you can focus on? For example, down markets can be an excellent time to adopt a contrarian attitude and see them not as a scourge to your portfolio, but rather a chance to invest while everything is on sale.
- Reframe your point of view. Emotions can make it hard for us to see the forest through the trees. We’ve all had the experience of helping friends and family through moments of heightened emotion by providing solutions that were right there—but that they couldn’t see. Try to take a step back and view your situation from the perspective of an objective observer. For example, if you’re feeling swept away by the excitement of a hot new stock, take a moment and ask yourself what you would recommend to a friend in this situation.
When our emotions get going, we tend to want to respond. By taking the time to reframe the situation, you can give your conscious brain a chance to catch up to your emotions before you act.
The author or authors do not own shares in any securities mentioned in this article.Find out aboutMorningstar’s editorial policies.