Some of us may be astute financial planners under ‘normal’ circumstances. However, that seemingly surefootedness tends to lose its grip – when we come across either a great buying tip or a panic sale.
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) alike. The fight or flight response – or quick and impulsive behaviour without conscious thinking – may have been absolutely perfect for ancient lizards to survive but that’s not the way financial planning should be approached. 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 specializes 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 you to 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 receive an investment tip that sets your pulse racing, pause for a moment and try one or all of the following approaches to properly analyse the situation first and ensure that your on-the-spot emotions aren’t clouding your long-term investment decisions.
Reset the emotion: Suppose you’re experiencing a negative emotion, don’t just give in. Instead, chin up and try and see the same emotion from a different angle. If it’s regarding missing out on a bull run, remind yourself that feeling a bit frustrated is normal. But instead of brooding, you can begin searching for individual stocks with strong fundamentals, where the ‘correct’ price discovery is yet to happen.
Relook at the problem: If a particular problem has been weighing you down, you ought to have a relook at the same issue. What if the problem, similar to the proverbial dark cloud, has a silver lining? For example, bearish markets can be an excellent time to adopt a contrarian attitude and buy fundamentally-strong stocks for the long-term.
Change your point of view: Sometimes, negative emotions can make it really hard for us to see the BIG picture. Some of us may have had the experience of helping friends/ family through moments of desolation and even panic by pointing at solutions that were already present but something they couldn’t see. Thus, try to take a step back and view your situation from the perspective of an objective observer. For example, if you’re feeling miserable that your bet on a certain stock has gone wrong, take a moment and ask yourself if your research on the company’s fundamentals is justified. If you are convinced that your research is rock-solid, buy some more of the same stock because the market will surely turn around sometime soon.
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. Happy investing!