- Bad economic news around the Covid-19 crisis can trigger "amygdala hijack," an emotional and potentially irrational response, in investors.
- Identify your emotional triggers, such as consuming too much alarmist media or constantly checking stock prices.
- It's OK, however, to make well thought-out changes to your portfolio at this time.
Our brains are wired to look for danger and react quickly to an approaching attack; however, this most recent threat is invisible, but no less distressing to our primitive brains. Plummeting stock prices are sending some investors over the edge, leading to irrational behavior that has dire long-term financial repercussions.
In his book, "Your Money & Your Brain," journalist Jason Zweig explains that financial losses are processed in the same part of the brain that responds to mortal danger. As investors see their investment portfolios plunge and paychecks disappear, an almond-shaped tissue in our brains called the amygdala kicks into high gear. The amygdala plays a crucial role in processing and steering your emotions, such as fear and anger, allowing you to respond quickly to dangerous situations. Once that happens, an "amygdala hijack" takes place.
An amygdala hijack refers to a personal, emotional response that is immediate, overwhelming and out of measure with the actual stimulus because it has triggered a much more significant emotional threat.
The ongoing communication between the emotion of the amygdala and the rational input given by the prefrontal cortex can be stunted in times of emotional threat, such as a financial loss. This communication disruption is also known as the amygdala hijack, and, essentially, the prefrontal cortex is disabled, preventing us from making sound, rational decisions.
This can play out in times when the stock market is so volatile – like now. Stocks become cheaper and are a better deal for long-term investors who are 10, 20 or 30 years from retirement. However, feelings of fear and panic make it tough for investors to buy stocks because of the amygdala controlling their thoughts.
Under the current circumstances, investors are constantly seeing terrifying headlines and negative news, which causes them to be in a fearful state of mind, and that anxiety creeps into the decision-making process around their portfolios.
For some investors, these financial losses are so excruciatingly painful that they flee the stock market, entirely, and move their investments to cash, locking in losses that they now have no possibility of recovering from. We know this behavior is irrational for long-term investors, but it feels "safe."
When it comes to investing, it is in times like these that your brain is not necessarily your friend.
While all this information if helpful to know, how does one stop the amygdala hijack?
The first step in preventing an amygdala in overdrive is to identify what triggers it. What has caused you to question your long-term investment goals?
Scary headlines and advice given out of fear can steer you in the wrong direction when it comes to predicting market movement. To ensure that you are making rational decisions, rely on real facts and accurate market numbers before moving forward with any drastic changes to your portfolio.
Take breaks from the constant fear-inducing barrage of news bombarding your senses. In addition, if you stop looking at the stock market every day, you may find that you have more control over your fear-based thoughts.
In these unprecedented times of market volatility, it's crucial to take charge of what you can control and maintain the perception of control over your environment, in order to combat this amygdala hijack.
To prevent other people's panic from clouding your own investment decisions, make decisions only when the markets are closed and only make small moves at first. It can be helpful to work with a financial advisor during this process to keep emotions out of the decision-making process.
If you feel there is a need for you to make immediate changes to your portfolio, it may be the right time to get rid of investments that are no longer a good fit for your portfolio, because it is at a time when you won't have to pay taxes on any possible gains. By focusing on what you can control, you can also stay invested through this downturn, which experts continue to recommend for long-term investors.
Instead of thinking of your stocks in terms of what you paid for them, think of them, for the moment, as gifts. If you were offered a gift that is currently cheaper than what it was at the time it was bought, would you still be OK with returning it? Or would you want to buy more? By thinking about a market decline in a similar way, you can combat the amygdala hijack and curtail the influence your emotions exert on you as an investor.
Unfortunately, investors are not out of the woods yet, as a constant influx of upsetting headlines will probably continue in the months ahead. We need to do what we can to help us keep our brains in check, in order to continue making smart investment decisions.