While many of us may excel at financial planning in 'normal' situations, our confidence can waver when faced with an enticing investment opportunity or a sudden market downturn. In these moments, our carefully crafted financial strategies may seem to vanish, leaving us vulnerable to making hasty decisions that could have negative financial consequences. What causes this shift in our decision-making process?
Some refer to this phenomenon as the influence of the 'lizard brain,' a primitive part of our brain that once played a crucial role in the survival of ancient humans and lizards alike. This instinctual response, characterized by rapid and instinctive reactions, may have been beneficial for our ancestors but is not conducive to sound financial planning practices. Let's explore some strategies to regain control over our decision-making processes.
It's Important Not to Allow Our Primitive Instincts to Make Investment Decisions for Us
Successful investing requires a mindset that differs from the instinctual reactions of the lizard brain. To be a good investor, it is essential to create a strategy, focus on long-term goals, and remain steadfast even in turbulent times. On the contrary, the lizard brain prompts quick responses to immediate dangers.
While financial setbacks may not seem like a significant threat in theory, they can trigger a physical response similar to a life-threatening situation due to the way losses are perceived. This physiological reaction can hinder rational decision-making and lead to investment mistakes if emotions are not kept in check.
Regaining Control Over Your Decision-Making Process
Thankfully, we have the ability to combat the influence of the primitive part of our brain. Studies indicate that we can successfully manage our emotions by making cognitive adjustments. Cognitive adjustments involve changing our perspective on a situation (or ourselves) to modify our emotional reaction to it.
When you come across a stock tip that excites you, take a moment to pause and consider using one or all of the following methods to thoroughly assess the situation and prevent your immediate emotions from impacting your long-term investment choices.
Restore the emotion: If you've been feeling burdened by a specific issue, it's a good idea to reconsider the same problem. Consider the possibility that, like the saying goes, every dark cloud has a silver lining. For instance, bearish markets present a great opportunity to take a contrarian approach and invest in fundamentally sound stocks for the future.
Take another look at the problem: If you've been feeling burdened by a specific issue, it's time to reconsider it. Consider the possibility that, like the saying goes, every cloud has a silver lining. For instance, downturns in the market can present a great opportunity to take a contrarian approach and invest in stocks with strong fundamentals for the future.
Alter your perspective: At times, negative emotions can cloud our judgment and prevent us from seeing the bigger picture. Many of us have likely helped friends or family in distress by pointing out solutions that were already available but overlooked by them. Therefore, it is advisable to step back and consider your situation from an unbiased perspective. For instance, if you are upset about a stock investment that went awry, pause and evaluate whether your research on the company's fundamentals is sound. If you are confident in your research, consider increasing your stake in the stock as the market is likely to rebound soon.
When emotions run high, our immediate reaction is to respond impulsively. By reframing the situation, you allow your rational mind to catch up with your feelings before taking action. Wishing you successful investments!
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