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emotional investing

Is Your Brain Risking Your Financial Success?

By | 2019, Newsletter | No Comments

The world is full of information, yet our brains are only capable of processing a certain amount. If we had to analyze every aspect of every situation or decision, we would never get anything done. In order to cope, our brains have created shortcuts to help us make sense of things. These cognitive shortcuts – known as heuristics – are rules of thumb or educated guesses. In many cases, being approximately right is good enough. However, there are times when these shortcuts are not good. Recognizing when they are creeping into our decision-making will help us determine if they are helpful or hurtful in our current situation. This is critical when it comes to your money.

Overconfidence

While confidence is good, overconfidence exaggerates our abilities and can cause us to underestimate the risk of being wrong. For example, you may pick a stock that is growing. If the stock price continues to go up, you conclude that you have a good strategy or a natural talent. However, when the stock plummets, you distance yourself from the truth, believing it was just bad luck. An overconfident person may even repeat the same mistake over and over again.

Framing

When we have already made up our minds, we place our existing perspective on all new information that comes our way. For example, expecting a drop in the stock market, you put a negative spin on any good news. People who frame eventually get a big surprise when they find out the cost of being wrong.

Anchoring

Every one of us has experiences that form our opinions. When we anchor ourselves to these opinions, we ignore anything that doesn’t fit our views. If you lost money investing in a recession, you might conclude that the stock market is too risky. Even when presented with a better perspective of its potential growth, you may still feel like there is too much risk.

Herding

Have you ever found yourself doing something you would not do on your own? Going along with what a larger group is doing, whether those actions are rational or not, even in the face of unfavorable outcomes is known as herding. You hear that investors are selling, so you sell, or you hear they are buying, so you buy more without considering how it impacts your financial plan.

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How Emotion Drives Your Money

By | 2019, Money Moxie, Newsletter | No Comments

Emotional Response

Financial advertisements make inflammatory statements such as “You cannot afford losses like those of the last recession” or “Making the wrong Social Security decision can cost you thousands.” These advertisers want to make us feel that we need to make changes without considering the reality of our situation.

Everything we hear or see causes an emotional reaction; good or bad. Information we hear or see hits the amygdala, the center of emotion in our brain within 12 milliseconds.

Logical Response

It takes 40 milliseconds for the same information to hit the logical part of our brain, the cortex.

By that time our emotions have hijacked our brain, and we cannot think straight. There literally is no time for rational thinking. Our minds were made up before we even realized what was happening.

Finding a Solution

Next time you find your logic being hijacked by emotion, take a step back. Think to yourself: “What if the situation I am fearing does not happen?” “What if the opposite happens and things are better than I think?”

Your financial plan is the tool we use to prepare you for market volatility and prevent emotional decisions from sidetracking you from your important financial goals. If you do not have a plan or have not recently reviewed your plan, I invite you to meet with one of our financial advisors.

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