The human brain is a fascinating organ. Most often don’t think about it, but our quirks, preferences, habits—all that makes us who we are—are all contained in a mass of pale gray flesh.
But how does the brain affect what we do and how we react in different situations? What, for instance, makes some people more susceptible to road rage while others just cruise along? Along a similar vein, why do some investors panic and pull their money out of the market at the slightest hint of volatility while others manage to stick it through the ups and downs?
It all ties back to one thing—emotion. Like it or not, humans are emotional beings, and many decisions we make are driven by our emotions.
Take the road rage example. Driver A cuts off Driver B, Driver B gets angry, and this causes him to engage in road rage behaviors like sudden and unsafe lane changes, speeding and rude hand gestures—endangering both himself and Driver A, along with everyone else on the road.
In investing, fear often drives investor behavior during times of heightened market volatility. Fear of losing all or some of one’s savings causes many to sell out of the stock market (often at the worst possible times) despite the fact that, historically, stocks rise more than fall over the long term. But fear blinds investors to that fact, and many make decisions that can potentially harm their long-term portfolio returns.
For more on how the human brain and emotions can negatively impact investing decisions, see Michael Hanson’s 20/20 Money and Ken Fisher’s The Only Three Questions That Count: Investing by Knowing What Others Don’t