The neuroscience of mistakes
Have you ever kicked yourself for making a good plan and then not sticking to it? Has it ever happened to you in the financial markets?
For most people, the answer is yes to both. And that has a lot to do with how we biologically respond to financial events. Your brain doesn’t just subtract numbers when you’re losing money, it actually undergoes a neurological response that’s akin to being in mortal danger. This really brings a new perspective to being in a Bear Market. Not a lot of healthy long-term thinking happens when you’re afraid for your life. So it’s easy to succumb to impulsive decisions that depart from your carefully constructed plan.
Alternately, when you’re making money your brain doesn’t just tally numbers either. You experience a neurological response similar to being on cocaine or morphine. Another situation in which long-term thinking is poor. To compound this, your brain’s response when anticipating bad situations or good situations is much more extreme than when actually experiencing them. So even just thinking about upcoming events, good or bad, can lead to procrastination and inertia in your financial life.
What you can do to prevent mistakes
- When you’re anxious about the market, go directly to your financial plan and review your clearly stated goals. Reminding yourself of your long-term goals helps counteract short-term impulse thinking.
- Make it a habit to check your financial plan. Sometimes, it’s hard to even remember what to do when the stock market is plummeting. This is why EP Wealth Advisors have regular reports and reviews.
- Don’t check the financial news or your portfolio too often. Remember, this is like giving yourself frequent doses of mortal danger and narcotics. It’s why EP Wealth Advisors checks in with you quarterly, but not more.
- Find a person you trust (beyond your spouse) who can talk to you about financial decisions before you make them. We all have blind spots, especially when we’re talking about our own finances. But a trusted partner with whom you can discuss your finances will help you identify those blind spots and keep you focused on your long-term goals.