4 Steps to Cope with Market Madness
When we are emotionally charged we are rationally challenged.
Posted Jun 14, 2010
The stock market suffered its worst May in 50 years, with the Dow losing 8.3%. Are we on the edge of another financial disaster? Are we about to witness another market crash? Are you starting to feel nervous?
When we perceive a threat, whether it is a saber-toothed tiger in a prehistoric jungle or a 300 point drop in the Dow, our brain floods our bloodstream with hormones such as adrenaline, which sets off a chain of physical responses that gets us ready to fight to defend ourselves, to run away, or to freeze in place until the threat goes away. While this works great in the jungle, it wreaks havoc in our financial lives. This response is the primary reason we engage in self-destructive financial behaviors. When we are scared or excited enough about the economy or our finances, our animal brain takes over, and we do one of three things: we fight, we flee, or we freeze.
People stuck in a financial fight reaction may react with anger and blame. In a subconscious effort to avoid taking personal responsibility, they may blame others for their problems: the government, a bad stock tip, predatory lenders, greedy bankers, short-sellers, etc. When we are stuck in a blame cycle we miss out on opportunities to examine and change our own financial beliefs and behaviors, dooming us to repeat our mistakes.
In terms of fleeing, in the Great Depression, the wealthy fled cities in fear and holed up in their country homes with stockpiled canned goods. Some went so far as to mount machine guns on the eaves of their houses in anticipation of attacks from hungry hoards, which never came. In the past few years I have seen people sell all of their stock holdings at record lows, only to and buy gold at record highs. This pattern of selling low and buying high underlies all stock market bubbles and crashes.
A common freeze reaction is to feel so overwhelmed we "play possum" with our financial lives. We put our heads in the sand and avoid thinking about our finances, stop looking at our bank statements, shy away from conversations about money, and ignore recommendations from our financial advisors.
So what can you do if you find yourself stuck in a financial fight/flight/freeze reaction? Here are four steps to help you calm down and make better, rational financial decisions.
Step 1: Recognize that when you are emotionally keyed up- either afraid or excited- you are inclined to act irrationally. When we are emotionally charged we are rationally challenged. Remind yourself that financial decisions made in the heat of emotion are almost always ill advised. Prior to acting, it is essential to calm down and get your rational brain back online. Delay making any decisions until you are calm.
Step 2: Take a few deep breaths. When we are stressed, we take shorter, shallower breaths. Taking several deep breaths can initiate a relaxation response. With each breath, repeat in your mind a comforting word or phrase, such as "relax" or "take it easy." This helps bring the rational brain back on line.
Step 3: Evaluate the accuracy of your thinking. Just because it pops in your mind doesn't mean it's true. What is the evidence that supports your assumption? What is the evidence against it? Is there a better explanation? What is the worst thing that can happen if your assumption proved true? Could you live with that? What is the most likely thing that will happen? What advice would you give a friend who was in a similar situation?
Step 4: Don't do anything! Don't make any rash decisions. Put some time between your emotional reaction and whatever action you take in response. When we are upset it takes about twenty minutes of calming thoughts to quiet the animal brain enough to allow the rational brain to take control again. Even then, we can still be swayed by our emotions, so consider seeking professional financial advice before making big financial decisions.
Whether the market is screaming up or plummeting downward, whatever you do, don't let your animal brain take control of your finances.
Dr. Brad Klontz, Psy.D., CFP®, is a financial psychologist, an Associate Professor and Founder of the Financial Psychology Institute at Creighton University Heider College of Business, a Managing Principal of Occidental Asset Management (OCCAM). and co-author of five books on financial psychology, including Mind Over Money: Overcoming the Money Disorders That Threaten Our Financial Health.
You can follow Dr. Klontz on Twitter at @DrBradKlontz.
Copyright © 2016 by Brad Klontz
Copyright © 2010, 2013 by Brad Klontz