Your Brain On The Market
The title of this blog is taken from the “This Is Your Brain On Drugs” public service announcement that was run by the Partnership for a Drug-Free America in the 1980s.
The video shows a man talking about the dangers of drugs. He holds up an egg and says, “This is your brain.” Next he turns to a hot frying pan on a stove and says, “This is drugs.” He then cracks open the egg, fries it, and says, “This is your brain on drugs.” Finally he looks up at the camera and asks, “Any questions?”
Why is a wealth management firm talking about brains getting fried?
It’s to remind everyone that powerful stimulants can impact our investment behavior. Drugs are stimulants, for sure, but so is money, especially when money is the focus of emotional media and unsettling headlines.
Recently, WealthManagement.com published a story discussing just how powerful a stimulant money can be. The daily brief gave an overview of a book out by Kabir Sehgal, Coined.
The following is taken directly from the transcript of Mr. Sehgal’s YouTube video for The Big Thing that highlights his book:
“I looked at the topic of what’s happening in the brain when we deal with money. And there’s a part of the brain that activates — it’s called the nucleus accumbens. It’s deep within the sort of evolutionary, the oldest part of the brain. I looked at studies that compared people who make money to those who are high on cocaine. Remarkably, the brain scans were almost identical.”
Yes, your brain also gets fried on money.
Many studies have shown that investors are more stimulated and feel more pain when they experience losses than when they experience gains. Even without the research, however, I think we know instinctively that we can get anchored on our failures instead of our successes or all the things we have to be thankful for.
Coming back to the stock market, we have certainly experienced a few emotionally-charged down days year-to-date.
Just as it is almost impossible to resist slowing down and taking a look at a car wreck, it is very difficult to resist sensational headlines like:
“Total Fail”
“U.S. Stocks Post Worst 10 Days In Recent History”
A recent favorite was the following headline, which is both emotionally charged and inaccurate:
“Stock Exchanges Plunge Into Bear Market Territory”
I will not mention the well-respected daily financial paper that published the headline above, but will remind you all that a bear market is a 20% drop, not a 10% drop.
Being down 10% certainly gets our neurons firing. I encourage everyone to remember, however, that 10% drops are not uncommon.
Think about the old saying, “Investors create 50 year floods every 5 years”
And yes, it’s OK to smile when you think about the words “investors create”.
We constantly get calls asking our opinion about where the market will go next. I don’t have a crystal ball, but I am willing to make the following predictions.
If you continue to see the market drop, you will see:
- More sensational headlines that are designed to sell ads, but not conducive to good investing
- Wall Street, which loves volatility, not missing out on the opportunity to sell a trade or a product when anxiety is high
- Sales pitches for expensive downside protection products and hedging strategies
If and when these predictions come to pass related to a sales pitch, to paraphrase another drug-related PSA:
“Just Say No”
Related Reading:
Keep A Steady Hand On The Tiller
Don’t Put Yourself in a Corner 
COVID-19 Update 
Every Day Can Not Be Good