This Is Your Brain In a Stock Market Crash

by | Jun 14, 2010 | Financial Therapy, Healthy Money Relationships, The Economy, Weekly Column | 1 comment

Bryan flipped on MSNBC to catch the stock market’s closing numbers. It was March 9, 2009. A visibly shaken reporter was telling viewers the Dow Jones had fallen to 6547, its lowest closing in over thirteen years. Retirement accounts had lost trillions of dollars, and many experts expected the market to continue to fall.

Bryan’s heart raced; his hands began sweating. He grabbed the phone and ordered his investment advisor to sell all his investments and move everything to money market funds.

Psychologists, investment advisors, and neuroscientists will agree that what Bryan did wasn’t rational. He reacted to the decline of the stock market as if his life were in danger. While watching stock markets fall is not enjoyable, there was no real emergency. He and his wife were in their mid-50’s, still working, with about $1,000,000 in their retirement accounts that they wouldn’t need for another ten years. The volatility in their portfolio was not going to affect their current cash flow or lifestyle.

Had Bryan held out and done nothing, his retirement portfolio would have gained $300,000 by the end of the year. Instead, he lost $250,000. His panic selling cost him $550,000.

Unfortunately, Bryan has a brain that isn’t well equipped to handle complicated financial decisions. Neither do the rest of us.

Our brains were splendidly designed to handle physical threats. If a saber-tooth tiger was bearing down on one of our ancestors, his brain would kick into high gear to move him out of harm’s way or help him fight for his life. It’s hard to run from or fight stock market volatility, but our perception of danger is just the same.

Our brain is divided into three sections: upper (the cerebral cortex), middle (the limbic system), and lower (the basal ganglia). The upper brain is where we reason, the middle brain is where we react to emotional impulse, and the lower brain is what regulates the operations of the body.

Our limbic system is where our emotions reside. This middle brain has one function, to move us toward pleasure or away from danger. The very word “e-motion” suggests movement. Difficult emotions like fear, anger, and sadness can cause the limbic system to move us away from a perceived danger, while joy, peace, and happiness move us toward a perceived benefit. There is no gray with the limbic system, it’s black or white, good or bad.

When Bryan heard the television commentator deliver bad economic news, his limbic system reacted reflexively to a perceived threat much as it would to a real physical threat. It immediately sent a message to the lower brain to prepare to flee. His heart started beating faster, the blood flow to his stomach reduced, and his palms became sweaty. The limbic system also disconnected most of the upper brain’s ability to reason. The limbic system was now ready to evoke motion by making a seemingly rational decision to move out of harm’s way. Its way of eliminating the threat was for Bryan to call the advisor and sell his investments.

Fortunately, neuroscientists have found we can rewire our brains to separate the actions from the emotions. This is done by creating new neuropathways between the cortex and limbic system. A number of methods help the brain accomplish this, including cognitive behavioral therapy, financial therapy, experiential therapy, brain training, and awareness meditation. They all take time and practice.

If you don’t think you have the time or money to engage these methodologies, just remember Bryan. Had he invested some time, effort, and money into rewiring his brain, he would be some $500,000 richer today.

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