By Steven S. Shagrin, J.D., CFP®, CRC®, CRPC®
For financial advisers across the country, emotional client scenarios are more common than ever before. The economic turmoil of the last year has caused intense feelings of fear, desperation, panic, depression and capitulation. Try as we may to educate our clients, logic and reason may not always be the best method of communication when they are caught in an emotional spin.
Fight, Flight or Freeze
The brain is a mysterious organ that makes human beings uniquely qualified to mess up their lives because of their thoughts and beliefs. Much has been discovered about the brain in recent years, including how it works in the subconscious a good deal of time and how investing and capital markets have become many people's biggest fear. And as we know, fear often results in fight, flight or freeze.
In his book, Your Money and Your Brain, author and Wall Street Journal columnist Jason Zweig says humans are hard-wired to act this way. The amygdala, an almond-shaped group of neurons deep within the temporal lobe, performs a primary role in the processing of emotional reactions. The amygdala responds to potential risks by flooding the bloodstream with stress hormones that enable us to react quickly to danger. These emotional warning flares can be lifesavers if you encounter a large, poisonous snake, but sudden waves of emotion make it difficult to stay calm in the face of a whipsawing market. According to Zweig, brain scans reveal that merely being told you are losing money is enough to make your amygdala more active.
An article from the online stock tip and investment news site Qwoter (www.qwoter.com) titled "Primal vs. Emotional Investing" says many experiments have been conducted to test the impact primal instincts and emotion-based thinking have on investing and psychology. The article offers some interesting research findings, including:
- For investors, the amygdala's fight or flight response can produce ensuing panic that can derail a long-term investment strategy.
- Humans are primed to predict. Two areas of the brain cause us to constantly look for patterns in the world around us and respond out of unconscious prediction.
- When we win big or expect to win big, we get a dopamine buzz-a euphoric feeling. If the win doesn't materialize, that euphoria quickly turns into depression.
Fear of Loss
In "Market Mess? Blame Your Brain," an article by Matthew Herper posted Sept. 25, 2008 on Forbes.com, Herper says greed, lax regulation, panic and the biological makeup of investors' brains caused the market meltdown.
"Brain imaging studies show that investors as a whole get more and more used to big returns, and thus take bigger and bigger risks in a bull market-and then the bubble pops and stockholders start selling like mad," Herper writes. "One reason: Investors fear losing more than they look forward to winning. According to a 2007 paper, researchers used MRI scans to watch the brains of people as they decided whether or not to take gambles with a 50/50 risk. Gains caused brains to light up in areas that released dopamine (the chemical boosted by Zoloft and Prozac); losses caused those same areas to decrease."
Hone Your Skills
A new set of skills is needed to help clients through these emotional rollercoaster rides. To hone listening and counseling skills, some advisers may be inclined to seek out training programs like those offered by the Money Coaching Institute (www.moneycoachinginstitute.com), Purposeful Planning (www.purposeful-planning.com) or the Kinder Institute of Life Planning (www.kinderinstitute.com). Other advisers may decide to partner with a Certified Money CoachTM, Registered Life PlannerTM or family therapist to provide the services their clients need during difficult times.
Whichever path you take, understanding how the human brain works-and how we are all hard-wired to react in certain ways to certain stimuli-can help.
Steven S. Shagrin, J.D., CFP®, CRC®, CRPC®, is a Certified Money CoachTM. Contact him at Shags@PlanningForLife.info.