Mind Over Matter: Emotions vs. Logic in Finances by Rice Financial Group
With the end of summer, investors are faced with trade wars, inverted yield curves, increased market volatility, and talk of recessions and even depressions. While a clients' first response might be to bury their heads in the sand, it’s actually a good time to reassess how to make financial decisions.
Ian Rice CFP® of financial planning firm, Rice Financial Group, offers his take on how to make financial decisions when emotions are running high, and logic, well, seems to be hard to come by.
With the end of summer, investors are faced with trade wars, inverted yield curves, increased market volatility, and talk of recessions and even depressions. While a clients' first response might be to bury their heads in the sand, it’s actually a good time to reassess how to make financial decisions. Understanding how brains work is an important first step in learning how to make sound financial decisions in all economic environments.
Here’s the unfortunate truth: Investors' brains wants to sabotage them. Their behavior, habits, and mindset have more to do with their financial success than their economic circumstances or market returns.
So, what does all this mean? The amygdala is a tiny little part of the brain that manages emotions and survival instincts. It fires quickly, stimulates fear and greed emotions, and actually alters the chemicals in the body. This is the part of the brain that makes people angry or fearful. When it is on high alert, logic goes out the window. Fortunately, there is more at play. While the amygdala controls emotions, the frontal cortex works to help make logical decisions. It processes things slowly and helps people analyze information.
“Here’s the deal: Our subconscious works to protect us and keep us safe by trying to watch out for things in conflict with what we believe. This has tremendous implications for how we make financial decisions,” said RFG Founder and Managing Partner, Ian Rice. “For most people, this creates blinds spots where we are only receiving information we actually already believe. This process is what makes you freak out when you see the market take a dive and immediately call your investment advisor, panicked, wanting to sell off your investments in an effort to avoid the pain of a loss. And your investment advisor says...don’t worry about it. Your information and her information are coming from the same sources based on the same data but you are being governed by your amygdala and emotions of loss while she is being controlled by her frontal cortex and is totally calm and encouraging you to stay the course.”
So how do investors and advisors deal with this seemingly impossible difference of opinion? Well, investment advisors should have their clients in diversified portfolios, set to a risk tolerance that keeps clients from letting the amygdala sabotage financial success. Clients also may need to recognize that they're anchoring - or focusing too heavily on one piece of information when making finance decisions. Investors often “anchor” to market high points, setting unrealistic future return expectations. If the market drops, they may feel panicked or that they are doing poorly despite still being on track to reach long-term goals.
The moral of our emotions vs. logic in finances story? Be skeptical of everything the brain tries to say. It may be running on emotion when what clients really need is a little logic. To learn more, please reach out to Angela Hood.
About Ian Rice
Ian Rice entered the financial planning business in August of 2009 and is now Managing Partner of Rice Financial Group. Ian runs a technologically advanced practice which allows him to serve clients from Alaska to Puerto Rico and still be home in time for dinner. With a full staff and team of supporting advisors, Ian has embraced not just becoming a world class advisor but also building a thriving business. Ian regularly travels for speaking, training, and advising engagements and has earned the following designations: Certified Family Business Specialist (CFBS), Certified Financial Planner Professional (CFP®), Charter Financial Consultant (ChFC), Charter Life Underwriter (CLU), and Retirement Income Certified Professional (RICP). For more information on Ian and Rice Financial Group, visit their website, http://www.ricefg.com.