I have been following the stock market for the last year. My interest was piqued by the recession and the volatility of the market and how this has affected people.
To watch the market and the day-to-day fluctuations is a good lesson in how the brain is wired in terms of memory and emotion. For example, last week, the unemployment figures for January were released; they were worse than expected and the market tumbled by several percentage points. This happened despite, among other positive economic indicators, approximately 70% of companies reported higher than expected earnings for the fourth quarter and the overall unemployment rate was better than it had been in a year or more. There was a sell-off and the markets tumbled in value; the Dow Jones closed under 10,000 for the first time in about four months. Granted, I have no training in economics and know as much about finance as The Hulk knows about subtlety, but still, the reaction to the January unemployment figure seemed severe.
Why do people react so strongly in the stock market? My belief is that it is because money and financial issues cause strong emotional reactions and, in relation, because of how the brain processes memory. Memory and emotion are linked very closely. The brain uses some of the same neuro-chemicals to process both emotion and memory. In the article “The Flavor of Memories”, (Time Magazine January 29, 2007), neurobiologitst James McGaugh is quoted as saying that “when faced with an emotion-charged situation, such as a threat, our bodies release the stress hormones adrenaline and cortisol.” He continues that these chemicals signal a part of the brain called the amygdala to release another stress chemical called Norepinephrine. This causes the body to respond in a “fight or flight” pattern. “The heart beats faster, respirations increase and muscles tense”. In addition to the physical response, “these signals also tell the neurons that any memories recorded in the next few minutes need to be especially robust.”
What does all of this mumbo jumbo mean? To put it simply, in an emotionally charged situation, human beings are wired to have strong memories of the feelings and events that go with it. This likely serves as a protective factor for us; dangerous situations should elicit a rapid and protective response. Too much of this, however, can lead to anxiety problems such as selling stocks in a panic and losing money, or even worse, a severe anxiety disorder called Posttraumatic Stress Disorder.
There is a rule of thumb about investing, not to let your emotions get in the way of your decisions, but that is easier said than done because of the emotion/memory connection. There is likely a plethora of people watching the market climb back up this week, who are smacking themselves on the forehead and wishing they would have thought a bit more before reacting last week. You can’t really blame them for their reactions, however, as their memories from last year are of the market tumbling resulting in massive financial strain, and of feeling horrible about it.
What the market can teach us, then, is to understand how the human brain is wired, that during a stressful or emotional event, strong feelings, thoughts and reactions are elicited, triggered by powerful memories. Granted, sometimes you may need to have these, for example if you are driving in your lane and a car is coming right at you from the other way. That is probably not the time to be pensive and thoughtful. In a majority of cases, however you are able to take a breath; don’t just do something but stand there. Let the memory/emotion response calm down, subside. You will be able to better assess the situation and react with a cool head and with all of your mental faculties intact. You will find that your “mental health portfolio”, and possibly financial portfolio, will flourish.