Your Money & Your Brain - Fear

Chapter 7 of YM & YB discusses fear. The manner in which our brains process fear has a large effect on how we invest.

The more vivid and imaginable a risk is the scarier it feels, and the ensuing fear is effected by what psychologists call "dread" and "knowability."

Dread is determined by how vivid or catastrophic an event seems to be.

Knowability is how immediate or specific the consequences appear to be. Plane crashes seem more "knowable" than health dangers brought on by pesticides.

When we feel we understand the situation and are in control we underestimate the risks. We tend to be more fearful of flying than driving after having a couple of drinks. Yet, the driving is much riskier.

We have a greater fear of losing all our money in a market crash versus losing our nest egg to inflation. The dread and unknowabilty dominate our thinking.

Your brains amygdala, which is part of your reflexive brains alarm system, further contributes to potentially bad investment decisions. This part of your brain responds to all kinds of signals and even words. So when you watch a news story of a bad day on the trading floor, you see traders arms gesturing wildly, clanging bells, and you hear alarming words: crash, panic, etc.

Studies show that when you see this, your armygdala is very active and is filling you with fear signals.

Zweig recommends several tactics that you can use to keep your fears in check:

1. When you feel overwhelmed with fear. take a time out. Let your circuits settle.

2. Ask yourself:

* other than price, what else has changed?

* are my original reasons to invest still valid?

* If i liked this investment at a higher price, do I like it now that it is cheaper?

3. Resist the pull of the herd. Ask someone who may not have an interest in your investment whether the fear is reasonable and if you were in my shoes what other information would you require before making a decision.