bad news on a road sign showing fear center of the brain controlling our investment decisions

Don’t Let “False Negatives” Lead to “False Fixes”

Whenever we see portfolio losses, the alarm system in our brain tends to go into overdrive – “Don’t just stand there – DO something!” it silently screams to our more rational selves.  And the more often we look and listen to financial media messages, Jay Mooreland, author of The Emotional Investor, points out,  the more our amygdala, fear center of the brain, is likely to exert its uncanny power over our actions.

When logic is allowed to prevail, on the other hand, we realize that:

  • investment markets are always volatile
  • “volatility” is subjective

The financial media are of no help in maintaining calm, that’s for sure. Broadcasters grab on to each new event or development, then take matters to the “nth” fear-mongering degree. In talking with Sheaff Brock interviewer Shelly, Mooreland recalled two “panic-inspiring” events whose effect on the market was short-lived:

October 2014 Ebola scare—“The only thing spreading faster than Ebola these days is the fear of Ebola itself,” Duncan Rolph wrote in Forbes. On October 15th, the same day the CDC announced that an Ebola infected nurse could have infected up to 300 people, the Dow plummeted 370 points. On October 22nd, the same day it was announced that the 43 people who were in contact with the US’s first Ebola patient were cleared of the disease, the stock market rallied.

BREXIT—“From Tokyo to London to New York, stocks tumbled sharply on Friday, June 24th, as markets digested the changing world order. American shares were down 3.6 percent. The Dow Jones industrial average sank 611 points,” the New York Times reported on June 25. Then, just five short days later, the Wall Street Journal headline read: “U.S. Stocks Rally Along With Global Markets as Brexit Worries Ease.”

“Financial decisions are rarely fully rational,” writes the MIT’s AgeLab, a “think tank” created in 1999 to translate technologies into practical solutions that improve people’s health. “Rather, they are dependent on the full context of one’s life, attitudes, and history.”

In medicine, a “false positive” is a test result which indicates that a particular illness is present when, in reality, it is not. In investing, a “false negative” happens when some financial news triggers an out-of-proportion fear reaction. “I can’t take another 2008!” your brain shrieks. Remember, Mooreland cautions, volatility is subjective. How much volatility are YOU experiencing based on short term market developments?

“In the upcoming webinars Sheaff Brock has arranged exclusively for its investors,” Mooreland assured our investment team, “I intend to share specific steps for controlling fear-based financial decision-making and empowering the rational mind to rule over impulse thinking. For now, my message to investors is:

“Don’t Let False Negatives Lead to False Fixes!”

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