FEAR and BEHAVIOR FINANCE

It amazes me how much fear has been perpetrated on us over the past decade. Everything is urgent. Everything is crisis. Everything is “Breaking News.” When I’m in my workout club often for more than an hour, invariably the TV shows Breaking News - for the entire hour. How can something be breaking news an hour later?

It can’t.

Have you also noticed how seemingly all the video games, often targeting kids, are war oriented? Sure, I see some race car games but most of them have to do with killing, explosions, shooting and killing – oh I said that. Additionally, I find it interesting too that the NFL has been taken over by the Defense Department. Have you noticed this year that all the coaches on the sidelines are wearing camouflage fatigue like jackets and hats? Before 2009 Colin Kaepernick would have had to find some other way to protest because until the height of the Iraq War, NFL football players weren’t even required to leave the locker room for the national anthem.

The Defense Department, ramping up massive recruitment and media operations for the Iraq and Afghanistan wars, paid millions of dollars for what amounted to “paid patriotism,” or mega-military spectacles on the playing fields. It got so bad that Sen. John McCain, a veteran and considered one of the most patriotic men in the Senate, along with Sen. Jeff Flake (R-Ariz) found that the DOD shelled out $53 million to professional sports between 2012 and 2015. The justification is “we’re under attack” even when we’re not. We’re not always under attack.

I’m not against the military, I served from 1966 to 1968, so I get it.

But all this tends to heighten everyone’s GSR (galvanic skin response) to a much too high level of stress. None of it calms us down.

GSR - The galvanic skin response refers to changes in sweat gland activity that are reflective of the intensity of our emotional state, otherwise known as emotional arousal. Our level of emotional arousal changes in response to the environment we’re in – if something is scary, threatening, joyful, or otherwise emotionally relevant, then the subsequent change in emotional response that we experience also increases sweat gland activity.

The amygdala is the part of our brain where fear comes from – fight or flight. It is the reason we are afraid of things outside our control. It also controls the way we react to certain things or events that causes an emotion that we see as potentially threatening or dangerous.

My wife Judy and I recently saw the documentary movie “Free Solo.” It’s about Alex Honnold, a famous free solo rock climber who climbs all kinds of rock faces throughout the world. “Free Solo” means without any protection, no ropes, no anchors, no nothing. Having done some rock climbing it often can be fearful enough even when you’re roped in but this guy is nuts. The movie features his attempt to climb Half Dome in Yosemite National Park in California, the biggest, most difficult climb on the planet.

He’s been doing this sort of thing for years so they did an MRI of his brain. During the MRI they’d show him different pictures and he’d simply click a button indicating that he saw it. He didn’t value it, and just saw it. They wanted to see how his amygdala responded.

They found that his amygdala was, well, not very active. His amygdala was subdued more than most, probably more than anyone. Therefore he was able to take on pretty scary stuff without as much intense fear as most of us would experience.

See the movie to see how it turned out.

But why so much fear in our culture?

Because it gets and keeps our attention. And it sells. If I keep your attention I can push more advertisements in front of you … and on and on.

Have you ever gone to the lake or a mountain stream or simply a quiet walk … without any devices on you? For more than an hour or so, like maybe a week?

It’s interesting what makes us calm. I was in the doctor’s office the other day after running around all day getting things done, feeling urgency in everything before the appointment, and one of the first things the technician did was take my blood pressure. It was a bit high. So she said, “Close your eyes, take three deep breaths and count to 100.” So I did and it brought my BP down considerably, back to normal.

Got Yoga?

Anyway, what does all this have to do with finance, or more specifically, your money?

Currently, let’s say October and November of 2018, (so far) the stock markets have increased volatility, mostly on the downside. It freaks us out. We see our accounts going down even a little and it freaks us out.

One very common retort we hear is, “I just don’t want to see my account go below X.” In behavior finance we call this Anchoring. Anchoring is a behavioral bias in which we use of a psychological benchmark, in this case the value of an account. We fix ourselves on the anchor and making decisions (and/ or fret) on the basis of that anchor.

Hey, everybody does it. It’s normal. But it’s not rational.

I use these terms, “normal” and “rational,” for a reason because these are the terms used in behavioral finance. In Standard Finance the concern is standard deviation, volatility, Beta, Alpha, etc. and we make decisions based on these metrics. I want the highest return for the least risk, sort of thing. This is where we find “rational” investors.

Behavior Finance, on the other hand is where people act “normally.” For instance, someone holds a stock too long because she inherited from Daddy and if it was good enough for Daddy it’s good enough for me, possibly all the way down. In Behavior Finance we call this the Endowment Effect. Normal but not rational.

It’s normal to worry, to fret. Its okay, we’re all normal in this way. But we also need to remain rational and not let our emotions and fears drive us to being our own worst enemy when it comes to anything, but particularly our finances.

So how shall we then live?

Turn off your TV.

Read fiction.

Take walks outside more. When we’re on vacation Judy and I walk about 12 miles every day. Its great exercise and you get to see the place you’re visiting so much better.

Relax. Show love to others.

It’s going to be okay.

Any opinions state are those of the author and not necessarily those of Raymond James.