It’s not the type of scream you can hear – but at one time or another we have all experienced it. The scientific term for our “lizard brain,” is the amygdala, which is located deep within the temporal lobe of the brain. Though it’s no larger than the size of an almond, it is the control center for of our emotions – especially fear and anger. Science has unlocked a wealth of information about this part of our brain – the ‘fight or flight’ survival instinct resides there, but rational thought does not.
This is Your Brain on Investing
When it comes to investing, we see this play out all the time. Our many hardwired biases make humans poor investors. Behavioral finance experts have studied these tendencies, which include Overconfidence, Loss Aversion, Recency Bias and Anchoring Bias, to name a few.
Studies have shown that the same part of our reptilian brain that is linked to human tendencies of addiction and survival, also processes our feelings about making investment decisions. Money and investing stir emotions deep within us.
One study, cited by author Jason Zweig, in his book Your Money and Your Brain, shows MRIs of stock market day traders, gamblers and drug addicts. The neurons that fire in the brain just as a cocaine addict expects a fix are identical to the neurons that fire before a day trader executes what he expects to be a ‘profitable’ transaction. In fact, the highest level of brain activity occurred before the trade was placed by the speculator, not after. Anticipating the act provided the highest euphoria, not the act itself.
Investor vs. Investment Returns
There is no need to look any further for proof of our tendencies than the Dalbar Study of Investor Behavior*. The annual survey found that over the past 20 years, the average stock-fund investor realized about a 5% per year return, during which time the U.S. stock market index returned nearly twice as much. There is no other plausible explanation for the underperformance other than behavior. Buying in at highs, and selling out at lows, over and over again, will destroy your long-term returns.
We hope this blog post will help you identify the scream of your Lizard Brain the next time you feel or “hear” it. If you’re trying to make an investing or money decision, ignore the sound no matter how piercing it feels. You’ll be better off.
*Source: Dalbar’s 21st Annual Quantitative Analysis of Investor Behavior. Investment returns through Dec. 31, 2014.