This is Your Brain on Finance

Brain on FinanceTexas Tech recently ran a simulated stock market game study where student subjects had to pick an investment advisor who provided portfolio recommendations. In the study, students were shown random performance returns. Researchers noted that when investment returns dropped, the dorsal anterior cingulate cortex, the part of the brain that is used in detecting errors and comparing numbers, was activated.

When an advisor made a random recommendation that turned out well, a completely different part of the brain associated with visual recognition of faces (the advisor’s) lit up. When the student focuses on numbers, and particularly numbers with a negative value, they tend to fire the advisor and move on. Why is this?

When we respond to a visual stimulus, our initial reaction is often an emotional one based on primitive response mechanisms. As Professor Russell James, head of the study, noted, “This system is not dysfunctional. It is functional for a different environment where the purpose is survival.” But making decisions for short-run survival during times of scarcity can be inconvenient under very different, modern conditions.

So how do you overcome this? Choose to focus on your long-term goals as opposed to the short-term up’s and down’s of the market. There will always be volatility over the short-term that tests investors resolve. But staying disciplined and focusing on the big picture – where you want to be – will increase your chances of meeting that goal.

About Chas Boinske

Charles P. Boinske, CFA, is a 30 year investment management veteran overseeing the strategic direction and portfolio management process for Independence Advisors, LLC. Have a question for Charles? CLICK HERE TO ASK CHARLES

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