Introduction
As you study more and more about investing and the successful investment leaders, you may think it is all about strategizing. It also creates this illusion that everyone knows how to interpret the market and act accordingly without any slips. However, as human beings, our primitive instincts have a part in driving our decisions. No matter how hard we try, our emotions and survival response react to something that affects our survival in the modern world – finances. This is where the term "lizard brain" comes into the picture. Learn what it means, how it affects your investment decisions, and how to tame it.
What is the lizard brain in investing?
The lizard brain refers to the amygdala. It is a part of the brain that regulates your fight or flight response. Our lizard brain helps us react to immediate threats. While it is helpful, it also often triggers emotional reactions in non-threatening scenarios, like investing. It can sabotage your ability to think rationally, when it comes to long-term financial planning.
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Let's take an example to understand how the lizard brain works: Assume there is a market crash, and you are apprehensive. This triggers a panic response to sell during a market crash. Another example includes the fear of missing out during a bullish market. Such emotionally charged decisions can interfere with your long-term financial goals.
Effects of lizard brain on investing
Your lizard brain can create behavioural biases that have the following effects on your investment strategies:
· Loss aversion
As you feel the pain of losses more acutely than the joy of gains, often leads to holding onto losing stocks for too long or avoiding risky but potentially rewarding investments.
· Herd mentality
The stock market can get quite confusing, especially for a new investor. This makes it tempting to follow the crowd when the market bubbles or crashes. Hence, this results in irrational decisions.
· Overconfidence
When you outsmart the market a few times, it gives you a high. Such heightened emotions can make you overtrade or take undue risks.
· Anchoring bias
When you time the market regularly, it is easy to get lost in the numbers. As your emotions take over, you may obsess over a specific number, such as a share's past high price, which can skew your decision-making.
· Confirming bias
Based on past experiences or certain details you know, you may develop specific beliefs. When you look for information that supports such beliefs while ignoring objective evidence, you can make ill-informed decisions.
Importance of managing emotional investment decisions
Succumbing to your lizard brain can lead to financial repercussions. As noted in the examples before, instances like panic selling during market dips can lock in losses. Similarly, chasing hot stocks out of FOMO often leads to overvaluation traps. By controlling your emotions and sticking to a rational strategy, you can compound your wealth over time.
The successful and revered investors share the qualities of being patient and disciplined. This highlights the importance of using a steady approach regardless of how the market impacts your emotions.
Practical strategies to control the lizard brain
You need not eliminate your emotions altogether to control your lizard brain. Here are some practical strategies that can help instead:
· Stick to a defined investment plan
Create a financial plan that lays out clear goals and asset allocation strategies. Having such a roadmap helps you stay disciplined regardless of how the market behaves.
· Focus on the long-term vision.
Treat investment like a marathon instead of a sprint. If you are in it for long-term wealth growth, avoid reacting to short-term market noise and prioritise your long-term vision.
· Automate your investments
You can automate your investments to deduct a certain portion from your savings regularly. One such medium includes a Systematic Investment Plan (SIP). Investing this way reduces the need for constant decision-making. Thus, reducing the influence of emotions.
· Gain knowledge
When you have a solid understanding of market fundamentals, you are less likely to rely on instincts and can make informed decisions. Hence, keep learning about the market.
· Practice mindfulness
Techniques like meditation and journaling can help you identify emotional triggers as you go through your investment journey. They help maintain a calm mindset during market fluctuations.
Conclusion
Taking control of your lizard brain is the first step toward smarter and efficient investing. Recognising your behavioural biases and how they impact investing can help you think inward and adopt strategies to counter them. You can make decisions driven by logic rather than greed or fear.
You can control your lizard brain through simple techniques like sticking to a plan, automating your investments, or seeking professional advice. Managing your emotions this way is the key to achieving long-term financial success. Remember, the market rewards those who can keep their emotions in check and think rationally.
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