This year it has been hard not to notice the stock market volatility—one day it is wildly up, the next day it is wildly down. In a recent market recap, JP Morgan notes that, so far in 2016, there have been 23 days with movements in the S&P 500 of over 1% (up or down)—which works out to a large market move occurring about three days a week on average.
This kind of uncertainty wreaks havoc on our brains! But, thanks to research done in the field of neuroscience, and our good friends at Harmony Crew who shared their research with us, we have a deeper understanding of how our brains are wired, and how we process things like the stock market gyrations.
To better understand, let’s look at the two major brain centers: the amygdala, which is responsible for emotions and motivation, primarily related to survival—and the prefrontal cortex, which handles all analytical thinking and decision making. The prefrontal cortex is our rational, logical center and uses the majority of the brain’s oxygen flow.
Our brain constantly assesses our environment for potential threats at a rate of about five times a second. If any risk or threat is perceived, the amygdala “hijacks” the blood and oxygen flow from the prefrontal cortex, reducing our reasoning abilities by as much as 50%!
This brain hijack idea was pioneered by Daniel Goleman in his book, Emotional Intelligence. In an interview, Goleman says: “The emotional brain responds to an event more quickly than the thinking brain. The amygdala in the emotional center sees and hears everything that occurs to us instantaneously and is the trigger point for the fight or flight response. It is the most primitive survival response. If it perceives an emotional emergency, it can take over the rest of the brain before the neo-cortex (the thinking brain) has had time to analyze the signals coming in and decide what to do. That takes a long time in brain time. The amygdala in the meantime has decided, Oh no, I’ve got to do something! It can hijack the rest of the brain if it thinks there is an emergency, and it is designed to be a hair trigger. In other words, better safe than sorry. This has helped immensely in evolution as a survival mechanism, when you are answering the question: Does it eat me or do I eat it? You can’t sit around and think about it; you need to have an instantaneous response.”
Literally our brains are hardwired to fail at making rational, well-reasoned decisions when we are in an emotional state! Which is why at Meridian, we help our clients build their financial plans and investment guidelines when we are all calm and reasoned and rational; when we are in a “cold state.” And, when wild markets cause everyone’s amygdala to freak out at the perceived threat, we are able to refer back to the plans we made when we were not panicked—which often acts as a circuit breaker, breaking the emotional energy in order to interrupt the panic, anxiety, and fear triggered from a brain hijack.
So, while we can’t stop the brain hijack, we can navigate it with planning. With a plan, we are able to recognize when it happens, and resolve it peacefully, without allowing it to derail us permanently.