Don’t Let Your Hippocampus Stop You From Being A Successful Investor

The well written article explains how our primitive part of our brain can sabotage good decision making. For those of you that have come through my therapy room, you’ll be well-versed in how influential the limbic part of the brain can impact on our happiness and ability to make positive decisions. Enjoy this article and if you want to improve your skills in making great decisions, drop me a line.
Comment by Mark Jones, Psychotherapist
Why does everything in the press these days seem to be a crisis?  A crisis triggers emotions that have a powerful effect on people.  The press has discovered this power and has become very good at triggering and manipulating emotions.  Both the press and advertisers are fighting for shelf space in your memory.  Emotions are a powerful link to memory.
Emotion and memory are closely related. You know this from your own experience. Go to a party, and meet a bunch of new people. Which faces are you going to remember?  The woman who made you laugh? The man who made you feel embarrassed?  Your new boss? — You remember the ones who made an emotional impact.
Thus, you would not be surprised to learn that the system of the brain that controls emotion, the “limbic system,” is also in charge of transferring information into memory. From years of experiments and surgical experience, we also know that the specific location for this transfer is a portion of the temporal lobe called the hippocampus.
The hippocampus is a small organ located within the brain’s medial temporal lobe and forms an important part of the limbic system, the region that regulates emotions. Psychologists and neuroscientists generally agree that the hippocampus plays an important role in the formation and indexing of new memories about experienced events.  Part of this function is hippocampal involvement in the detection of new events, places and stimuli. This is partly why returning to a location where an emotional event occurred may evoke that emotion. There is a deep emotional connection between episodic memories and places. The hippocampus is responsible for processing of long-term memory and emotional responses.  We would not even be able to remember where our house is without the work of the hippocampus. The hippocampus also encodes emotional context from the amygdala.
When you think of the amygdala, you should think of one word, fear. The amygdala is the reason we are afraid of things outside our control. It also controls the way we react to certain stimuli, or an event that causes an emotion, that we see as potentially threatening or dangerous.  The amygdala is a limbic system structure that is involved in many of our emotions and motivations, particularly those related to survival. The amygdala is involved in several functions of the body including fear responses, emotional responses, hormonal secretions; arousal, and memory.
The amygdala is involved in the processing of emotions triggering the fight or flight response.During the fight-or-flight response, the amygdala takes over.  The structure causes the adrenal gland to release epinephrine into the bloodstream, along with other hormones like cortisol; signals the heart to pump harder, increasing blood pressure; opening airways in the lungs; narrowing blood vessels in the skin and intestine to increase blood flow to major muscle groups; and performing other functions to enable the body to fight or run when encountering a perceived threat.  Many bodily functions take a back seat during the fight-or-flight response.
The term perceived threat makes an important distinction and brings up a critical point to remember. As in the case of chronic stress, the body’s stress response is triggered repeatedly on a daily basis in response to actual physical and psychological threats as well as perceived psychological threats. As a result, the body can become exhausted, and the overabundance of epinephrine and cortisol can result in lowered immunity and other health problems. Hyperactivity of the amygdala has been associated with fear and anxiety disorders.
Fear is an emotional and physical response to danger. Anxiety is a psychological response to something perceived as dangerous.  Anxiety can lead to panic attacks that occur when the amygdala sends signals that a person is in danger, even when there is no real threat.
How do you let fear affect your investment portfolio?
In February, markets were sitting at the top of a bull run that began years ago.  Suddenly, the release of some macro-economic data sparked fears of inflation and higher bond rates.  This fear caused a panic that lead to the S&P 500 dropping from its high at 2872 to 2581, a 10% drop.  Markets had begun to recover into March when the “f” word reared its ugly head again, this time in the context of a trade war with China.  What changed in the market?  The companies were still making as much money.  They were still paying the same dividends to shareholders.  The difference was fear and its ability to cause panic selling.
Some investors have positioned their portfolios defensively for a big portion of this nine-year post Financial Crisis bull market.  Some have been afraid that a recession is “just around the corner” allowing their amygdala to rule the day and missing opportunities for years.  A little bit of research might have helped these investors have confidence in a long-term strategic portfolio that does not rely on market timing.  For example, according to Ned Davis Research, the stock market has declined 5-10% 77 times in the last 70 years. It is practically an annual event.  On average, the recover from these levels has taken one month, assuming you did not get scared out of the market.
What would your hippocampus say? The hippocampus and amygdala work in concert to consolidate our emotions and long-term memories. This process is critical for evaluating information in order to respond appropriately to situations.  However, the amygdala has a trump card!  Whenever a possible fight or flight emotion is perceived, the brain’s nutrients, blood flow, and oxygen are directed to the amygdala.  This saps the other parts of the brain clouding creativity and rationality.  The brain becomes less concerned with painting the next Mona Lisa when it perceives a possible attack by a lion.  Remember this when viewing the next “crisis” on the news, or the next irrational drop in the stock market.  Is this really a crisis?  Are you being manipulated?  What would your creative, rational hippocampus say?

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