The Fear of Missing Out

Rapidly rising stock markets are the most challenging times for financial advisors who truly care about their client’s long-term well being. This latest market rally is no different  as it has prompted a number of calls from clients asking if they should be more aggressively invested to avoid missing out on the rally. Frankly, I’ve always suspected that my answer fell short of satisfying them. Now I know why.

In short, I was answering an emotional question with a logical answer, and emotions are more powerful motivators than logic. Quite simply my answer didn’t address the heart of their question.

Scientists are now learning that our centuries-old assumption that logic is superior to emotion is a deeply flawed one. Jonah Lehrer has written a fascinating book entitled “How We Decide” explaining the vital role of emotions in our learning and decision-making. Within the last twenty some years scientists have discovered that emotions, specifically dopamine, play the dominant role in our learning and ultimately, in our decision making.

Lehrer says that “feelings are not simply reflections of hard-wired animal instincts. Instead, human emotions are rooted in the predictions of highly flexible brain cells, which are constantly adjusting their connections to reflect reality. Every time you make a mistake or encounter something new, your brain cells are busy changing themselves. Our emotions are deeply empirical.”

In the book, Lehrer describes experiments done on monkeys by Wolfram Schultz of Cambridge University. Trying to find why dopamine was so important in Parkinson’s disease by studying its effects on monkey’s brains, he discovered something very curious; that dopamine neurons began to fire just before the monkey received a reward – a treat or a banana. How “could one cell represent anything so complicated as food?” and before it was offered, Schultz wondered.

To answer the mystery Schultz conducted a series of tests over years that would fundamentally change our understanding of the learning and decision-making process and the hierarchy of emotions and logic. All this will tie directly back into rising stock markets. Please stick with me.

Shultz’s studies started simply at first. He would sound a tone, squirt some apple juice into the monkey’s mouth, and then monitor the electrical activity inside the cells of the brain. At first the dopamine neurons fired only when the juice was administered. However, once the animal learned that the tone preceded the juice (requiring only a few trials) the same neurons fired at the sound of the tone instead of receiving the sweet juice. He found that the process could be indefinitely extended. The dopamine cells could be made to respond to a light preceding the tone that preceded the juice and so on.

Lehrer says that “what’s interesting about this system is that it’s all about expectation. Dopamine neurons constantly generate patterns based on experience: if this, then that. They learn that one tone predicts the juice, or that light predicts the tone that predicts the juice. The cacophony of reality is distilled into models of correlation that allow the brain to anticipate what will happen next.” If all goes according to plan, the dopamine neurons secrete a burst of enjoyment.

But our minds are more complex than the monkey’s, right? Not so where Schultz’s experiments are concerned. Seems our brain stem (most basic bodily functions) and limbic region (animal emotions) are very similar to those of other primates and behave just the same in similar experiments. It is in our frontal cortex that makes us superior. This region is the domain of reason, intelligence, and morality, which separate us from the animals. For centuries it has been accepted that reason, intelligence, and morality enable us to rebel against the primitive feelings to make dispassionate and logical decisions – WRONG.

Scientists have discovered that the analysis that occurs as we experience and practice takes place beneath our conscious awareness, in the emotional regions, or the primitive regions of our brain. As Lehrer puts it, when a person is drawn to a specific course or action his mind is trying to tell him to choose that option. It has already assessed the options at the sub-conscious level beyond logic and reason. Lehrer says “homo sapiens is the most emotional animal of all.”

By now you may see where this is going. In our past we have experienced pleasure from rising markets in the form of material gains. Our minds are telling us to follow a course of action that will result in the pleasure of receiving greater wealth. Problem is, markets are RANDOM. They represent a classically random system.

While dopamine works great in instances where there is predictable cause and effect, and even when things don’t necessary go according to plan, it actually works against us in random situations. Read Montegue of Baylor University says that “people enjoy investing in the market and gambling in a casino for the same reason that they see Snoopy in the clouds. When the brain is exposed to anything random, like a slot machine or the shape of a cloud, it automatically imposes a pattern onto the noise.

But that isn’t Snoopy, and you haven’t found the secret pattern in the stock market.” He goes on to say, “the brain is so eager to maximize rewards that it ends up pushing its owner off a cliff.”

The products and the sales tactics of the financial services industry are designed to prey on peoples’ eagerness to maximize rewards and to minimize losses. These ‘services’ in fact do most people substantially more harm than they will ever realize, because they have no way of measuring the cost to their lifestyles. They are simply doing what ‘feels right,’ – what their ‘intelligent’ emotions are telling them to do.

When it comes to markets and investing, without plan or purpose, we simply are simply wandering allowing our ‘intelligent emotions’ to do us more harm than good. Add more risk to your plan only if your purpose requires it, irrespective of current market conditions.

Depend on your trusted financial advisor, who thoroughly understands your life plan and how to confidently achieve it, to help you make informed decisions about taking more or less risk, not your dopamine neurotransmitters.

Have a great weekend