Traditional economic theory teaches that humans will make rational decisions when presented with all the facts and appropriate alternatives. Research shows, however, that in many instances investors make irrational decisions driven by our prehistoric “lizard brain.” These are the reactions developed over many years to promote survival and include common responses such as “fight or flight” and the “herd mentality.” Understanding these tendencies is the critical first step to counteracting genetically ingrained – and potentially destructive – investment behavior.
This issue of the Abbot Downing newsletter explores the many ways the brain can sabotage our best laid investment plans, unless a conscious effort is made to circumvent them. By understanding the common instincts that can trip us up, reactionary decisions can be removed from the investment process and an orderly approach can be taken even in the event of unsettling market scenarios.
- We are not naturally suited to make wise investment decisions. Much of our ancient coding is hard wired to lead us to instinctively poor choices.
- A key way to overcome the brain’s tendencies is to have a clear understanding of what you want and need your investments to accomplish for you, your family, and your community – now and for generations to come.
- It’s important to focus on what you can control, including minimizing costs, controlling taxes, ensuring adequate cash flow, keeping your estate plan current, to name just a few.
- Remember, there is more to life than money. Make rational choices in line with your long-term goals and family values, while resisting the urge to react to investment stimuli with your lizard brain.
Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your legal and tax advisors to determine how this information may apply to your own situation.
Wells Fargo & Company and its affiliates do not render tax or legal advice.