Your Brain on Fear & Greed: Why It’s Hard to Stop the Fear-Greed Cycle (& How to Break It)
What happens when you start to feel afraid or greedy?
Do you feel like taking your time and waiting to make your next move?
Probably not.
That’s because both fear and greed make us reactive. These emotions tend to cloud our judgment and make us impulsive, even trigger-happy.
Fear and greed also spark real changes in our brains and bodies. That can alter our outlook and mindset. It can also change how we handle our money and financial decisions, especially under stress or in more uncertain times.1,2
Let’s find out how by looking at how our brains respond to fear and greed.
Physiology of Fear: How Our Brains React to Fear
Fear is natural, and can take hold of us instantly.3
With that fear, we get surges of adrenaline and cortisol, a hormone tied to stress. We can also get some dopamine, the “chemical” tied to pleasure.4,5
That means faster heart rates, causing us to breathe faster and affect our blood flow.
Essentially, that’s our fight-or-flight response triggering our survival instincts, so we can react quickly and try to stay safe.
That instinct can still help us today in many situations but not necessarily when it comes to money and financial choices.
In fact, when we’re making money moves based on fear, we’re far more likely to be impulsive, irrational, and focused on the short term. That can mean bailing on investments too soon or falling into the trap of “herd behavior,” where you’re scrambling to do what everyone else is doing. Those are the moves often associated with big losses in the bigger picture.6
Physiology of Greed: How Our Brains Respond to Greed
Like fear, greed is also rooted in our brain chemistry, and it’s tied to dopamine too.5,6
In fact, dopamine and greed go hand in hand. Dopamine can fuel greed, and greed can mean more dopamine is released in our brains. And with more dopamine, we experience more pleasure.7
With that, we want instant pleasure, and we can get tunnel vision, falling into a vicious dopamine-chasing cycle.
That can lead to wild overconfidence and tripping over ourselves to join some “gold rush” or get-rich-quick scheme before we know much about it. Like fear, greed can lead us into herd behavior and irrational choices that interfere with our ability to see and make prudent decisions for the long-term.
Also like fear, greed can trap us in a cycle that has us chasing whatever’s next, instead of focusing on our bigger financial goals.6
How to Stop the Cycle of Fear & Greed: 5 Simple Tips for Any Investor
Knowing the biology of greed and fear gives us another way to recognize these emotions and how they can influence our choices and mindsets. With that knowledge, here’s what we can do to stop the cycle of greed and fear:
- Set your entry and exit points ahead of time: Establishing your risk tolerance in this context can give you a more black-and-white rule of thumb for making financial choices, so you’re not just going on your gut.
- Focus on goals, not returns: Goals are about your values and what you want in the big picture. That can silence greed and fear, helping us zero in on what’s more important.
- Resist on-the-fly decisions: Take an hour, a day, or even longer whenever possible before you make more significant (or even major) financial decisions.
- Rebalance your portfolio regularly: Make a schedule for checking in on your investments and make changes, if needed. This can prevent spur-of-the-moment decisions that can set you off course.
- Extend your outlook: Like fear and greed, the markets tend to run on cycles too. That means that turbulence and instability are often followed by upswings — and if you opt out too soon, you could miss out on the returns available for those who just stay the course and wait for that cycle to take another turn or two.
Also, you can talk out any choices before taking action. Remember, you don’t have to make small, substantial, or even big decisions about your money on your own. Discussing it with someone you trust, like a financial professional, can give you another perspective and more insights. And that can go a long way toward making more sensible financial decisions, no matter what you want in the big picture.
Sources:
2.https://www.medicalnewstoday.com/articles/323492
3.https://www.nm.org/healthbeat/healthy-tips/emotional-health/5-things-you-never-knew-about-fear
4.https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6662819/
5.https://www.webmd.com/mental-health/what-is-dopamine
6. https://www.investopedia.com/articles/01/030701.asp
7.https://hbr.org/2010/10/dopes-and-dopamine-the-problem
This material has been prepared by a third party that is unaffiliated with Townsend Asset Management Corp. and is provided for informational purposes only. Townsend considers this third-party source and information to be reliable, but its accuracy and completeness cannot be guaranteed. It may not represent the views of Townsend or its affiliates. It should not be considered a recommendation to purchase or sell any particular security. Past performance should not be relied on as an indicator of future results. All investing assumes a certain degree of risk, including loss of principal. Townsend has obtained permission to distribute this material. Townsend Asset Management Corp. is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm can be found in its Form ADV Part 2, which is available upon request. TAM-23-87