Technical expertise is only part of what makes a successful adviser. Ben Kumar explores the science behind fear and decision-making, and explains why helping clients manage their emotional responses to market uncertainty is one of the profession’s most valuable skills.
Our brains are wired to remember bad news.
There’s a part of the human brain called the amygdala that commits our experiences to memory. We actually have two amygdalae – one on each side of the brain. The amygdala in the left hemisphere responds to both positive and negative stimuli. The one on the right specialises in negative experiences, largely ignoring the positive ones.
So there’s a negativity bias simply in what our brains choose to record and store. But things get worse.
The amygdala isn’t just a gloomy librarian, cataloguing and storing memories. It goes further, seeking out common themes in those memories and then suggesting appropriate responses.
It acts like a very intrusive Netflix – looking at things you’ve watched already, recommending similar things, then coming round to your house and forcing you to watch them.
Over time, your amygdalae teach you to respond automatically to certain events in the world. You start to associate particular situations with specific outcomes and behave in particular ways.
When those associations are negative, you become fearful and behave accordingly. Given that the amygdalae tend to look for negative events, you’ll end up scared more often than not. That’s fear conditioning.
This approach evolved over millions of years; it was better for survival on the African savannah to be more scared rather than less scared.
You might think that this no longer makes sense in the modern world. But not being scared isn’t necessarily a good thing.
In 1994, Nature published an account of a 30-year-old American woman known as patient SM-046. She suffers from a rare disease which, towards the end of her childhood, completely destroyed both amygdalae while leaving the rest of her brain untouched.
The main consequence has been a complete absence of fear in her day-to-day life – her brain simply doesn’t make the right connections.
Her experiences are a perfect demonstration of how important fear conditioning is. Most of the time, she is mildly happier than most people. She has the full range of other human emotions, isn’t scared of spiders, snakes or the dark, and rarely feels stress.
But, on occasion, her lack of fear has caused her real problems. SM-046 is unable to recognise and avoid dangerous situations. She’s been held up at knifepoint and gunpoint multiple times and suffered near-fatal injuries due to domestic abuse.
Although she remembers these events, and their negative consequences, she’s unable to recognise similar situations as they begin to occur.
So although she spends most of her life content, she’s also in danger more often – even in the modern world. It seems the amygdala is still pretty useful, even though we’ve left the savannah behind.
SM-046 would be a great client to have as a financial adviser. You’d never receive a phone call from her worrying about market declines or alarming headlines.
But the rest of humanity has functioning amygdalae. Our brains are permanently scanning the world for bad things, reminding us of the negative consequences and prompting reactions.
That’s useful for avoiding dark alleyways or angry-looking snakes, but less helpful when it comes to financial markets.
Markets are inherently balanced. Every buyer needs a seller. But our brains, primed for negative news, don’t see that balance. The brain sees a buy versus a SELL. Good versus BAD. Which triggers fear conditioning and makes us panic.
Understanding the biology is a start.
And it’s where good financial planning comes in. Markets don’t care about our amygdalae, but our clients’ amygdalae care very much about markets.
The best advisers and paraplanners help clients separate real risk from imagined risk, replacing instinctive reactions with disciplined decisions.
Beating millions of years of evolution isn’t easy. Our amygdalae may have helped us survive the savannah, but they still spend most of their time trying to get us to watch the wrong programme.
A sensible plan gives clients back control of the remote.
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