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Your Wealth Journey Investment Insights: Should You Listen to Your Gut?

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One of the hardest parts of making predictions is accounting for the human element. Like it or not, we’re an unpredictable bunch. You can never really know what people are going to do.

But, it’s not necessarily the actions of others you need be concerned with. Your own impulse reactions might be the biggest obstacle you face on your journey toward your financial goals.

Exploring the Human Factor

For us humans, evidence does not always lead to the logical reaction. We have things going on in our heads that have nothing to do with solid evidence and rational decisions – a brew of chemically generated instincts and emotions that can make us leap way before we even think about looking.

Rapid reflexes have served us well at times. Our prehistoric ancestors depended on them when responding to both predator and prey. A child’s cry brings parents running, while that same child’s laughter brings an instant outpouring of love and positive chemicals flood our brains.

As a result of these occasional positive outcomes, we end up with the false belief that our “gut feeling” is always right. In finance, where the coolest heads often prevail, many of our base instincts cause more harm than good.

Your map and plan might point you toward green pastures just around the bend, but your gut may be telling you to take a shortcut through a dark forest.

Which way should you go?

To the uninterested third party, the decision seems obvious: stick to the plan. But, despite the evidence in front of you, you’re going to have a very hard time not listening to your gut – even though it leads down an unfamiliar path with little direction.

In a sense, intuition is vastly overrated.

Or, as neurologist and financial theorist William J. Bernstein, MD, PhD, said, “Human nature turns out to be a virtual petri dish of financially pathologic behavior.”

Behavioral Finance, Human Finance

To help us make sense of the relationship between our heads and our financial health, we turn to another field of evidence-based inquiry: behavioral finance.

Wall Street Journal columnist Jason Zweig’s Your Money and Your Brain provides a great overview, summarizing the behaviors themselves and what’s happening in our heads to generate them. For instance:

  • When markets tumble – Your brain’s amygdala floods your bloodstream with corticosterone. Fear grips your stomach and every instinct points the needle to “Sell!”
  • When markets unexpectedly soar – Your brain’s reflexive nucleus accumbens fires up within the nether regions of your frontal lobe. Greed grabs you by the collar, screaming that you best act soon if you want to seize the day. “Buy!”

Find A Guide

Of course, that’s not all. Our brains are packed with biases that influence our investment activities – confirmation bias, hindsight bias, recency, overconfidence, loss aversion, sunken costs, herd mentality… but that’s a post for another day. We’ll cover that next time.

The trouble is, you can’t always see them for yourself. They’re happening to you, after all. Having a guide who knows how to recognize these biases and how to navigate them is critical in reaching your financial destination.

Our wealth-building process doesn’t stop at mapping and planning. It’s our ongoing guidance that keeps you headed in the right direction, regardless of what your gut might be telling you.

Ready To Stop Trusting Your Gut? 

Contact Atlas today

 

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