Ever wonder why you sell valuable stocks under the stress of investing, or buy something too risky, even though you know better?
You may be level-headed a lot of the time and make wise investment decisions based on research and fundamentals. But some days you feel a bit like Jekyll and Hyde – you have big highs that make you feel invincible, and lows that bring a helplessness that seems insurmountable.
It all feels a bit hormonal – and it is. Here’s a visual breakdown of what’s going on inside your body when faced with the stress of investing, brought to you by our moody friend, Ian.
It’s scary out there
Honestly, it all feels a bit hormonal. And it is.
It’s not in your head
That’s because what feels like emotional reactions are partly physical, according to physiologist and former Wall Street trader, John Coates.
He found that the same primal reactions that are ingrained in our bodies when we feel danger happen when traders deal with financial markets.
Testosterone kicks in when you need to prepare for battle. It can be useful when faced with a “fight or flight” situation, but it builds on itself, and too much of it can lead to too much risk.
If you make a mistake or come under lots of stress, cortisol kicks in. If it remains too high for too long, you can experience anxiety and a tendency to find danger where none exists. You become too risk-adverse.
Financial markets don’t love your hormones
When a trader makes a mistake or an investor acts based on fear, the anxiety cycle kicks in. Fear and panic are contagious and can make jittery markets worse.
On the flip side, a winning streak will make you feel invincible. Investors get overconfident. They take chances they shouldn’t, and maybe it works out – until the next downturn.
At which point, panic takes over once again.
When too many people act in this way, market volatility becomes worse, so understanding these reactions is key to try to regulate them.