Over the past month, we’ve published a series of blogs discussing some of the psychological issues that financial advisors are facing during the COVID-19 pandemic. Central to our perspective is that the human brain responds in predictable ways to the challenges associated with a worldwide medical crisis, the contraction of our economy and market volatility, and we’ve tried to teach advisors how to help clients who have become emotionally overreactive.
Importantly, advisors are people, too. You have protective instincts, and the events of the day will activate your emotions just as powerfully as any client’s. One inevitable consequence is a tendency toward extreme thinking. When our “fast-thinking” brain (as behavioral economist Daniel Kahneman describes it) gets activated, we search the world for dangers and build a decidedly negative worldview. Psychologists call this catastrophizing: seeing the future in a profoundly negative light. This reduces our ability to sort available information.
The other extreme, denial, can also affect our ability to achieve clarity. Sometimes, being exposed to a lot of negative information causes our brain to be repelled by all the danger. In classic psychology, denial means the brain avoids dealing with the painful information and clings only to positive evidence.
If you’re a financial advisor, you cannot afford either of these false extremes if you want to understand the mechanisms in the current markets and navigate investment decisions wisely.
Simple Steps Toward a More Effective Mind-Set
In his book The Number, Lee Eisenberg explains there is a number that represents the amount of money and resources that people need to enjoy the active life they desire, especially post-career. According to Eisenberg, “Those who say that this is either (a) the Apocalypse or (b) the Golden Age are both wrong. Most experts who look into our financial future can be classified as hawks or doves. The hawks screech that the future is terrifying, worse than you think. The doves see mostly blue skies ahead.”
As of this writing, we are unsure if the short-term future holds another wave of COVID-19 cases and further economic contraction or the first hints of economic recovery and a return to something like business as usual. Because it’s still too early to tell, we scan the news and try to figure out what to believe. Unfortunately, the most compelling voices are often at one of the extremes, and they heavily influence our thinking patterns precisely when we should be most careful about decision-making. Here are some ways to pull back from extremes and recenter your thinking.