Yahoo Finance Your Brain Is Rigged to Panic in the Next Correction
By now, you're no doubt familiar with the claim by author Michael Lewis in his book, "Flash Boys." Lewis believes high-frequency traders have rigged the stock market, causing harm to Main Street investors. Many respected financial commentators disagree. They believe high-frequency trading is only harmful to day traders, and not to the average investor who is holding stocks for the long term.
Personally, I do not believe high-frequency trading rigs the market against average investors. However, this debate misses the point. The securities industry, together with much of the financial media, has rigged the market, just not in the way claimed by Lewis. They do so by skewing financial news toward negative information. The impact of negative financial news disposes your brain to panic when the market declines.
When investors panic and become anxious, they seek the guidance of "experts," whose financial interest is often conflicted. If these experts are not registered investment advisors, or RIAs, they have no obligation to provide advice that is solely in your best interest. Instead, they are held to the lower standard of providing advice that is "suitable." This loophole gives brokers legal cover to generate commissions by encouraging unnecessary trading at precisely the time when you are panicking.
The prevalence of negative news. As I write this blog post , I am staring at this March 16 headline from CNBC: "Hedge fund manager: It's a 'truly scary time.'" The article features the warnings of Andy Redleaf, the CEO of $4.2 billion hedge fund and mutual fund manager Whitebox Advisors, and his case for why a stock market correction, and perhaps a global recession, may occur.
He may turn out to be right or wrong. I have no idea. I do know the financial media's emphasis on negative financial news preconditions our brains to panic and make short-term investing decisions, which are often not in our best interest. And negative financial news is everywhere. Here's a small sampling of headlines:
-- Dec. 27, 2014: Predictions for 2015: U.S. Stock Market Crash Debated, But The Rich Will Be Richer In This Economy
-- Jan. 14, 2015: Stocks lower on growth concerns, copper plunges
-- Jan. 19, 2015: China seen posting weakest annual growth in 24 years, will spur more stimulus
-- March 16, 2015: Bull market is 'closer to the end' than investors think
For each of the positions asserted in these articles, there's a flip side. They could easily have been presented with a positive spin.
The impact of negative financial news on your brain. There is compelling evidence that exposure to negative information can make you significantly more anxious and sad. According to a 2012 Psychology Today article, "The Psychological Effects of TV News," it also causes you to obsess over your personal concerns, in ways unrelated to the information that initially created your anxiety.
Investors consistently exposed to negative news may be inclined to imagine all kinds of doomsday scenarios, including losing all of their money, a worldwide financial panic and being homeless and destitute. Clearly, when you are in that state of mind, you are in no position to make intelligent, rational and objective investment decisions.
Prepare your brain. Fortunately, you can take steps to avoid succumbing to negative financial news and panicking about your finances. An article by Gail Schneider, written in October 2008 and published in Positive Psychology News Daily, "The Economic Sky is Falling: Can Positive Psychology Help?" suggests you should put the news in perspective, exercise, meditate and cultivate positive and supportive relationships.
Put the news in perspective. Write down your worst-case and best-case scenarios and estimate the probability each will occur. Be as objective as possible in estimating the most likely outcomes. This process will help you put negative news into perspective. The financial media isn't going to do this work for you. Although you can't control negative financial news, or predict the timing of a market correction, recognizing your brain is rigged to panic may help you avoid making poor, short-term financial decisions.
Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth advisor with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is "The Smartest Sales Book You'll Ever Read."
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