Controlling the Investment Lizard Brain
Investing is challenging enough without bringing emotions into the equation. Unfortunately, humans are emotional, and as a result investors often place too much reliance on their feelings, rather than using objective information to drive rational decision-making.
What causes investors to make irrational decisions? The short answer: our amygdala. Author and marketer Seth Godin calls this almond-shaped tissue in the middle of our head, at the end of the brain stem, the “lizard brain.” Evolution created the amygdala’s instinctual survival flight response for lizards to avoid hungry hawks and for humans to flee ferocious lions.
Over time, the threat of lions eating people in our modern lives has dramatically declined, but the human lizard brain is still running in full gear, worrying about other fear-inducing warnings like Iran, Syria, Obamacare, government shutdowns, taxes, Cyprus, sequestration, and other things (see Series of Unfortunate Events).
When the brain in functioning properly, the prefrontal cortex — the front part of the brain, in charge of reasoning — is actively communicating with the amygdala. Sadly, for many people and investors, the emotional response from the amygdala dominates the rational reasoning portion of the prefrontal cortex. The best investors and traders have developed the ability to separate emotions from rational decision-making by keeping the amygdala in check.