"It is easier to exclude harmful passions than to rule them, and to deny them admittance than to control them after they have been admitted." Seneca (4BC - 65 AD)
Emotions are swirling among financial markets participants. Yesterday, I highlighted "Plato: The Philosopher King" and his wisdom to seek moderation, emotional restraint, and self-acquaintance. An article in today's Wall Street Journal, "Fear the Roller Coaster? Embrace It," (subscriber only) inspired me to extend upon my focus on philosophy and reach into one of its 21st century offspring: Behavioral Finance. Here are a few choice excerpts from the WSJ piece:
We are only as effective as our emotions allow us. Which is why this current market is so daunting. Consider the unknowns in play: The choked market for short-term corporate funding; The impossible-to-value mounds of LBO debt and equity; The daisy-chain effect between liquidating hedge funds and the broader market...
"We are responding from a different part of the brain when we are in the midst of calm, clear thought," says Brett Steenbarger, a psychiatry professor at the State University of New York's Upstate Medical University who also trains traders and hedge-fund managers.
The area is the prefrontal cortex, what he calls the "executive" node of the brain that plans and reasons. When we are fearful, blood flows away from the area toward the motor areas of the brain -- the ones that produce a flight-or-fight sensation...
The professor then goes on to recommend different means of coping with financial fear, including "training" yourself to recognize fear in the first place. Another approach is to prepare for a sharp market decline of 10% to 20% by "rehearsing" your reaction to it.
These methods seem simple but they are widely ignored by the average investor. They are the same methods I use in my investment advisory practice and are woven throughout the philosophies found in this blog. For a broad refresher course and links to additional behavioral finance information, check out the recent TFP post, "Know Thy Risk."
There is no doubt that emotions will continue to compete with our reason. Emotion is not necessarily an enemy -- after all it provides some of the greatest pleasure in life. Just be aware that unchecked passions can have a devastating effect. If you know yourself intimately, you will know not to open the door when the most dangerous of emotions come knocking...
