Emotional Investing
Money Mixtape
Monday, 27 January 2025 - 8 minutes
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Welcome back to Money Mixtape, where music meets money! Kicking off today's discussion with the Rolling Stones' "Emotional Rescue", we explore a crucial topic: how emotions impact financial decisions. Behavioral economics, which emerged in the late 20th century, challenges the outdated idea of purely rational investors, showing that emotions and psychology deeply influence investment choices.
Victor explains how our brain's reward system, activated by financial gains, releases dopamine, creating feelings of pleasure similar to eating dessert. While thrilling, repeated wins can foster greed, encouraging risky behavior that often leads to losses. Conversely, financial losses trigger activity in the brain's anterior insula, evoking feelings of pain or disgust. Persistent losses can discourage investing altogether, further amplified by social anxieties about poor financial performance.
Fear, originating in the brain's amygdala, is another powerful emotion that impacts investments. Fear manifests in two ways: risk aversion, where investors prematurely sell or avoid investing due to perceived risks, and FOMO (fear of missing out), prompting impulsive decisions based on peer behavior. Both responses can derail sound financial strategies.
Since emotions can't be completely suppressed, Victor suggests strategies to manage them. Mindfulness practices, like yoga, can help investors stay calm. Slowing decision-making, setting predefined rules, using stop-loss orders, and automating investments are practical safeguards. Ultimately, successful investing requires balancing emotional control with knowledge, cultivating patience, and staying focused.
In closing, the reminder from "Emotional Rescue" rings true: sometimes, we must rescue ourselves from emotional pitfalls. Stay rational, stay patient, and stay invested!
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