Each of us make decisions, big and small, by comparing our emotional and rational sides. When it comes to finances and investing, this is no different. Too often, we believe that our rational side will be able to control our emotional side. If we’re being honest, however, emotions tend to take over.
In the book “Switch,” written by Dan and Chip Heath, there is a great metaphor called, The Elephant and the Rider. At first look, you may think that the rider is in control. The elephant goes wherever he rider wants it to and at the pace it’s being driven. However, what happens if the elephant becomes upset or is spooked? Which one is in control at that point?
The elephant may lose control, but it cannot be stopped and the rider is obliged to go wherever the beast takes them. That beast is going to look for safety in the fastest way it thinks it can.
Emotions work in exactly the same way. They guide the next thought and the next action. The trick is finding the right balance between both emotions and rationality.
Once you acknowledge and prepare for emotional reactions, you’ve made the first step in avoiding irrational decisions. We may be ready to jump and exclaim that our rational side is in charge, but that may be only a temporary solution. Emotions tend to come back bigger and more aggressive until they’ve taken over altogether.
This relates to investing in the following example. If you own real estate and see that investment tumble quickly, the natural reaction is to want to get out of the situation and avoid any further worry. If the level of stress is high in this investing realm, just imagine how difficult the stock market would be.
Emotionally, jumping ship at the slightest obstacle may feel like the right thing to do. However, you need to dig deep and find the rationale that is waiting to be heard and recognized. If the initial flare-up can be surpassed, then the choice will serve us best in the long term, making both rational and emotional sides happy.
Removing the fear of uncertainty is a great way to please both the rational and emotional aspects in everyone. We’ve found that having someone to assist you, having a high level view of financial situations, can help give you some perspective and balance the two battling sides. At Paradigm Life, we help you come up with a plan and prepare for those times when big decisions need to be made in your specific financial sphere.
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FAQ
Q: What are some common emotional pitfalls that investors should be aware of, as mentioned in the article?
A: Common emotional pitfalls include fear of market volatility, impulsive decisions during market fluctuations, and chasing quick profits driven by greed. These emotions can lead to poor investment outcomes.
Q: How can investors recognize and avoid emotional investing pitfalls to make more rational investment decisions?
A: Recognizing emotional triggers, having a well-defined investment strategy, setting long-term goals, and seeking professional advice are some ways to avoid emotional investing pitfalls and make more rational decisions.
Q: Why is it crucial for investors to address emotional biases and pitfalls in their investment approach?
A: Addressing emotional biases is essential because it helps investors maintain a disciplined and rational investment strategy, leading to better long-term results and reduced risk of financial losses due to impulsive actions.
