Fight, Flight or Freeze

Ever wonder how our innate human tendencies are involved with our investment process? If you look at them closely you will recognize how we behaved over our history really has a lot to do with how we invest.

I didn’t say that this was necessarily a good thing.

Social scientists and researchers that study the brain repeatedly point to our consistent behavior when threatened. We all suffer from a fight, flight or freeze response.

Actually however, this is not in random order. In fact it’s quite linear. In other words to start with

• We freeze. At the first sign of trouble, rather than run and alert that saber tooth tiger to our whereabouts, we do nothing.
• Then we run. Once spotted, when the danger is evident, it’s in our nature to flee to protect ourselves.
• We fight typically only when we have no other choice.

Now doesn’t that sound to you just like what investors do? The market takes a massive downturn and the first thing that we all do is freeze. We don’t want to sell when it’s down so we hang in there to ride out the storm.

When things get really rough however you start to see investors bail. In the back of their minds they’re rationalizing that they can’t afford to see any further losses but they actually end up guarantying their losses by cashing in when the markets down.

Finally we see the fight reaction. This doesn’t occur to often with a properly diversified portfolio. You do see it often however it in privately held situations where the owners of an asset are so heavily invested in it that they start to squabble amongst themselves often to try and rectify a situation that had really nothing to do with any of them.

So when you see yourself doing the same thing, question it. If markets are down dramatically and high quality shares are trading in some cases for 25% of their previous value, is it really the time to do nothing?

E.O. & E.