Picture the late-night news headlines: “Markets Plunge Amid Recession Fears” or “Geopolitical Crisis Sparks Global Sell-Off.”
You feel panic rise. Is that anxiety? Fear? The last slice of pecan pie that should probably still be in the fridge? An inner voice shouts, “Sell now, before it gets worse!” What feels like rational urgency is often a reflex from your amygdala, a region of the brain specialized in processing fear and threats.
The amygdala, presented as two almond-shaped glands tucked in the base of your brain, is a component of the limbic system. It activates the sympathetic nervous system and initiates a ‘fight, flight, or freeze’ response. Though naturally adaptive in life-threatening scenarios (e.g., encountering a predator), this rapid-response system bypasses the logical brain, the prefrontal cortex, where rational analysis occurs.
Neuroscientific research by Joseph LeDoux confirms that emotional signals reach the amygdala faster than cognitive evaluations reach the cortex, giving emotion a powerful head start in decision-making. Translation: You feel faster than you think. This is why countless investors are often the self-inflicted victims of emotionally charged financial decisions. Yes, red tickers, shrieking headlines, and breaking news are all meant to hijack our central reasoning system, and you’re no less of a human for feeling this way. That said, what’s at the root of these reactions?
Emotions are intrinsic to the human experience. They drive our choices, inform our relationships, and serve as powerful motivators. However, in the context of investing, these same emotions can function as significant liabilities. Emotional decision-making under duress, especially during market volatility, has been shown to reduce long-term financial performance and increase regret. Understanding this dynamic and reprogramming our decision-making process is paramount to behavioral finance.
Why Emotions Hijack Our Financial Brain
Studies in behavioral economics reveal that investors frequently reverse the optimal order of decision-making. Instead of first analyzing a situation, they act on feelings and rationalize their actions afterward. This is called post hoc rationalization, and it contributes to phenomena like panic selling, herding behavior, and performance chasing, all of which tend to diminish returns.
A 2021 meta-analysis published in the Journal of Economic Psychology found that emotionally reactive investors are more likely to underperform the market due to poor timing decisions based on fear or overconfidence. Why? Because we simply want to feel safe, secure, and at peace, maybe more so than feeling wealthy and more financially fulfilled. This is why base assessments on risk tolerance can be unreliable because the person being assessed is not typically in an emotionally charged state. How can we reasonably expect to know exactly how someone will handle risk without contextual evidence to verify that initial assessment?
And yet, a certain type of news article, a market correction, or an industry-wide announcement can rattle even the calmest investor. This is where behavioral finance finds its true value.
From Reaction to Reflection: Reversing the Pattern of Emotionally Charged Investing
The antidote to this emotional cascade is intentional awareness. Behavioral finance encourages a reversal of the typical response sequence. Instead of feeling → doing → thinking, the framework is thinking → feeling → doing. This simple shift slows down decision-making enough to match the speed of logic. It allows the prefrontal cortex to grab control of your psyche and guide behavior, rather than ride in the sidecar of your emotional rollercoaster.
This strategy is embedded in the Behavioral Financial Advisor™ (BFA™) model, a framework that combines neuroscience with behavioral coaching to elevate emotional competence, a concept distinct from emotional intelligence. There’s a reason why my only designation at this time is BFA™. I choose to specialize in behavioral finance – what you, as an investor, are thinking, feeling, and doing – because I believe that is the most human-centric approach to being a fiduciary.
The Full Financial Framework emphasizes this progression: first identify your thoughts, then acknowledge your emotions, and then, and only then, should you take action. At first glance, this would present as emotional intelligence. I encourage you to look beyond the mere management of your mental-emotional state and consider a more profound level of awareness.
Emotional intelligence is knowing what you feel and the effects caused by how you manage your emotions. Emotional competence is the ability to perceive the mental-emotional state of someone close to you and adjust your reactions and interactions to create a more favorable experience for yourself and the other person.
Emotionally intelligent investors tend to focus only on how emotionally charged decisions affect their future state. Emotionally competent investors understand how their emotionally charged decisions will also have a dynamic effect on how their spouse, children, employees, and other beneficiaries and dependents’ emotions. When we make emotionally rash decisions with money, the fallout doesn’t stop with us. It tends to severely hurt the minds and hearts of those we care about the most.
Emotionally Competent Investing
Much like anger management, behavioral finance management deserves taking time to simply breathe and think before letting impulses win the day. Academic research supports the benefit of delayed response in high-stakes environments. A white paper from the Journal of Financial Planning underscores that a pause, even a few seconds, between impulse and action improves financial outcomes by giving executive function time to intervene.
Similarly, Daniel Goleman’s work on “amygdala hijacks” reinforces the need for self-regulation in emotionally charged decision contexts. When you feel overwhelmed, asking “What am I thinking? What am I feeling? What am I doing?” restores control and cognitive clarity.
In practice, emotional competence in investing means aligning your financial actions with your long-term values, not short-term feelings. This requires structure, self-awareness, and often the guidance of a fiduciary advisor trained in behavioral finance, someone who helps clients navigate uncertainty with a plan rather than react to it impulsively. I happen to know ‘a guy’.
The Smart Money Philosophy argues that financial longevity is built not on trying to predict markets but on managing oneself through volatility. That’s why my process, The Full Financial Framework, emphasizes that preparation, not prediction, is the key to weathering financial storms.
Emotion is not the enemy of good investing; it is an untamed asset. With the right framework, you can convert emotional awareness into informed action. Whether it’s fear during a downturn or euphoria in a bull market, the disciplined investor recognizes these emotional cues and uses them as signals to pause, reflect, and act with wisdom.
If you’re looking to integrate behavioral insight into your financial strategy, consider working with a professional who incorporates neuroscience and evidence-based practices. This is a prime invitation to connect with me for a Behavioral Finance Second Opinion Session.
I’m offering you the opportunity, at no financial cost to you, to connect with me for a conversation. Let’s talk about what questions and concerns you have about how emotions may be negatively impacting your financial decisions. This gives you a second opinion on your current financial situation. We’ll take a look at where you are right now, what patterns we may see, and where may be the right place to focus together. If I know I can help guide you, we can talk more at that time.
Whatever you decide, it’s worth mentioning this truth. The best investors aren’t the ones who avoid emotion; they’re the ones who manage it with an even-keeled, data-driven perspective. That approach will serve you well moving forward.
