Often, the biggest threat to your financial success is living between your ears.

You’re welcome for the laugh, maybe even an eye roll. Of course, you know what happens to your thinking, your focus, peace of mind, and essentially, every other part of your life when the market takes a tumble. Market makers worldwide understand that the most advantageous investment opportunities often arise when everyday investors panic or buy because of a shrieking headline.

That’s where behavioral finance comes into play. What is behavioral finance? How do your emotions tend to affect your financial decisions? What are some ways to better manage your emotions as an investor in any market conditions? In this article, we’ll uncover key concepts grounded in this historic conversation around emotions and investing.

What Is Behavioral Finance?

Behavioral finance is a concept that blends traditional finance with psychology, shedding light on how emotions and cognitive biases impact financial decisions. The Corporate Financial Institute defines behavioral finance as:

“The study of the influence of psychology on the behavior of investors or financial analysts. It also includes the subsequent effects on the markets. It focuses on the fact that investors are not always rational, have limits to their self-control, and are influenced by their own biases.” (Source: Corporate Financial Institute)

Your brain, my brain, and frankly, any other person’s brain is automatically wired to protect what’s valuable to us, including, in this case, our investments. There’s a reason why, for every story you’ve heard of someone experiencing tremendous financial success, there are many more stories detailing devastating financial loss. Why? Because humans do dumb things when we’re driven by emotion instead of logic.

The problem is our fear-driven instincts move significantly faster than our logic-powered reactions.

How Your Amygdala’s Speed Defies Logic

There’s one number that should change the way you think about every financial decision you’ve ever made in a moment of fear.

Eighty-eight milliseconds.

That’s roughly how fast your brain detects a threat before your conscious mind has any idea it’s happening. Neuroscientist Joseph LeDoux at New York University spent decades mapping the brain circuitry behind this phenomenon. What he found has profound implications, not just for psychology, but for anyone trying to make rational decisions about their money under pressure.

LeDoux identified two distinct pathways the brain uses to process threatening information: 

• The first is what he called the “low road”. This is a fast, direct line from the thalamus straight to the amygdala, bypassing the thinking brain entirely. This pathway operates in roughly 150-200 milliseconds. (Source: LeDoux, J.E. (2000). Emotion circuits in the brain. Annual Review of Neuroscience, 23, 155–184)
• The second pathway, the “high road,” routes that same information through the prefrontal cortex. This is the rational, analytical part of your brain. The routing happens before sending a signal to the amygdala. The high road is more accurate, nuanced, and significantly slower.

Translation: You feel before you think. Every. Single. Time.

More recently, researchers recording impulses directly from the human amygdala found responses to fearful stimuli beginning at just 88 milliseconds. (Source: Journal of Neuroscience) These responses were triggered even when the stimuli were not consciously perceived. The amygdala sounded the fight-flight-freeze alarm before the person knew anything was wrong. These responses are so fast they appear to reflect an entirely automatic, unconscious process.

I call this the 88-Millisecond Rule. This is exactly why fear can feel completely beyond our control. Those first critical milliseconds are when we instinctively feel fear, recoil, and rush to react.

Now apply that to the moment you see a market headline screaming that the Dow just dropped 600 points. Your amygdala doesn’t know the difference between a bear in the woods and a red ticker on your phone screen. It processes both as threats. It triggers the same amygdala-sourced ‘fight, flight, or freeze’ response that kept your ancestors alive on the African savanna. Your heart rate climbs. Your focus narrows. Somewhere in that 88-millisecond gap between stimulus and awareness, the emotional damage is already done. Your rational brain is still getting dressed while your amygdala is already calling the broker.

Let me assure you: This is not a character flaw; it’s simply a sign that you’re human. This also isn’t a failure or lack of intelligence or discipline (at least, not yet). Human neuroscience is doing exactly what it’s designed to do in these types of circumstances. Unfortunately, the same system built to detect and outrun predators now has an iPhone 17 Pro Max showing you exactly what’s happening in any market, in real time.

What could possibly go wrong?

How Much Do Emotional Decisions Affect Investment Returns?

This is clear evidence that emotional investing is the well-traveled pathway to regrettable financial decisions:

• The primal urge to fight your emotional responses often leads you to chase market trends at their peaks and buy high.
• The flight response is what pushes investors to sell during downturns, fearing future losses.
• The freeze response is when investors feel unable to take action or adjust their portfolios. 

Each of these reactions, while easy to explain after the fact, is counterproductive to long-term financial growth. We’d be foolish, though, to dismiss these instincts as inevitable without knowing the real ramifications when we give in to any of them.

DALBAR’s 2025 QAIB (Quantitative Analysis of Investor Behavior) report, the firm’s annual study on investor behavior, found that the average equity fund investor earned just 16.54% in 2024, compared to the S&P 500’s 25.02% return. That 848-basis-point gap in a single year was the second-largest investor performance gap of the past decade, driven almost entirely by behavioral mistakes:

• Withdrawing before rallies.
• Chasing performance after the fact.
• Reacting to headlines rather than sticking to a plan.
• Trying to ‘time the market’ following an emotionally charged buy/sell decision.

What’s your plan for reaction when markets fluctuate? This is where behavioral finance becomes not simply a concept but a tool for financial resilience. Your self-awareness in recognizing emotional triggers, whether anxiety or excitement, is what can help protect your long-term growth from short-term reactions.

Your Path Toward Logic-Driven Investment Decisions

“But, Mike, how do I interrupt my fear and panic in even the most turbulent market conditions?” There’s a reason I chose to have only the Behavioral Financial Advisor (BFA) designation at this time. It empowers me to focus on the emotional side of investor behavior. I get to review incredible resources, frameworks, and peer-reviewed academic studies on managing your emotions as an investor.

For the sake of a good chuckle, I can confidently say that telling yourself simply to ‘calm down’ is not a good antidote to managing fear as an investor. Since I’ve been married for 41 years, I can tell you with even greater certainty that telling your spouse to ‘calm down’ is even a worse idea. I can already hear the couch calling your name.

You need a logic-driven structure you trust before the next headline hits. That’s why I created my proprietary process called The Full Financial Framework. (It’s already in book form here if you want your complimentary copy. Get a copy of my book.) This is a process you can follow and refer to at any given moment. 

It’s perfectly natural to feel fear or excitement when the markets move. Natural emotions don’t have to lead to irrational decisions. Anchoring your financial choices in evidence over emotion can help you bypass years of portfolio regret. When fear strikes during financial uncertainty, it’s wise to ask, “Does this actually change what I’m trying to accomplish?”

If the answer is ‘no’, then you’ve given your rational brain the time it needs to catch up to your amygdala. Taking a deep breath to consider that question slows your actions down to the speed of logic. There are only a few market-driven scenarios where the answer to that question is ‘yes’. It’s in those circumstances when it’s worth consulting with a Behavioral Financial Advisor – and I happen to know ‘a guy’.

How much have your emotions cost you financially over the past few years? There’s a reason why you’re still reading this – you likely want to know how to better manage your emotions (and your portfolio).

You’ve probably made a few financial mistakes in your life due to what’s happening in the market. I’ve made plenty of my own before I became an investment advisor. Now, as someone with 30+ years of entrepreneurial experience and 15 years of advisory experience, I bet we can share a few stories.

That’s why I’m inviting you to join me for your complimentary Full Circle Conversation. This is a one-on-one conversation with yours truly. We’ll talk about your current financial situation, what matters most to you, and what questions you have about your financial future. If it makes sense to continue the discussion, we can make plans from there.

The first step is to tell me a bit about yourself. It takes less than two minutes to fill out the form below. Let’s get started.