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young and the invested decision-making

I have been careless in some of my decision-making.  Careless is being generous.  My decision-making was naïve and arrogant.

When I was learning how to start investing money, I bought SiriusXM stock on news of the two companies merging (previously, Sirius Satellite Radio and XM Satellite Radio) and believed the touted benefits resulting from the deal would easily make the investment a no-brainer.  Well, it did in the sense I didn’t think before acting.

The stock proceeded to plummet to practically nothing.  As a result, I felt physical pain watching the stock make its descent and I blamed myself constantly for the stupidity.  At this point, I made the even dumber decision to gamble by buying more.  Certainly the wrong way to start my path to building wealth.

Lucky for me however, a series of fortunate events transpired and the stock recovered. I took advantage of the opportunity and sold virtually at no loss.  But these results aren’t typical.

Of all the decisions you make, mistakes involving money can be some of the hardest felt.  Quite often, these involve some of the most important decisions in life.

In my case, the decisions stand to this day as some of my worst investing mistakes and guide my investing ethos (i.e., investing in index funds).  And I’ve made more than a few.  If my goal is to reach a Millennial retirement, I need to minimize my mistakes more so than maximizing my gains.

In this post, I examine the decision-making process and how making the right decision isn’t always easy.  Sometimes, it’s nice to wish other people could be the smart ones and I could leave the decision-making to them.

However, life is about choices and you are the one best suited to make good decisions.  In this post, I lay out what’s necessary to have good decision-making skills.

What Was I Thinking During this Decision-Making? (Spoiler: I Wasn’t).

Looking back, I don’t remember hitting the key strokes to initiate the second trade allowing me to throw good money after bad.  What I do remember, however, is why I made the decision to buy another time.

I wanted the red in my brokerage account to go away and be replaced by the sea of green I originally imagined the investment would deliver.  My mind’s thoughts blurred knowing I had lost almost $1,500 (my entire account balance at the time).  I just wanted to make the hemorrhaging stop.

I was so mad at myself I couldn’t think.  What I ended up doing was committing a crime of passion focused on my self-preservation.  Maybe I’m exaggerating, but I was certainly desperate and felt so bad that I couldn’t think straight.

It turns out, there’s a biological reason for that.  And it all happens in the brain thanks to how we evolved.

There is a Thumb on the Mind’s Scale

The human mind does not measure gains and losses in the same way.  For me, I saw immense upside from the decision to buy the stock compared to the almost impossible (in my mind) downside of the investment.  We can see how that turned out.

Without getting too technical, the human mind has a deep-rooted imbalance between evaluating gains and losses that has evolved over time.  Our ancestors were hunter-gatherers who saw self-preservation as their imperative because some poor decision-making could lead to their demise.

Those who chose to focus on survival more than maximizing opportunities lived to see another day and increase the chance of passing along their genes.  I was betraying my genetic roots by attempting to maximize my opportunities instead of limiting my losses.

Much like a wide-receiver who sees his path to the end zone but takes his eyes off the ball and drops the pass, I got ahead of myself. I thought about what I would do with the gains instead of whether the investment was smart.

wide receiver dropped ball in the endzone made bad decision

The Bug is in the Hardware, Stupid

If you want to skip the biology lesson, skip ahead to “And Now Back to Your Regularly Scheduled Programming (TL; DR)”

For those who took college biology, this part may sound familiar to you because it will be a deeper dive into the brain’s processing function.

The brain contains lobes, cortexes, and other important features.  The main part for handling information received from external stimuli is the thalamus.  It serves as a hub for accepting, processing, and relaying sensory signals to the rest of the brain.  This section activates when you’re in that moment of distress from experiencing a loss.

young and the invested Thalamus_small

Look at the thalamus as a doctor who diagnoses a patient’s sickness.  The thalamus identifies different sensory information and directs where it goes.  Messages travel to two important destinations: your amygdala and your prefrontal cortex.

Think of these as equal and opposite- two opposing forces fighting for control.  The amygdala has the burden of handling emotions like anxiety, fear, arousal and aggression.  The biggies.  The deadly sins, if you will.  Basically, its job is to act as an early warning system designed to keep you alive.

The amygdala is where the human mind makes the decision to prioritize survival over maximizing opportunities.  At the extreme, this is where your mind confronts the decision of fight or flight.  And it does so in 12 milliseconds.

That’s pretty quick for a computer that’s evolved over the entirety of human existence.  Not as great an iPhone X or a Google Pixel, but more than adequate considering it’s not had the benefit of Moore’s Law.  Evolution takes millions of years, whereas a twice as fast iPhone will be out this time in 2020.

If the amygdala is responsible for the deadly sins, the prefrontal cortex is the rationed thinker who favors better better decision-making over gut response.

the thinker caught in decision-making

The prefrontal cortex is the brain’s planning department, plain and simple.  It deliberates decision-making and moderates social behavior.  It’s the friend who lets you know when you get weird around an ex.

Think of the prefrontal cortex as an air traffic controller directing your thoughts and actions.  It allows you to pause and reason through your decisions. While this part of the brain sounds great, unfortunately, it comes equipped with a competitive disadvantage.

The thalamus sends information to the amygdala and the prefrontal cortex simultaneously, but your amgydala will always win this sprint.  It takes 40 milliseconds for the prefrontal cortex to get a message as compared to the amygdala’s 12.  Great for survival, less so for level-headed thinking.

Blue Screen of Death

blue screen of death screenshot asking you to make a decision

The math here isn’t hard to see.  That’s a 28 millisecond differential where emotions rule the roost.  Your rationed thinking is clouded out by a chemical created in the brain called cortisol.

This acts as a clotting agent during moments of duress and sends a very clear message to the brain. “Raise the bridge and lower the gate! We’re under siege!” Understandably, this can create some stress on the rest of the body.

There isn’t much control you have at this point given the unflinching speed at which the signals pulse through your body saying to be on high alert.  This reaction is simple cause and effect programmed into our DNA.

Put succinctly, you’re emotional before you’re rational.  And unless you’re incapable of feeling emotion, tough noogies.

Now that you know a bit more about how the brain processes emotions, you should use this to prepare yourself for stressful decision-making that lies ahead.

Learn how not to make decisions out of fear or anxiety but give yourself that 28 milliseconds to process what’s happening.  Don’t act hastily when some measured reasoning might save you big.

Related: Should You Invest or Pay Off Student Loans?

And Now Back to Your Regularly Scheduled Programming (TL; DR)

If you decided to skip ahead, welcome back!  If you chose to read your daily recommended biology lesson, kudos to you.

When I faced the decision point of making the second investment, I did not see survival as my motivation necessarily, because I knew I would be fine in the end without the $1,500.  However, my amygdala (the part of the brain which reacts to emotions) stole the show and called an audible before my prefrontal cortex (steady, level-headed thought center) could act.

If my prefrontal cortex had mapped out my actions and I was a logical decision maker, I would not have made the follow-on investment.  Hindsight being what it is, my bet paid off, but these decisions absolutely were not right.

looking at a map for decision-making on your trip

I wasn’t operating with my prefrontal cortex in charge.  My amygdala was calling the shots and I should have been more reasoned and mindful of the risks involved.  But biologically, the amygdala triggers before the prefrontal cortex and quite often our initial reaction is based on emotions.

How to Put Mind Over Matter During Decision-Making

What takeaways do I want my biology lesson to deliver?  By understanding how the brain processes a loss (or any extreme emotion), you can see humans are not purely rational and often act on emotional impulse during key decision-making moments.  Also, you can see there is a battle humans face: decisions vs. choices.

Decisions are the action made based on the availability of choices.  When possible, humans always want to avoid a loss and stop the bleeding if one occurs. This is especially true when humans make decisions under risk.

In fact, due to evolution, the fear of losses has propagated through time and the prospect of losses became a more powerful motivator than the promise of gains, all things being equal.

Said differently, the discomfort suffered from a loss weighs greater on the mind than the pleasure associated with gaining the same amount.  In all likelihood, we would not be here were these motivations flipped.

As you can see, if humans received signals in the amygdala and prefrontal cortex simultaneously our decision-making would differ.  Were rational thought to hold equal prominence as emotions in our mind, because decisions have consequences, I would not have made the poor investing decisions.

Unquestionably, I would have avoided acting on emotional impulse doubling down on my series of bad decisions.  I needed a better decision-making process.

What it all boils down to is our inability to control the inputs which come into our brain.  The only element we truly have control over is the outcome.

When you’re in that moment of pain, loss, anguish, or something unbearable, remember that built-in disadvantage the prefrontal cortex suffers compared to the amygdala.  Your initial response will be motivated by emotions, not rationed thinking.

Try to hold on for just a moment longer before acting.  Your prefrontal cortex, your brother in arms, would rather lose a lobe before he let you come to harm.  Just give him a chance.

About the Author and Blog

In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time.  My job routinely required extended work hours, complex assignments, and tight deadlines.  Seeking to maintain my momentum, I wanted to chase something ambitious.

I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity.  I launched the site with encouragement from my wife as a means to lay out our financial independence journey to reach a Millennial retirement and connect with and help others who share the same goal.

Some of my favorite things to discuss include investing in index funds, how to save money, travel hacking with help from the Reddit churning community, house hacking and optimizing the benefits of my condo vs. apartment living, and tax topics like the earned income tax credit, common tax deductions,  tax reform in 2018, or other useful tax topics.  I want this to be a journey for us all to learn how to make a lot of money and pursue the lives we want.

Disclaimer

I have not been compensated by any of the companies listed in this post at the time of this writing.  Any recommendations made by me are my own.  Should you choose to act on them, please see my the disclaimer on my About Young and the Invested page.

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