How to keep your calm during a massive financial crisis
When I first got my driver's licence there were no smartphones and no GPS, only old-school maps. Whenever I went somewhere unknown, I would pull out the street directory and plan the trip before I started to drive.
Even when I had a car full of friends, I would make them wait until I had enough certainty and confidence to head off. Without certainty about the route to follow, I wouldn't feel confident enough to drive off into the unknown. This is similar to how we treat our finances in times of uncertainty.
It's as though our brains raise the stakes - like a high-stakes poker game.
When under stress our financial decision-making looks similar to the way we make decisions when gambling. Without the certainty of an outcome in life, or when life is filled with ambiguity, the way our brains approach financial decisions is littered with the same decision-making pitfalls that shadow a compulsive gambler. This means we're more likely to overestimate our level of influence, avoid pain at all costs and take much bigger risks when we feel as if we need to recoup a loss.
This is why we should never make snap judgements after realising our investments have taken a dive, a client reneges on a payment or we lose our job. The desire to recover quickly from the pain of the loss clouds our judgement so much that we'd rather lose more in the attempt to regain our loss than not try at all.
That's how we fall into the gambler trap. Our brain actually rewards us for "giving it a crack" even though we're much worse off.
But it's not just individual decision-making that goes out the window in times of heightened uncertainty. There are some fascinating things that happen to our group decision-making as well.
We all have seen examples of what happens to people's spending behaviour when high uncertainty and panic spread through our communities: stockpiling goods that we don't need, not buying things that we do need and trading off our future to relieve more immediate pain.
At heart we are herd animals and therefore influenced by those around us. This influence is magnified by uncertainty, because one of the ways we feel safe in these times is through the strength of our social connections. The stronger the tribe, the longer we all stay alive. This is why social isolation in times of uncertainty can be particularly unsettling.
There are two key things that seem to happen in times of high uncertainty that directly impact our ability to make good decisions.
Keeping these two things in check is crucial to giving ourselves the best chance of making it through a financial crisis. The first is that emotion floods the brain, triggering our fight-or-flight response, and the second is that our ability to think about the long term reduces dramatically.
Both of these responses limit our cognitive capacity and leave us open to all sorts of mental traps and biases that undermine our financial decision-making.
Sometimes the trick is to drive on calmly, even if we don't know exactly where we are going, learn to read the signs along the road and correct our course along the way. We should never undermine our ability to make good decisions in the search for certainty.
How to make better choices during uncertainty
- Count your blessings. Look at what have rather than what you may have lost or missed out on, as this helps lower emotion and brings you into a more rational headspace.
- Think in three time frames. Ask yourself what the impact of your decision will be in one week. In three months? In 12 months? This mental trick creates distance and perspective, allowing "tomorrow's you" to judge today's decision.
- Connect. Connecting with people is so important for psychological safety. During enforced self-isolation and social distancing, use video chat software and reach out to your contacts. The more you try it, the more comfortable you will be doing it, and the better off you will be.
- Talk about big financial decisions with those you trust. This helps you externalise the decision making process and allows for a less emotional perspective. It also gives you the chance to learn from other people's experiences.
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