The Curious Way Investors React To Uncertainty
If by chance you have missed every commercial slogan for the last nine months, let me point out that we are living "in these uncertain times". I suspect you don't need the reminder, as most of us can easily think of how this unpredictable year has affected our lives. Not only that; we can feel it. This year has demanded that we be flexible, responsible, and resilient in the face of challenges we couldn't have imagined.
As much as I want to be the bearer of good news and signal that relief is in sight, the reality is that we may be heading into a time with even less certainty than we have had these last few months. We have already started to see increased volatility in markets as we approach the election and as COVID cases spike around the world. We know markets don't like uncertainty but in these days and weeks ahead, it will be more important that we recognize how we as investors often react when the future isn't entirely clear.
Even though our brains make up only 2% to 3% of our body mass, they use between 25% and 30% of our energy. When things aren't orderly and predictable, our brains drain us of even more energy as we worry about what might happen and how to keep ourselves safe. Our bodies are programmed to conserve energy, so we have a natural predisposition to move away from energy-draining uncertainty into something less taxing to our system.
As a result, we tend to have a curious reaction when faced with the unknown; we become more convinced that we know what will happen. We make predictions about extremely positive or catastrophic events that we believe will unfold. For example, we might be convinced that the market is going to boom or bust based on the outcome of the election. Such a thought isn't harmful, in fact, it could be considered positive if we view it as something that calms our worried minds and helps us conserve much-need energy. Responding to uncertainty with overconfidence only becomes an issue if we use it as justification for financial decisions like getting in and out of the market.
After so many months of depleting our internal resources to stay positive and healthy, we may want nothing more than the relief of knowing what is going to happen next. It's natural to have a hunch about what is to come, but as Warren Buffet says, "in the business world, the rearview mirror is always clearer than the windshield." We may not be able to predict the future, but one certainty we can rely on is that our long-term outcomes will be better if we don't make financial decisions based on what we "know" lies just ahead.