Behavioral finance tells us that people are of two minds. There is the rational mind that thinks slowly and methodically, and there is the emotive mind that reaches decisions in the blink of an eye based on feelings and fleeting perceptions. I call this emotive mind (which I associate with the midbrain) the puppy brain. Most people love puppies, perhaps because puppies (in addition to the adorableness factor) love you back. They crave attention, they crave food, and they like to sleep a lot. They are prone to erratic behavior when they see you at the end of the day, and they tend to get upset and shred your furniture when you leave them alone during the workday. Puppies are not known for their reasoning skills. Puppies are all about instincts and drives that we would call “feelings” in humans.
When we talk about the general superiority of humans as a species, the reasoning usually comes down to opposable thumbs and huge frontal lobes. We are supposed to be intelligent, reasoning beings that use that capacity to thrive in any environment. What we find is that while people have the capacity for rational action, we use it to varying degrees depending on our personality, our cognitive ability, and our circumstances. A lot of deep thought takes a lot of mental energy, and it takes a lot of time. If we needed to do a thoughtful analysis every time a dangerous situation arose in our environment, we would most certainly die before we figured out what to do. When we experience fear, anxiety, or another powerful emotional state, we tend to rely on our emotive, quick brain to get us out of trouble quickly.
When you are relying on long-term trends to build wealth, you have to have the discipline and courage to let the trend play out. This means that you need to write a good investment plan, and set a carefully constructed allocation strategy. A few clicks during a fit of mass panic can cause untold damage. Once a sell order entered at the bottom is entered and executed, there is no taking it back. Your high number of shares has been converted into a low number of dollars. You can only buy shares with dollars, so you have made a terrible, irrevocable mistake.
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