What’s your investing mindset?
Practicing mindfulness could help you make better financial decisions
Financial professionals on Wall Street use mindfulness training
Mental techniques could help you avoid three common investing traps
Behavioral economists have long championed the importance of the connection between human psychology and investing success. Now, a growing body of research is showing that we can actually “train” the mind to make better financial decisions through a technique known as mindfulness.¹
An ancient practice that comes from Eastern traditions, mindfulness has been shown to:
- Improve focus and concentration
- Reduce stress
- Enhance performance-based activities
Research has shown that financial traders using mindfulness techniques1:
- Are better able to interpret the market
- Improve the quality of their responses
- Make sound financial decisions
You don’t have to work on a trading floor to take advantage of a mindfulness practice.
So, how does it work, and how can you benefit?
Practiced regularly, mindfulness techniques can help balance responses between two parts of the brain that are sometimes in conflict — the amygdala and the prefrontal cortex.² The amygdala controls our “gut” reactions, such as fear or anger. The prefrontal cortex is the analytical and logical part of the brain that’s more reflective and controlled.
There are several investing “traps” that investors are prone to, according to a Columbia Threadneedle report.3 These traps can be countered with the right mindset.
Here are the top three traps, along with techniques to help overcome them:
Investing trap 1: Fixating on previous losses
Nobel Prize–winning economist Daniel Kahneman has developed a theory called “the sunk cost fallacy,” which shows that we typically respond to a financial loss more strongly than we do to an equivalent gain. Mindfulness research backs up Kahneman’s theory: The fear-based amygdala becomes more active when experiencing loss but shrinks in size after a brief period of practicing mindfulness.¹
The mindfulness technique of perspective — or looking at life events within the context of the bigger picture — can help you see losses in broader context. For example, we know that over the last century, the market has made overall long-term gains despite periods of market correction.
Financial planning tip 1: Risk management
While past performance does not guarantee future results, diversification and other risk management investing strategies could help mitigate losses in a portfolio.
Investing trap 2: Emotional decision making
The fear-inducing 24-hour news cycle can exacerbate emotional decision making. Why? Fear commonly results from the idea of scarcity — the perception of an economic shortage — according to the authors of Scarcity, Why Having Too Little Means So Much: “When scarcity captures our attention, it changes how we think. By staying top-of-mind, it affects what we notice, how we weigh our choices, how we deliberate, what we decide and how we behave.”4
The mindfulness practice of gratitude, which involves making a mental inventory of all that you have — can counter anxiety-based thinking by helping shift your focus away from the perception that you are lacking.
Financial planning tip 2: Filter market information
Your advisor can help put market “noise” into context and focus on information that’s relevant to your portfolio.
Investing trap 3: Investing without a plan
Scientists have pinpointed two decision-making areas of our prefrontal cortex: one that favors more immediate stimulus responses and another that favors goal-directed strategies.5 But short-term thinking can endanger longer-term strategy.
The mindfulness practice of finding balance between present and future needs can help you dig deeper into questions that are more relevant to your investing goals and long-term plans.
Financial planning tip 3: Focus on your goals
Revisiting goals for the future and tracking your progress could help avert financial decisions that don’t align with your overall plan.
Stay in the moment
Ruminating about past money mistakes or anxious about your financial future? Your advisor can help put things in perspective so you can stay focused on the present.