Michael Mauboussin: How Stress Clouds Your Investment Judgment (and How to Fix It)

Johnny HopkinsMichael MauboussinLeave a Comment

In this interview with Morgan Stanley, Michael Mauboussin discusses a number of ways to take the emotion out of investing decisions. He explains how stress affects decision-making, both in biology and in finance. Just like a zebra reacts to danger with a short-sighted focus on survival, stressed investors tend to prioritize immediate concerns over long-term goals. This can lead to missed opportunities during market downturns, when buying low holds the most potential for future gains. Here’s an excerpt from the interview:

Mauboussin: Think about the role of stress in biology. If you’re a zebra and see a lion that decides you’re a target for lunch, your physiological stress response kicks in.

This causes your adrenaline and heart rate to spike and makes you singularly focused on surviving today, not months or years from now.

Similarly, for investors, stress impedes your ability to think about the long term.

So, while there may be fabulous investment opportunities beyond the horizon, stress can prevent you from being able to look out that far.

Think about a market crash when prices are low.

Intellectually, this is the ideal time to buy assets because they’re so cheap. But the stress of the market’s crash and its impact on your portfolio can instead lead you to avoid doing anything or, worse, sell at the wrong time.

This is where a trusted advisor can be incredibly helpful. They can keep their eye trained on the long-term horizon, knowing your ultimate financial goals. This can help keep you on track and avoid making short-term decisions that may be detrimental to your long-term returns. Because ultimately, achieving the results you seek is just as often about reducing errors as it is about picking winners.

You can read a transcript of the entire interview here:

Morgan Stanley – How to Take the Emotion Out of Investing

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