How the Financial Mess Toys with Our Heads

Sometimes when stressed out about money, I eat lots of gummy bears, skip my gym routine and feel the urge to shop, shop, shop. Fortunately, sanity wins out and I find better outlets for financial anxieties. But it's tempting to get lost in escape fantasies when reality becomes a bear market.

With that in mind, this item from Kiplinger's Personal Finance caught my eye.

"Does a down market mess with our heads? Are we hard-wired to make bad decisions in bad economic times? These are questions senior editor Bob Frick explores in the November issue of Kiplinger’s Personal Finance magazine—on sale October 7th. In an in-depth look at investment psychology, Frick uncovers some surprising truths, including:

· Financial stress puts us in particular danger of making stupid mistakes. You’d think the opposite to be true—that we would get more conservative when we’re feeling pinched. Instead, behavioral studies show that people are often willing to go double or nothing to avoid feeling that they’re losing.

· We are biologically programmed to make poor decisions under stress. Stress hormones affect our brains to make us short-term, impulsive thinkers when financial problems often call for long-term, creative solutions.

· A psychological quirk called recency will can make us more pessimistic. Studies show how heavily influenced we are by events in the recent past when making present-day decisions—for better or for worse. An example: The 1987 market crash and the demise of the dot-coms destroyed investor optimism. But what, in fact, did the future hold for the market? In the year following the bottom of those setbacks, the S&P 500 rose 36.6%.

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