Market volatility is caused by 'reptilian brain' decisions

Our ancient instinct to run from fear clouds investment decisions says behavioural economist for financial services

Market volatility is caused by 'reptilian brain' decisions
Steve Randall

Many retail investors are making poor choices because of ancestors from many thousands of years ago.

That’s according to a new investment decision model that links to the theory that humans have three distinct parts of the brain that operate in very different ways, first outlined in the 1960s by American neuroscientist Paul McLean.

McLean said that the reptilian part of the brain is important for keeping us alive by running from danger and maintaining other primal instincts; the emotional brain reacts to senses, emotions, and sentiment; and the rational brain is the one for objective thought and decisions.

The new investment decision model, developed by Dr Dan Geller, behavioural economist for financial services at Analyticom, found that decisions made by the reptilian brain are bad for investing and have contributed to the recent market volatility.

That’s because, despite data showing a strong US economy including retail sales and job creation, many investors have chosen to ‘cut and run’ due to fears of losing their investments.

The scientific study, which has been peer reviewed and published in the Journal of Applied Business and Economics, noted that investors’ exposure to negative news stories triggers their survival mechanism.

The most successful investors (Warren Buffett is mentioned in the report) do not rely on these primal instincts because they have the time to study annual reports and other information about potential investments.

So why not just study?

While the scientifically predictable investing model is designed to help investors respond to market fluctuations in a more analytical way, it also highlights why many retail investors remain under the control of their reptilian brain.

“Most investors are independent investors, who have a day job, and are investing independently because they want to control and manage their investments and retirement accounts,” said Geller.

That means that they will not have the time to analyze all the data and will frequently use shortcuts to make investment decisions.