with mountains of data, reams of corporate filings and
advice from professionals, investors often rely on a
range of emotions to make financial decisions ó
whether they realize it or not. And those underlying
feelings can present roadblocks to rational investing.
a presentation for wealth managers in Garden Grove,
Calif., speaker Frank Murtha described a scenario in
which an investor gets cold feet. The market has dropped
to a point where the investor previously said heíd be
comfortable buying some stocks, but heís nervous and
tells his investment adviser heíd like to hold off.
When the market goes back up, the investor is angry he
missed out on the opportunity to make money.
is nothing more emotional and less rational than the
relationship that people have with their money,"
Murtha, who holds a doctorate in counseling psychology,
told the audience at the CFA Instituteís wealth
management conference. His firm, MarketPsych LLC,
conducts behavioral finance research and consults within
the financial industry.
sat down with the Orange County Register to discuss
What are the main emotions that drive investors?
Fear is by far the most dominant emotion, and it affects
peopleís investing more than anything else.
You were explaining the difference between fear and
panic in your talk earlier. Could you review that?
Fear is anticipatory. For example, when youíre
standing on the edge of a boat, you might have a fear of
drowning. "I donít want to fall over the
side." Panic is, "Oh my gosh, Iím drowning.
What do I do?" And one of the things investors can
do is have mechanisms in place (to deal with) the
natural anxiety thatís going to be part of this
process because thereís risk. You can have guardrails
so that you donít find yourself slipping off into
panic, getting caught unprepared, unaware without a
plan. Because those are the panics that we see in the
market, and thatís where massive amounts of wealth get
What are some examples of guardrails?
One guardrail is the ability to work with somebody other
than yourself ó a professional. It doesnít even have
to be a professional per se, but a trusted person who
has wisdom and your best interests at heart. Otherwise,
youíre much more at risk for wandering off the path
and falling prey to your own fears and biases. I think
having cash (on hand) is essential. Cash is control. The
ability that you know you can act. This money is
available. I can take advantage of situations and I know
I canít lose it. A sense of control is essential to
combating fear, and cash is one way to get that.
Is there an emotion you see playing out more
post-recession now? Or is it still fear and anxiety for
the most part?
Fear and anxiety, certainly. I think one of the biggest
emotions out there post-recession, post-banking crisis
is a desire for redemption. People want to make up for
the losses and I think thatís a trap people fall into.
They lost some money; they got frightened out. They
werenít able to take advantage of the upswing the way
they wanted, and theyíre stuck with this sense of
regret and a desire to get back what they lost. And it
sets people up to take a really bad risk down the road
(to compensate). Itís part of a pendulum swing that
really gets investors. A sense of regret.
one is a sense of loss. You lose more than money when
you lose money. You lose your sense of well-being, your
vision of the future. You almost have to go through the
five stages of grief to get back to a point where youíre
healthy again with it. I know there are a lot of
investors out there who havenít gone through that
process to get back to the point where they can have a
healthy relationship again with their money.
If theyíre still stuck in loss, how does that play out
in their investing?
You have to reach a point of acceptance. When youíre
at the point where youíre like, "I gotta find a
way to make up for this," or youíre saying,
"Iím done," thatís not necessarily healthy
either. If youíre not using your money in a proper
way, youíre not going to be able to reach your
financial goals, in all likelihood.
Is there anything else you think it would be important
for readers to understand?
The market is a form of peer pressure. The price of
stocks is determined by how much your peers, other
investors, like it. If they like it, it drives the price
up. If they donít like it, it drives the price down.
So how do you overcome peer pressure? The same way you
overcame it when you were 16 years old: You develop a
sense of who you are so that youíre secure enough that
you donít feel the need to bow to peer pressure. Then
you can put together an investing plan that fits who you
are in your much healthier place. I think that the most
important thing investors can do is do the work
necessary to develop a sense of an investor identity.