'We Have Met the Enemy, and He Is Us'

Market turmoil plays out dramatically in daily media coverage that takes an almost apocalyptic tone.

With headlines screaming "unprecedented" and "crisis," it's no wonder many investors scramble to move their money.

If one emotion has prevailed over the past year, it's fear.

Fear, often used as an acronym for "false evidence appearing real," can be a dangerous enemy to investors.

Consider an analysis of investor performance by the financial analytics firm Dalbar.

It found that over the past 30 years, the average equity fund investor's efforts to outguess markets has resulted in performance that falls well behind the blue chip S&P 500 Index because they panic-sold when the market declined.

Similarly, fear after the Great Recession in 2008 pushed many middle-class workers out of stocks entirely, only to miss out on the longest bull market in history from 2009 to 2020.

As a financial professional, you've likely seen this fear in your clients as you try to serve dutifully as a reliable voice of reason.

But let's face it, not all clients listen. This is often due to a major disconnect that can exist between what we as humans know we should do and what we actually do.

For example, we know we should buy stocks low and sell them high — but most investors do the exact opposite.

Likewise, we know it's bad to carry credit card debt, yet the average U.S. household credit card balance is $8,942, up 4.5% from 2021.

The source of this curious tendency to contradict our powers of logic and common sense is associated with the inner workings of the human brain.

You needn't be a neurologist to understand how certain cerebral physiology can affect human behavior.

In fact, learning more about the wiring of your clients' — and your own — brain is one of the most valuable steps you can take as a financial professional.

A tiny area of the brain has superhuman powers.

Much of our irrational behavior can be traced to the primordial functioning of an area of the brain called the amygdala.

This complex structure of cells about the size of a grape is found near the middle of the brain. It plays a central part in our fear and rage responses and its function has been invaluable to the survival of our species.

Have you ever narrowly missed an accident while driving your car and felt the adrenaline or watched a scary movie and jumped at a particular scene? You have the amygdala to thank.

However, notice the difference between these two events — the first was a genuine threat and the latter only perceived.

For the amygdala to effectively do its job, it must drive behavior instantly, before we even have time to consider our actions. A lion running toward you, for instance, will immediately stimulate your amygdala to release stress hormones.

As you run away, your brain will automatically direct more energy to your limbs to facilitate a rapid escape.

Your digestive system and immune response will be suppressed, as will your reproductive system.

According to the Cleveland Clinic, "… your body is trying to prioritize, so anything it doesn't need for immediate survival is placed on the back burner." We've all heard reports of the stress response leading to superhuman abilities in the face of danger.

Cerebral 'hijacking' can lead to investor regret.

Granted, physical survival is much different from stock market survival.

Yet some investors unwittingly allow the amygdala to prevent them from responding rationally to financial uncertainty, making them wired to fail.

Psychologist Daniel Goleman described this phenomenon as "amygdala hijacking," a term he coined in his 1995 book, "Emotional Intelligence: Why it Can Matter More than IQ." This emotional response occurs when the amygdala takes over the brain's ability to react consciously and reasonably to a threat.

In cases of stress — think stock market volatility — the brain's frontal lobes will ideally lead people to react reasonably.

The hijack occurs when the amygdala responds by disabling the more rational frontal lobes and activating the fight-or-flight response instead.

This can result in irrational behavior — like selling off stocks at a loss.

This fear response is usually followed by regret and can endanger a financial practice because investors who are gripped by fear can lose faith in both their investments and financial professional.

Here's how to take the fear out of client behavior.

It's important for financial professionals to understand how the brain can affect client behavior so they can help clients avoid reacting as if they were under attack by a lion every time markets drop.

Taking these steps can help prevent fear-based decisions that lead to regret:

1. Preparation: The best course of action for financial success may not be speculation or even education.

Prepare for the inevitable moment when your client believes four of the most expensive words in this profession: "This time is different." Constantly reminding clients this belief will come and helping them avoid making the mistakes of the masses is your most important role.

2. Implementation: Enact a long-term, disciplined investment strategy void of speculation that is designed to carry you and your clients through the storm when everyone else is disoriented.

3. Rope and wax: Just as Odysseus strapped himself to the mast of his ship and put wax in his sailors' ears, financial professionals must consistently protect themselves and their clients from the inevitable barrage of negativity in the media.

Fear can be contagious, and the more one listens to it, the more likely the amygdala will step in and take over.

As the great comic strip character Pogo said, "We have met the enemy, and he is us." Or, in the case of investor fear, the enemy is our amygdala.

Thankfully, by familiarizing ourselves with how this tiny area of the brain functions, we can take a few simple steps to prevent it from running away with our clients' ability to make sound financial decisions.

Steve Luckenbach, regional vice president with Jackson National Life Distributors, is a 35-year financial services industry veteran and popular speaker on the topic of investor behavior.