The Sympathomedullary Pathway and Investing
When I went to med school, fight or flight were the two options for an acute stress response.
Well, I guess humans have evolved since then (or at least our understanding of them has), and now there are four acute stress responses: fight, flight, freeze, or fawn.
Let’s look at the acute stress responses and see what they mean for stock market investors.
Biochemistry of the Acute Stock Market Response
Biochemically, the hypothalamus stimulates the sympathetic nervous system to release epinephrine and norepinephrine into the bloodstream. The endocrine systems and smooth muscles are also stimulated, and CRF is released. CRF causes the pituitary gland to release ACTH, which then acts upon the adrenal cortex, releasing a shower of endocrines.
And, of course, the good ol’ lizard brain (the amygdala for us fancy doctor folk) recognizes the fear and sets the response going. This “smoke detector” principle—our ancestors survived because a false positive response to a threat is cheap, whereas a false negative response ended your genes—is important to understand.
So, evolutionarily we are set to have many false positive responses to triggers, like a crashing stock market. It causes adrenaline to surge through your body and cortisol to poison decision-making. And if you are chronically stressed (or burnout), decision-making remains impaired long term.
We all know what happens then. Oh, shit—the stock market is crashing again. Danger. Must react now!
Let’s see what each acute stress response does to the stock market investor.
Fight, flight, flee or fawn over the stock market.
Fight the Stock Market
When you perceive the stock market as a threat, you might fight it. Aggressive action means selling or buying. Or worse, using options or leverage in the face of dramatic price changes.
When you fight the stock market, you will get swept up in short-term changes that mean nothing over the decades.
If your instinct is to buy or sell when the market moves—delete the account from your computer or miss your password three times so that you’d have to call the 800 number to reset your password.
Put a step between you and the “click of a button” response that you know (at least when you are rational and not flooded with cortisol) will not be useful long term.
Flight the Stock Market
How about a flight from the stock market? Flight is, of course, running away from danger. This means “going to cash” when the market stimulates your sympathetic nervous system.
I’m just going to stop right there. You know when you should go to all cash. The only time you should go to all cash is never—the end. If you have ever sold out and gone to all cash in your life, honestly, think about principle protection products (perhaps RILAs, other annuities, or even buffered ETFs).
Freeze and the Stock Market
Freeze, and you do nothing. Just sit there and watch the horror unfold on CNBC’s big board. Red everywhere as the blood draws from your face, and you viscerally feel the panic.
This might be the right thing to do! Freeze. After all, the best thing to do when there is chaos in the stock market is—you guessed it—nothing!
But even better than that is not to watch it at all. Remember your locus of control. You can control your taxes, so you should spend lots of time thinking about that (how to control them, not worrying about how bad they might be).
You cannot control the stock market—it is outside your locus of control. Thus, ignoring the day-to-day and understanding that it always goes up (over time, or at least it has historically).
Moreover, “it’s different this time” are the four most dangerous words in investing. No, the only different thing is the cortisol running through your system is causing you to have type 1 and type 2 thinking errors.
I might have made up that type 1 and 2 business, but I’ll do anything to get you to realize that, no, no this time it is not different.
What is Fawn the Stock Market?
Alex, I’ll take what is fawn the stock market for 200. What is fawning, and how does one fawn the stock market?
Fawn as an acute stress reaction was not an option back in med school. But investing and the acute stress response have come a long way in the last 25 years.
To fawn is to attempt to please to avoid conflict. It is a response to trauma that is common among small “t” trauma survivors (which we all are). When you are triggered to have a trauma response, you might immediately go back to people-pleasing that allowed you to survive childhood insults. “oh, I’m sorry. I’ll do better.”
This is agreement and helpfulness. An interesting response to the stock market crashing.
Of all the sympathomedullary responses to a stock market crash, fawning the stock market may be the least bad response.
Conclusion: Acute Stress Reactions to the Stock Market
When the stock market falls, your body has a biochemical response. You might try to fight, flight, freeze or fawn the stock market. The sympathomedullary pathway is no way to invest.
A principled investor does not react to the stock market’s wily changes; he responds.
As we know, once your body is flooded with cortisol, it takes 15—45 minutes for you to metabolize it and start behaving normally again. Literally, blood is diverted from your cortex, and you make poor decisions when you are reactive to trauma (such as stock market losses).
That is not a saber-tooth tiger, though it feels like one when the big board bleeds red through and through. Remember the smoke detector set in your amygdala.
What should you do?
Nothing. Or better yet, Go away and do something else. You never need to do anything today with your investments. You have them set up so that your short-term needs are protected, and you know why you are invested long term.
Set it up right once, and then ignore it for the rest of the year. That’s how to beat the sympathomedullary pathway’s response to the stock market.