Our brain is not only the source of rational decisions. Anyone pursuing long-term goals such as building wealth often has to resist biologically ingrained impulses. Here's what helps you do that, and how to make it easy on yourself.
In a certain sense, our brain is still stuck in the Stone Age. That, at any rate, was the argument put forward as early as the 1990s by Leda Cosmides and John Tooby, who are counted among the pioneers of modern evolutionary psychology. According to them, many of the "circuits" in our heads are not tuned to today's everyday problems, but to the challenges faced by our ancestors in early human history.
"From an evolutionary-biology perspective, the first thing at stake is that we survive in the here and now," explains business psychologist Prof. Dr. Mira Fauth-Bühler of the FOM University of Applied Sciences. "We eat when we're hungry. We drink when we're thirsty." When this happens, she says, our brain releases dopamine and other messenger substances that signal an immediate reward and the craving for more. That is why, from an evolutionary standpoint, our brain is not geared towards behaviours such as saving and investing. Because with long-term goals like these, the short-term reward is missing. "To reach long-term savings goals, we have to suppress impulses that promise an immediate reward."
When it comes to investing in particular, that's not always easy. "These two stocks will make investors rich," "More than 100 percent upside potential": headlines like these are everywhere. They appeal to our tendency towards quick rewards, just as gambling does. In this way, they quickly tempt us into investment mistakes and into taking on unnecessarily large risks.
The emotional alarm bell
While some people love risk, others shy away from it. Not all people are alike. And we don't react the same way in every situation. An important role as an impulse-giver here is played by the amygdala, a kind of emotional alarm bell in the limbic system of our brain. When it perceives danger, it triggers emotions such as fear or anger.
In evolutionary terms, it was crucial not to spend too long thinking about whether to flee or fight. A pounding heart, sweat on your brow: biological reactions like these are involuntary and can lead to a particular behaviour in a flash. US author Jason Zweig, who has dealt with the subject in depth in books and articles, gives an example: "If I threw a rattlesnake into your lap, you wouldn't stop to ponder whether it was real or a rubber toy. You'd leap up out of your chair."
But what was extremely useful in evolutionary terms can lead us astray when it comes to investing. Neuroscientists such as Hans Breiter of Harvard University in the US have found that the amygdala can become highly active even when financial losses are merely feared. Price fluctuations that can trigger such fears are perfectly normal on the capital markets, though – and are not yet a loss. That only becomes real, in some cases, for those who react in panic to the swings and sell their securities.
Yet purely rationally speaking, there are good reasons to include the stock markets when building wealth, even if they sometimes fluctuate more sharply. Because over the long term and on average, share prices have always trended upwards. That's no coincidence: shares give you a stake in companies and therefore in the economy. And the economy is fundamentally geared towards growth.
A biological tendency to make predictions
That said: you can't know in advance which companies will be among the future winners. That's why there's much to be said for systematic global diversification, which significantly reduces the risks compared with investing in individual securities. And for a forecast-free investment strategy that doesn't engage in speculation about the future.
But that isn't immediately intuitive either. Because our brain tends to trust in its own forecasts. US author Zweig calls this the "dependence on predictions". What he means is that our brain is constantly searching for patterns in order to gain a certain confidence in how to act in the future. In early times this was important – for instance, to judge that certain plants always have edible roots, or that day always follows night.
Whether it's a sequence of numbers or of events – to this day we try, in all sorts of areas of life, to recognise patterns and draw conclusions about the future from them. If a company has beaten its profit forecasts in the first, second and third quarters, it seems clear what will happen in the fourth. If a particular market segment has been ahead for a certain time, we think we "know" how things will continue. Yet no one can reliably predict such developments. Which is why it's better not to base your investment strategy on forecasts.
Outsmarting the impulses
It's true that we are exposed to impulses from the evolutionarily older parts of the brain, but we are not at their mercy. We can act rationally. In the brain, the prefrontal cortex plays a key role when it comes to pursuing goals quite deliberately. We can learn and practise new habits.
Simply becoming aware of how our brain ticks when it comes to investing can be a first step. And a second can be to avoid exposing yourself to misleading signals. Anyone who doesn't follow the short-term price movements every day isn't constantly confronted with alarm signals. Anyone who steers clear of "hot stock tips" is less inclined to gamble when investing.
Even so, it can be exhausting to keep fending off emotional waves again and again. This is where a certain degree of automation helps: anyone who uses savings plans doesn't keep having to decide anew whether or not to invest.
One option for those who don't want to keep racking their brains over building wealth is quirion's global portfolio. It is based on scientific findings and follows a forecast-free investment strategy, with variants for every risk profile. Because a pure equity portfolio isn't suitable for every risk appetite and every investment horizon. All variants are also available as an ETF savings plan Plus, starting from a savings rate of just €25 a month.
