Who’s Managing Your Money?

Simply put, your brain was designed for survival and not for growing money.  And this is a problem if you want to beat the S&P 500 or at least have your money grow at a respectable rate.

When you want to beat the S&P 500 you will have to understand the difference between two parts of your brain, the critter brain (the oldest part of your brain) and the human brain (the newest part of your brain, known as the pre-frontal cortex).

The Critter Brain
The critter brain, the oldest part, sits on top of the brain stem.  Among its jobs, it makes sure that your heart beats, your lungs take in air, and your body temperature is regulated.  To accomplish this, the critter brain is continually answering two questions:  1) “Am I safe?” and 2) “Can I survive this?”  If the answer comes back “yes,” then the body keeps doing what it is doing.  But if the answer is anything less than a resounding “yes,” then the critter brain will quickly tell the body to take evasive action until the situation is survivable.

There are two interesting points about the critter brain.  The first is that the critter brain does not understand time nor does it see time as relevant.  The critter brain does not know the difference between you as a three year old and you as a forty-three year old.  This might be a problem if at three years old you didn’t have it coded in your critter brain that growing wealth with ease is survivable. 

The second point is that the data that the critter brain has coded to be survivable is downloaded from your parents between conception and when you were about four years old. This is how our parent’s beliefs can and often do become our own beliefs.  The early downloading of beliefs creates the foundation of our survivable behaviors in regards to investing and growing wealth.  It’s interesting to note that these beliefs are not updated with the addition of new knowledge about the world.  Once the coding is complete (around four years old), new information is pretty much ignored.  The question, “Can I survive this?” is answered by checking against the approved list of survivable situations.

The critter brain will do everything in its power and it has a lot of influence to turn the human in a direction that is known to be survivable and safe.  For example, if the critter brain notices a pattern in the woods that might be coded as a bear, it will immediately tell the legs to run!  Without thinking or processing, the body will move.  As soon as the critter brain can answer “Yes” to “Am I safe?” your legs will slow down.

It’s the same with the stock market.  If the critter brain notices that you are growing wealth AND it has never survived this before, then the critter brain will also take evasive action to stop this from happening.  Growing wealth, like meeting a bear in the woods, is not coded as a survivable event. 

Survivability is more important than logical function for the critter brain.  If you know that you are doing something that does not help the growth of your money in the stock market, this knowledge by itself will not change or affect your behaviors.  People continue doing the same things after they have acquired new knowledge teaching them to do otherwise, because their critter brain is not allowing the new knowledge to be put into survivable action.

The Human Brain
Now let’s turn our attention to the other part of the brain, the human brain.  The human brain is the newest part of the brain that sits up in front, known as the prefrontal cortex.  This is the part of the brain that separates us from chimpanzees and all other mammals on the planet.  Its job is to provide high-level processing such as solving complex problems, providing rational thinking, and strategizing long-term goals. We would like the human brain to be the one making our investment choices. When we create situations that allow the human brain to make investment choices, our money grows. But the human brain can only make investment choices when the critter brain is not in the driver’s seat.

The Critter Brain and the Human Brain – A Dysfunctional Family (or, “The Problem”)
Think of the critter brain and the human brain as independently owned and operated communication systems.  If there is any doubt by the critter brain that a situation cannot be survived, it will run the show.  Running the show means it will go into “fight or flight” mode, and neither fighting nor fleeing is helpful to your brokerage account balance. 

Said another way, the critter brain will change the current situation until it can be coded as survivable.  Unfortunately, for many humans losing money has been coded as survivable, while GROWING money with ease is not survivable.  If you were born of parents that had it coded in their belief system that being poor or losing money is survivable then you as their offspring might also have this coded in your belief system. 

The relevant belief systems may not be specifically about money – other beliefs can get generalized to your money situation.  Your critter brain might have it coded that staying with the crowd (just like it did 10,000 years ago on the African plains) is safer than going against the crowd.  This is so true that the same part of the brain lights up when going against the crowd as when the body is in physical pain.  Interesting, isn’t it?  Are you starting to understand how the critter brain might be working against you when you want to grow your money?

Staying safe is the reason why human investors inadvertently buy at the top and sell at the bottom.  Buy what is hot.  Buy what is exciting.  And, in the process of staying safe, you might under-perform the S&P 500.  An unmanaged S&P 500 index fund beats 87% of the money managers in the world, because our critter brain is wired to run with the crowd even if the crowd is losing money.  If you want different results from the crowd, this may be a problem.

Both the critter brain and the human brain are good at what they do because they learn very well.  The critter brain learns very quickly, early in your life, and then locks in that learning to keep you safe for all eternity.  The flip side to this is that it’s very difficult for the critter brain to unlearn.  Most of what the critter brain has learned about growing money doesn’t work, and yet this is the basis of our instincts.

If you want a different experience, you will have to update your system or recode your critter brain.

The Solution
We are left with two choices:  1) unlearn what you and your ancestors have learned to be true (this may take years) or 2) create a situation that eliminates the critter brain from sabotaging or playing a part in your stock market decisions (this takes days).

You will want to create a situation where the critter is not paying attention, right?  The way to eliminate the critter brain from participating in the stock market is to eliminate the “triggers” or “patterns” that the critter brain has coded to be not survivable.  In the investing world these patterns are called “investing biases.”  When we are stuck in an investing bias we are prevented from objective planning; we become subjective and start guessing.  This puts our critter brain in a situation where it needs to ask the question, “Can I survive this?” 

There are many investing biases, and some of the most common are stress biases, future forward bias, reaction bias, relationship bias, familiarity bias, story bias, self-attribution bias, over-confidence bias, false-anchoring bias, news bias and illusion of control bias.  If you are human and born on planet earth, regardless of how you earn a living, then you have these biases already hardwired in your critter brain.

If these biases are taken out of the investment conversation we eliminate the critter brain’s influence.  It stops even thinking of asking the question, “Can I survive this?”  and then your human brain can work.  There are four connected steps to eliminate investing biases.  The four steps are simple but they must be done congruently to prevent the critter brain from being triggered.  Let me share one of them with you.

If you want to bypass the critter brain you must limit contact with the stock market or your individual positions to no more than once a month. Let me tell you why.  Losing money is coded as pain to the critter brain.  Even if you are up by $5,000 in a stock, if you then check your investment Monday morning and it is down $100, this loss will be coded as pain and will carry a negative weight.  This weight is four times heavier than a win or winning situation.  This will then tell your critter brain that you are in danger.  When the critter brain is in danger it goes into fight or flight mode, and this will lead to actions that will not work for your stock market portfolio.  Under control of the critter brain, the human will do one of two things with its investments:  1) sell its winners way too fast or 2) keep its losers way too long.

If you choose to look at the market every day, hour, or week then in order for your critter brain to have a positive experience you will have to be winning five times more often than you are losing.  The probability of this is so low that it almost never happens.  The best investors in the world only win 40% to 50% of the time, not 80% to 90% of the time.  And so the solution is to limit your contact with the stock market. Simple but not easy!

The three other steps in combination with this one will manage your downside risk while allowing the winners to keep growing.  This will keep your critter brain out of the loop and allow your human brain to make the choices that you want it to be making. 

Remembering back to this change you will notice how well your money is now growing.  Some of you may be satisfied with your results from the stock market.  If you are, then keep doing what you are doing.  For those of you that would like different results, you will be amazed at how one or two small shifts can make the changes you want in your results, now.

Simple Steps to Grow and Harvest Your Money

You can grow your money in up and down markets regardless of where the economy is headed and how little financial knowledge you have. Fancy degrees do not matter. you need discipline, rules to follow and a method that works. You have to have your money work hard for you once you've earned it and this is where people fail.
This books teaches methods that work!