How long will the memory of devastating losses experienced by investors in 2008 stay with them and impact their investment decisions?
NPR has an interesting segment on the topic of why fearful memories are so persistent in the brain. (Click here to listen.) For example, consider the behavior of an Iraq war veteran who suffers from post-traumatic stress disorder. Researchers have observed that a soldier who survived a bomb explosion while driving a Humvee in Iraq can have difficulty driving to the supermarket back in the United States years later. Furthermore, it is often said that those who lived through the Great Depression were permanently changed. Case in point, my grandmother still saves aluminum foil to this day in order to save money. The same phenomenon certainly affects investors.
That’s because fear comes from a part of the brain called the amygdala. The amygdala isn’t logical, Ressler says. It just reacts. ”Before we are even consciously aware of something the amygdala has activated the fight-or-flight reflex,” he says, “and activated the fear system.
So, the question for investors is whether this fight-or-flight reflex will be beneficial to the investor going forward. I would suggest that it could potentially be beneficial if the events that caused the fearful memory were to repeat itself with regularity in the future. However, it is much more likely that this fearful memory will cause more harm than good to the investor. How can an investor cope with this problem? The NPR segment suggests that the answer may some day be to take a pill. Perhaps. However, here and now an investor can rely on a systematic process that has enough flexibility to thrive in a wide variety of market environments. This was the very thinking behind the development of our Global Macro strategy. The systematic process is the key to overcoming the negative affects of fearful memories.
Click here for disclosures from Dorsey Wright Money Management.
Posted by Andy Hyer 
