At 2:37 AM, Sadie went ballistic. Middle of the night. Barking like mad. Sprinting around the house.
I startled from serene sleep to heart-racing confusion, then lept out of bed and hurried to the living room. Fire?! Intruder?! What was happening?!
I still don’t know, but I have a guess.
We have a neighborhood fox. Sadie freaked out the last time she saw him. I think he returned. Thanks for defending us, Sadie…(kinda). Things calmed down after a minute, and we went back to bed.
But as I laid back down to sleep, I paused. My brain function, I realized, was far from normal. I didn’t recognize myself.
The previous minute was a fog of sleep deprivation and adrenaline. A “fight or flight” instinct had kicked in. I couldn’t explain my thoughts or actions. It was all reaction and instinct.
I want to reiterate and emphasize this: environmental factors fundamentally changed my internal thoughts.
My brain slowly shifted back to normal. And I pondered: “what if I had to make an important decision right now?”
Ask the Experts
The following comes from “Emotion and Decision Making,” a paper from Lerner (Harvard), Li (UC Riverside), Valdesolo (Claremont McKenna), and Kassam (Carnegie Mellon).
Researchers have found that incidental emotions pervasively carry over from one situation to the next, affecting decisions that should, from a normative perspective, be unrelated to that emotion.
An incidental emotion in my story is the frenzy caused by the fox. Imagine if I had immediately logged into my Fidelity account afterward. Would I have made a rational investing choice?
As the researchers point out:
For example, incidental anger triggered in one situation automatically elicits a motive to blame individuals in other situations even though the targets of such anger have nothing to do with the source of the anger
Fear from one situation can percolate into an unrelated situation. The same goes for excitement. We have one brain that handles millions of situations. Emotions from one situation pervade the brain, and other situations are affected. Logged into Fidelity, I might have sold all my index funds and bought gold! Oh nooooo!
Enjoying this article? Subscribe below to get new articles emailed straight to your inbox
This doesn’t just affect individual writers with barking dogs. We can track emotional choices across huge swaths of populations. Sunshine should not affect stock prices. Neither should soccer results. And yet…
…based on the assumption that people are happier on sunny days, economists found a positive correlation between the amount of sunshine on a given day and stock market performance across 26 countries (Hirshleifer & Shumway 2003, Kamstra et al 2003). In contrast, stock market returns declined when a country’s soccer team was eliminated from the World Cup (Edmans et al 2007).
The evidence is clear. Emotions affect your decisions. Unless…
Fire Drills
What’s the point of fire drills?
A building is on fire. A fire alarm goes off. I walk outside the building. Shouldn’t that be common sense? Why practice that activity—over and over and over—with a fire drill? Why waste that time?
I know why. And so do you, even if you’re not aware of it. It’s because of the “frenzy of the fox.”
We want people—especially kids—to have zero doubts about their reactions to a fire alarm. Zero doubts! Fire alarms are loud and scary. Emotions can run high. But there’s no time for panic, confusion, wrong turns, or pausing to grab Teddy the Bear.
We practice fire drills to eliminate that in-the-moment fear, uncertainty, or doubt. And to remind people, “Material items can be replaced.” And to imprint in our brains, “This is the fastest route to safety.” We practice fire drills to program our brains. Because in-the-moment emotions can kill us.
The confusion I felt with Sadie’s barking was acceptable for that scenario. We cannot afford the same confusion if the building is on fire.
The Fire Drill of Investing
What would you do if the stock market started burning down? This question is a fire drill, but for your investments.
I’ve asked this question to myself hundreds of times. I’ve read countless “the market is burning” stories before—of bear markets, panics, and crashes. I know the right “escape route.” When the market crashes, don’t panic and don’t sell.
Read more: The Market Crash Is Coming (…Eventually)
Why not? Why shouldn’t you panic? Because the market has crashed before and will crash again. A market crash is natural. Unlike a house fire, a market crash is expected, potentially healthy, and always recoverable. Over long periods of time—regardless of market downturns—positive performance has been close to a guarantee.
Selling during a market crash equates to selling low. And then you’ll be too nervous to buy back in as the market recovers. You won’t be invested as the market goes up. It’s a double-whammy of investing failure.
There are many instances of this story—of what not to do. Reading these stories acts as a stock market fire drill. I repeat these stories here to act as your fire drill. I hope it’s working!
And because I’ve practiced this “market fire drill,” I knew what to do in March 2020. Rather, I knew what not to do. I wasn’t panicked. I didn’t sell. I watched with curiosity. The drills had prepared me. In fact, I marched forward with my steady investment strategy and had faith that, eventually, the markets would recover.
Read more: Thoughts from March 2020 – The Beginning of the Coronavirus Stock Market
No frenzy. No emotion. The fire drills had trained me. I was safe.
Sure enough, the stock market has doubled in value in just 16 months since the COVID-19 low.
We have eons of evolutionary wiring that command us to react to troublesome stimuli. Our instincts shout: Don’t just stand there—do something! We want to address our fears, and we project those fears through our decisions.
But it was index fund godfather John Bogle who famously said:
While the interests of the business are served by the aphorism ‘Don’t just stand there. Do something!’ the interests of investors are served by an approach that is its diametrical opposite: ‘Don’t do something. Just stand there!'”
John Bogle
Ask yourself now: what will you do if the stock market crashes?
Or perhaps you’re not invested in stocks. There are other fire drills you can run:
- What will you do if a friend suggests you buy the $100 blouse?
- What will you do if your neighbor buys a brand new Tesla?
- What will you do if your cousin starts selling a pyramid scheme product?
Start wiring your brain pathways right now. Don’t let emotion incidentally affect you when it matters most.
Thank you for reading! If you enjoyed this article, join 8000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
Looking for a great personal finance book, podcast, or other recommendation? Check out my favorites.
Was this post worth sharing? Click the buttons below to share!
I’ve always thought more clearly in a crisis, it is when I’m at my very best. I’ve been incident commander for some huge scary fires and first on the scene to try to restore life to clinically dead people. The clarity of focus in those kind of situations is amazing. It becomes all about the mission, no matter how horrific the scene is. And I’ve seen horrific a few times. Maybe because of the situations I’ve been exposed to handling stock market dips seems like a no brainer by comparison. Just stick to your financial plan and do not react to temporary upsets. There are plenty of real terrifying dangers in this world, the stock market is not one of them.
Did you practice those crisis situations, Steve?
Did that practice help provide clarity of thought when the real situation arose?
Great article as usual!
I definitely think that drills help to prepare you. Going through the motions before something bad happens will (hopefully) help you to instinctively react correctly or at least “directionally right” when the real situation occurs.
Every time I take first aid re-training, I get reminded of the importance of it. I learnt this once, practiced it once, thankfully never had to use it… Then in the first re-training did I know instinctively what to do? No. But would I have reacted better than without training? Sure. The second re-training was already better. Do I know perfectly how to react in every situation? Still no. I only re-train every few years for a day or two. But do I know how to react better, especially in the really critical situations? For sure. Does it take away some hesitation from reacting in a real situation? Thankfully I dont know yet, but I lean towards yes. To me, this is similar to using masks. I wear a mask to protect others, and they wear one to protect me. I re-train for first aid so that I can help others, and I hope others re-train to help me, should the need ever arise.
As for stock markets, I havent yet experienced a crash when I was heavily invested. In theory I know what to do, or rather, what not to do. Will this help me not react emotionally when it happens? I hope so. I also hope that the personal finance community will help me stay on track when it happens. Observing others react (correctly) should help make it easier? But what if others react mostly incorrectly?
I’m still surprised at people’s reaction to fire alarms though. From what I’ve observed, most people don’t react “properly”.
Couple of stories around that:
I was living in a high-rise once, and the fire alarm went off in the middle of the night. At first I was confused… “What is this noise?” I hadn’t heard what it sounds like, so I didn’t immediately file it as “fire alarm”.
But after a few seconds I went “ok, fire alarm” and started to react. I took my wallet, keys, passport, laptop, phone, jacket, shoes (I know I’m not supposed to take stuff… But this is consciously what I take and I know where these are at all times so it wastes almost no time. It’s part of my “drill” process I guess) and was out the door, through the staircase and down. To my surprise, I was the first one out.
It took a while for other people to come out, and keep in mind, this is a huge building, 60-ish stories. People were just trickling down, some of them coming 10-15 minutes after the first alarm. Eventually there was a bunch of us downstairs, firefighters arrived… It took about an hour to be able to go back up. Thankfully there was no fire, but I was very surprised at how long it took some people to come out. What if there really had been a fire?
I also remember being in a hotel, and the person I was traveling with set off the fire alarm by having a steamy shower and then blow-drying her hair in the bathroom with the door closed. WE knew there was not a fire, but no one else did. Do you think people evacuated? Heck no. No one evacuated. Some people opened their room doors to “check if they could see something”. Of course we told them, “hey sorry, it was us”. But man… If I’m in a hotel, the fire alarm goes off and I don’t conclusively know that it’s NOT a fire…? I’m OUT the door.
Better safe than sorry.
Why does this happen? I’d be really interested in what makes people react as “oh it’s probably nothing” instead of “i need to get out of here ASAP in case it’s real”? Is it herd mentality? “Well, if other people are ignoring it, it must be nothing”? I’m not sure. But I’m curious.
I wish I had more time to dig into this, LadyFire! Those two fire alarm anecdotes have me so curious. I’d bet you’re onto something with the “herd mentality” idea.
Maybe combined with a “boy who cried wolf” influence. E.g. everyone fire alarm I’ve ever heard has been a fake. I don’t believe them anymore.
We know unintended consequences are a real thing. Maybe that’s one unintended consequence of fire drills?
You may be right about the “boy who cried wolf” effect there. But I just don’t understand the thinking… It “costs” me much less to react and have it be a false alarm, versus the cost of not reacting when it is real.
Once of my friends actually experienced a real fire in hotel and they were lucky to get out. So yes, even though in most cases it’s probably a false alarm, but with the stakes so high in case that it’s real, I’ll react every time. And it’s not like fire alarms happen “every day”, it’s still a pretty rare event. If they happened every day, I would get that people get wary and go with “most likely false” but… How often have you experienced a fire alarm?
Outside of the two events I mentioned, I’ve had fire drills at work about twice a year, at school perhaps once a year, and I think I had one additional fire alarm in a hotel when I was much younger, so I don’t remember that very well. Feels pretty rare still?
Risk = Probability x Consequence
The consequence of a fire is HUGE, for sure.
What’s the probability that an alarm is legitimate?
Non-zero…but pretty darn close to zero! 🙂
I think many people have poor mental calculus and get accustomed to the idea that alarms are always drills (even though it’s not true).
Risk = Probability x Consequence
Love it! Never heard it before, but it’s so true. After you hear it it’s obvious, but I just never looked at it in this way. Thanks for sharing!
I think when it comes to investing, especially for new investors it is critical to get an understanding of the long-term ups and downs of the market. I think JL Collins sums it all up quite nicely:
“The market always recovers. Always. And, if someday it really doesn’t no investment will be safe and none of this financial stuff will matter anyway.”
Thankfully when COVID hit, I was prepared and even though I just finished negotiating my exit from corporate America, I KNEW that everything would be ok. And we snapped back quickly. The next recession may not be as kind, but if you do those mental rounds and focus on the long-term you’ll be ok.
Now, as for real emergencies. I was in the Northridge Earthquake as a kid. I think because of this, I tend to remain calm under pressure and in emergency situations. Our house ended up being structurally unsound, my room was thrashed about and all of my furniture had toppled, but my parents with three kids got us all under control and set a great example. We immediately secured an RV and lived out front for a few weeks until we could find a rental property.
I am sure my parents were freaked out, but they didn’t show it, and ever since then I have tried to follow their example.
Great post! Reminds me of the stoic concept of “premeditatio malorum” where you meditate on bad things happening.
What you’re suggesting also has applications in the cognitive behavioral therapy realm where patients imagine a situation where they’d normally dysfunction, and they practice / “fire drill” their way into the appropriate emotional response. This is proven to be effective as a lot of patients, when encountering those situations in real life, react functionally.