Should Emotions Play A Role In Your Investing Decisions?

A quick Google search using the phrase “emotions and investing” will net you a few pages of articles that tell you 1) emotions don’t have a place in investing, and 2) how to remove your emotions from any and all investing decisions. Particularly in the wake of the most recent presidential election, when the market saw a significant after-hours tumble following a widely unanticipated result, to be followed by some intense volatility during presidential tweet-storms and shortly after Inauguration Day, many finance professionals are sounding the alarm bells: get your emotions out of your investing decisions.

But what if your emotions don’t have to be the big elephant in the room sitting between you and good investing choices or higher returns? What if your emotions could be a positive player on your one-person investing team? Here are a few ways you can start reexamining your emotions and whether they mostly help or hurt you when it comes to your decisions in the market:

  • “Leave your emotions at the door.” This is a popular phrase uttered by plenty of people, to include the aforementioned finance bloggers, but it’s also a phrase commonly heard at work. Who among us hasn’t had a manager who tells a team member having a rough day that they need to leave their emotions at the door before getting in to work?The problem is that this doesn’t actually work. Part of being human means having emotions. And trying to separate ourselves from them doesn’t mean they go away. It just means that we run the risk of making emotionally-charged decisions without realizing it, which means we won’t have control over our emotions. When we are unaware of our emotional state, or when we don’t believe that emotions factor into our decision-making, we run the risk of being controlled by them and not even knowing it. As a matter of fact, there’s been a sea change in many workplaces demanding higher and more present emotional intelligence from their employees…specifically employees making big decisions for the workplace.

    Why do we think that we would be able to leave emotions at the door in investing decisions? Perhaps instead, it’s better to recognize that we have them, understand what they are and what we might be emotionally reacting to, and use that knowledge to make the best decision for ourselves.

 

  • Behavioral investing is becoming more common. The finance world is beginning to understand that investors are, in fact, humans, and that humans do have emotions that they can’t really disconnect from…even when making decisions about their money, and perhaps especially then. This type of investing allows for humans to make investing decisions after carefully examining their emotions and values: what are my goals? Does the investment align with my values? Everyone wants profit, but am I worried about losing everything if I take big risks? Am I holding on to this particular stock because I don’t want to admit loss or failure?It’s good to know what those emotions look like. Sometimes, you can even let them guide you in behavioral investing: not making a big risk knowing that they have different financial goals than other big risk-takers, or not wanting to make an investment in a company that doesn’t jive with their values. Emotions can be a good litmus test for how you should move forward or backward in the market, but you have to ask the right questions first.

There are a lot of professionals who might tell you that it’s best to set your emotions aside when investing, and move toward the more utilitarian option. That’s not necessarily bad advice: we should be looking for utilitarian moves when investing. But to think that one can separate or disconnect one’s emotions from themselves when looking for utilitarian options is short-sighted. In order to make the best option, it’s important to first be aware of our emotions and how they are influencing our decisions (fear of loss or fear of failure), evaluate how important those particular emotions are to you (Will I lose my house?), and then make decisions in a balanced way.

Our emotions aren’t going anywhere, and it’s foolish to believe we can disconnect them from who we are. Your best bet as an investor is to instead understand what they are, hear them out, and then use logic and utility along with emotional responses to make the best investments for you and your personal financial goals.

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Written by Danielle Bilbruck

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