Emotional Bailout

The meltdown of the stock market beginning in October 2008 has been repeatedly analyzed.  Banking excesses leading to the drying up of credit. Collapse of the housing market and record high unemployment have wrecked havoc upon investors and destroyed consumer confidence.  The repercussions of this economic are no less than catastrophic and likely to last several years,  Behavioral scientists, who typically steer away from immersion in economic and fiscal behavior have questioned whether psychological constructs lend themselves to organizing and understanding  perceptions and decision-making of investors and can  be used to make these perceptions more accurate and their decision-making more effective?  Recently new disciplines of behavioral economics and behavioral finance have emerged.

 The present economic climate and its depiction by the media have generated a psychological climate of depression, anxiety, helplessness, defeatism, and vulnerability.  This feeling is pervasive and behaviorally contagious.  As in clinical states of depression, people view the present economic climate as pervasive, personalized, and permanent.  As in anxiety they may behave in hysterical, histrionic, avoidant, obsessive and self-defeating ways. Consumers, faced with the threat of job loss, housing foreclosures, and the erosion of retirement assets are prone to any of the same psychological symptoms well known to mental health professionals. They may over-react to unexpected losses by withdrawing entirely from the stock market.  They may lie awake at night obsessing over their financial balance sheet.  They may react with feelings of helplessness and deflated self-esteem typical of clinical depression.  They blame themselves for their overconfidence and greed as investors; they see the problem as generally pervasive and unending.

 Like clinical depression, periods of economic recession are cyclical.  Reactions to recession need not be rigid and pre-determined but can include a range of options.  Consumers need to overcome feelings of helplessness and to recognize opportunities, while, at the same time, embracing reasonable safeguards and defensive maneuvers. Just as we can ward off depression and anxiety by psychological defenses and effective problem-solving, so we can defend against self-defeating investment behaviors.  While Greenspan accurately warned against “irrational exuberance,” we now need to avoid “irrational dismay.”  During both bull and bear markets the intelligent and emotionally balanced investor finds a middle ground between the horns of euphoria and depression.  We need a psychological Abilify to combat bipolar investor syndrome.

Contemporary psychological models of personality and psychotherapy have seized upon the concept of resilience, developed by Martin Seligman at The University of Pennsylvania, as the basis for psychotherapeutic interventions.  Cognitive psychologists attempt to train their clients to examine and challenge their own negative perceptions.  Being able to replace irrational perceptions with realistic assessments and effective decision-making, to quell unrealistic fears, control obsessive thinking, abandon self-

blame, recognize the present economic downturn as time-limited,  identify opportunities when they present themselves, and plan for the long  as well as the short term is to be resilient during difficult times.  Such is the emotional stimulus package needed to complement federal efforts.

What to do:

The first step is to perform a global personality assessment.  The approach would be to identify long-standing, pervasive personality trends as they might impact upon financial decisions.        

                                                                                                              

The most general assessment refers to what Herman Rorschach, at the turn of the twentieth century labeled the “experience balance.”  This is a broad dichotomy reflecting the degree to which one responds in a rational, intellectual manner to life events v. the degree to which one reacts impulsively, and emotionally.  It doesn’t require a Rorschach test to make this distinction.   Emotionally healthy people have a reasonable balance between the two poles of the dimension.   In the extreme, both poles along an experience balance can be destructive.  Those high in intellectualization tend to be obsessive and compulsive in the reactions.  They worry excessively and develop defenses to ward off anxiety.  They put off making decisions and once they do act they ruminate about whether they made a mistake. Those high in emotionality respond hysterically to crises and react impulsively, often in a self-destructive manner. This dimension, while important, is complex, and , as a dichotomy, not a comprehension personality assessment, and sometimes an over-simplification.  The assessment tool is the extroversion-Introversion scale of the Guillford Temperament Survey.

            A second approach is a self-assessment of the degree to which emotional problems involve one of three dimensions: anxiety/fear, depression, anger.  To the degree to which these emotions impact upon overall behavioral reactions they may also influence financial decisions.  Standardized assessment tools are required to make these emotional distinctions.  A licensed Clinical psychologist may be the best resource for this assessment.

            Other parameters include age, health, tolerance for risk, job stability, an income, financial status, and the general economic climate.

            The second step, once a rough assessment has been completed, is to plan a strategy based upon these results. They strategy should include both short term and long term decisions. 

The dimensions of reaction include risk management, asset allocation,   investment vehicles—equity, fixed income (cash or bonds).  A financial planner trained in behavioral finance may be helpful.