Get unstuck : The freeze response in finance

Financial independenceWhy do so many people get “stuck” when trying to invest? And how can we get unstuck?

Everyone is different, but a common thing I see in investing is that when people are anxious, they often “freeze”.

They stop taking action and then get stuck.  In my financial coaching I help those people get unstuck.

This may seem strange for all you investing ninjas out there, but many people find making investment decisions overwhelming. Why? As usual, evolutionary psychology offers us some interesting answers and potential cures.

As Joe Navarro explains in What Every Body is Saying, one of the ways the human brain has achieved our survival as a species is by regulating our behaviour when faced with danger. Because we are genetically pretty much  identical to our hunter gatherer ancestors, this applies equally to a prehistoric man facing a Stone Age beast or a modern soldier in a combat zone.

We are part of nature.  Over the millenia, humans have retained the useful life saving reactions of our animal heritage.  We’ve heard of the “fight or flight” response but that phrase is incomplete.  In reality, animals (including humans) react to perceived danger in the following order:

  1. freeze
  2. flight
  3. fight

As early hunter gatherers crossed the African savannah they were faced with many predators that could outrun and overpower them.  Early man could not outrun a tiger nor beat it in a fist fight. Running attracts attention and fights are dangerous.  If the reaction really were just fight or flight, we’d be bruised and exhausted much of the time. The best way to avoid a tiger is not to fight it or run from it, it’s to ensure it never sees you.

Movement attracts attention. So the best initial response when you hear a rustle in the leaves is to freeze. The eye is drawn to movement so freezing can make you invisible to predators.  Many animals not only freeze their motion when confronted by a threat, but some even play dead which is the ultimate freeze reaction. And, as this video shows, it works.

Note the asymmetric payoffs to a freeze response. If the leaves rustle and there is no tiger (its just the wind) you’ve lost nothing by freezing.  But when there actually was a tiger, if you moved you were more likely to get removed from the gene pool.  So there are good evolutionary reasons why we err on the side of caution and feel more fear than is warranted by reality.

The freeze response has been passed from reptile to mammal to modern humans and remains part of our hard wiring.  For example, if you look at people in a tense situation (e.g. a job interview) they will often seem immobile or stiff at the start. Anxiety manifests as a lack of movement. As the interview progresses and the job applicant relaxes, you will see them move (for example their hands) more fluidly.  Body language is important and its worth learning about this for your interview / negotiation skills.

While the freeze response was useful in our evolutionary environment, it can be unhelpful in the modern world. Remember the phrase “rabbit in the headlights”?. It would be easy for the rabbit to avoid the oncoming car if it hopped to the side of the road. Here, freezing may result in a sub-optimal outcome for the rabbit.

Anxiety is our mind’s way of motivating us to problem solve.  The problem comes when anxiety tips over into fear. Fear is paralysing and can stop you from doing the right thing. Like a golfer who has lost their confidence, this is where your inner feelings and beliefs (your Inner Game) can mess up what you do in the real world (your Outer Game).

This begs the question of why people often feel fear around financial decisions.  We don’t really care about zeros on a computer screen or banknotes which are just pieces of paper. Money worries are worries about survival, resources, offspring and status, the things that mattered to our ancestors and that still matter to us today.

We feel the fear of loss of 20% of our equity portfolio, the same way that a caveman would have feared the loss of 20% of his food supply.  The human race has spent most of the last 100,000 years with its nose pressed up against the limits of our food supply.  A 20% increase in food supply for a caveman would be nice but a 20% loss of food supply might easily kill them.  This explains loss aversion and is why our fear of loss feels real, deep and primal.

Most people put finance and evolution / nature in 2 completely different mental buckets and never think about the linkages between them. But if you can accept the logic of this, then some answers become clearer.

To ensure a solid base for decision making you first need to be in the right mental and emotional state. So start by ensuring you have met the basic biological needs at the base of Maslow’s pyramid.  You need to be eating well, getting plenty of exercise and sleep and have screened out all anxiety triggers (the news and most of the stuff on TV).

Once you have a solid base, you can start to use your logical brain (rather than the chimp brain).  Logic tells us that investing in equities is the easiest way to build wealth over the long term.

We can then get started. One way to do this is innoculation. Think of a vaccine – a small, weakened dose of the virus allows your body to get used to dealing with it. So expose yourself to a small dose of the trigger of the fear.  For example, if you are scared of buying, you can break the logjam by buying a single share in a Vanguard ETF to get used to the feel of the process.   This can be with monopoly money (a practice account) at first then with real money later.

One way of side-stepping the complexity of choosing an index or region is just buy a global tracker from Vanguard such as VWRL or VHYL.  This gets you into the habit of making decisions, taking action and breaking the logjam.

If your response to this is:

Yeah…but how do I know which is the best one?

The answer is:

You can’t know for sure…and that’s fine!

No one knows which fund will go up most over the next 10 years.  Sure, I’ve got an opinion on which look good value but it’s just an opinion.  When it comes to market forecasters, there are 2 types; 1) those that don’t know and 2) those that don’t know that they don’t know.

We all want to know the future so a huge demand for financial forecasting exists. If people demand a product, then the market economy will supply it…even if it’s useless. Reading economist’s forecasts or fund manager’s economic commentary is a waste of time because everyone reads that shit and it has already been reflected in share prices.

Even worse are those websites predicting economic collapse, hyperinflation and the coming Zombie Apocalypse. I’d like to say those websites are harmless fun but when they stop people from investing, they are not harmless and they’re no fun.

Reading financial news / forecasts etc takes time and most people don’t have infinite time.  Reading this stuff is a form of displacement activity, a substitute for doing something useful.  Excess information has become a huge part of the problem. We all have limited processing capacity and more information beyond that point just frazzles us.  So turn off the screen and remove the noise from your life.

Excessive planning is just another trap. It’s important to let go of the notion of perfection in investing.  All we need to do is get the basics right (e.g. investing in equities via Vanguard’s low cost trackers). There is no need to pick the “perfect” ETF or fund or share.  There is no perfection in investing.

We need to get into the habit of taking decisions even when the future is uncertain and we are not sure which fund or share is “best”.  If you never get into the habit of investing, then the differences between funds / ETFs / shares etc are completely academic.

As you learn more, you can add funds and “tilt” your portfolio towards asset classes that have historically generated higher returns. You can see an example of tilting towards value in The Simplicity Portfolio.

But we have to learn to walk before we can run. We are all habit machines and so its really important to get out of the habit of being stuck.  Over time, the rut will only get deeper unless you take action to break out.

Often the best advice on “investing” is not really about investing, it’s about dealing with our emotions.  As David Schwartz puts it in The Magic of Thinking Big:

Action cures fear. Action feeds and strengthens confidence; inaction in all forms feeds fear. So to fight fear, act. To increase fear – wait, put off, postpone.

18 comments

  1. Michael · · Reply

    loving the column.

    I know the sensible advice is to buy a vanguard tracker / lifestyle fund but what in The Escape Artist’s view on companies such as Nutmeg which construct portfolios for a clear percentage fee? Given that providers now unbundle and charge platform fees do you think this is a good option?

    1. Thanks Michael. I think paying 1% a year is only a good option if you think that the world would be a better place if you had less money and the financial services industry had more…

      1. Michael · ·

        I find that the fee structure of most providers make it difficult to work out who would be cheapest. Eg fidelity introduced a 3 quid flat fee for holding ETFs. Either way the Man shafts you.

        Thanks for your opinion. Always enlightening.

      2. I know what you mean. But % fees are the work of the Devil. Flat fees are God’s way of telling us to save more and get a bigger portfolio 😉

      3. I’m with AJ Bell which in both ISA and SIPP charges a 0.20% holding fee if you invest in funds in either account. This is being charged up to £50 per quarter = £200 per year after which this charge is static. Once the value of the funds in the portfolio exceeds £100K the charge stays at £200 pa.

        I’ve always been bad at maths but an annual £200 fee on a portfolio value of £100K doesn’t sound expensive to me. But I may be missing a point or two here.

      4. A fee capped at £200 per year on a £100k portfolio is, in effect, a flat fee…and therefore not the work of the Devil

      5. TDdirect Investing does not charge any fee for holding ETFs, just trading costs.

  2. suffolkshandy · · Reply

    Nearly time to say bye bye to the man and start being in the vanguard of things. Thanks again sir for your sage guidance, the simplicity route will be my first port of call. Time to stop those nasty corrosive fees.

  3. bellabeck · · Reply

    Hi, I have been following Monevator’s Slow & Steady Portfolio for my SIPP but recently I have adapted my investments to more of a hybrid with around 60:40 passive ETFs and the rest Investment trusts to catch just a bit of beta, especially in small caps and emerging markets. I would love to see a model portfolio along these lines.

  4. Great stuff as always. Not knowing how to “start” is a real challenge when young i feel…. you are mostly time pressured, peer pressured & the amount you can save is relatively small change at the beginning. I’m feeling chipper of late as I’ve managed to turn a young work colleague onto various FIRE blogs, Vanguard etc, & only last week he came up to me & said he had made his first Vanguard purchase in an ISA he had set up at HL (not my choice of provider but he did his own research & felt best about them).

    As for me… I just keep paying myself first every month…. Vanguard Lifestrategy 80% for me, 60% for Mrs LCIL, & the kids birthday money is 100% as they are young!!

  5. The only way your going to learn swimming is by jumping into the pool and not through online courses, similarly the only way to invest is to start investing in the markets right now. The earlier you experience the up’s and down’s, the better you become at investing and expanding your risk tolerance. Rightly said, a good way to start is through Index ETF’s.

  6. The Big Monkey · · Reply

    This has come just at the right time. I’ve been berating myself for being stuck on the financial front for some time now. It’s time for action as this is the last part of the escape plan that needs putting into place………

    1. Great to hear! Why not come back and tell us in 2 weeks time what action you have taken?

  7. The Big Monkey · · Reply

    I was thinking about booking a session with TEA. Is he any good?

    1. You can see what other people who’ve had the coaching say here.

  8. Couple of hours before you published this I finally pulled my finger out after freezing for a couple of years, letting divis, rent and interest accrue.
    I first lumped summed into investments in mid 2007, consequently I’m perhaps not the most rational about volatility and a have a propensity to sit on cash.
    I’ve found it’s a bit like cleaning the windows, you can put it off for so long but at some point either you do it or pay somebody else to do it. The thought of *actually* paying someone else to do it typically spurs me into action 🙂
    Something that works for me is the Harry Browne mind trick of a diversified, low volatility portfolio paired with a smaller, riskier portfolio. Choosing which to fund is an entirely emotional decision with a limited downside, which makes it easier to actually do something.

  9. Felice Pazzo · · Reply

    Interesting article, EA, but, as you’ll appreciate yourself, the freeze response is the domain of (Kahneman’s) Type 1 (Fast / effortless) thinking system, whilst making a decision in the full knowledge that the market could go down is definitely a much harder Type 2 (Slow / hard) thinking system. I like to consider myself somewhat aware of all the behavioural economics research out there, but even I still find it hard to justify investing given the long term bear markets that Monevator was discussing last week in his “How Scary Can Investing Be”.

    1. Thanks Felice…I think you should read this

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