Over the past month, we’ve published a series of blogs discussing some of the psychological issues that financial advisors are facing during the COVID-19 pandemic. Central to our perspective is that the human brain responds in predictable ways to the challenges associated with a worldwide medical crisis, the contraction of our economy and market volatility, and we’ve tried to teach advisors how to help clients who have become emotionally overreactive.

Importantly, advisors are people, too. You have protective instincts, and the events of the day will activate your emotions just as powerfully as any client’s. One inevitable consequence is a tendency toward extreme thinking. When our “fast-thinking” brain (as behavioral economist Daniel Kahneman describes it) gets activated, we search the world for dangers and build a decidedly negative worldview. Psychologists call this catastrophizing: seeing the future in a profoundly negative light. This reduces our ability to sort available information.

The other extreme, denial, can also affect our ability to achieve clarity. Sometimes, being exposed to a lot of negative information causes our brain to be repelled by all the danger. In classic psychology, denial means the brain avoids dealing with the painful information and clings only to positive evidence.

If you’re a financial advisor, you cannot afford either of these false extremes if you want to understand the mechanisms in the current markets and navigate investment decisions wisely.

Simple Steps Toward a More Effective Mind-Set

In his book The Number, Lee Eisenberg explains there is a number that represents the amount of money and resources that people need to enjoy the active life they desire, especially post-career. According to Eisenberg, “Those who say that this is either (a) the Apocalypse or (b) the Golden Age are both wrong. Most experts who look into our financial future can be classified as hawks or doves. The hawks screech that the future is terrifying, worse than you think. The doves see mostly blue skies ahead.”

As of this writing, we are unsure if the short-term future holds another wave of COVID-19 cases and further economic contraction or the first hints of economic recovery and a return to something like business as usual. Because it’s still too early to tell, we scan the news and try to figure out what to believe. Unfortunately, the most compelling voices are often at one of the extremes, and they heavily influence our thinking patterns precisely when we should be most careful about decision-making. Here are some ways to pull back from extremes and recenter your thinking.

1) How Do You See the World? Are You a Pessimist or an Optimist?

A great starting point for conditioning your thinking patterns is self-awareness. Assume that your brain leans toward one extreme or the other and look at your personal history of decision-making. This gives you an important clue about how to counterbalance your natural tendencies with more intentional and focused research.

As you do this, be aware of how built in these positive or negative inclinations are. Pessimists often describe themselves as realists, while optimists are often unaware that they work hard to see a silver lining even when the storm clouds reveal a tornado. During times of crisis, extremes feel satisfying and true even if key information is missing.

2) Be Sensitive to Your Natural Tendency Toward Confirmation Bias

Writer Dean Yeong sums up a key concept from Rolf Dobelli’s book The Art of Thinking Clearly: “The confirmation bias is the mother of all misconceptions. It is the tendency to interpret new information so that it becomes compatible with our existing theories, beliefs, and convictions. In other words, we filter out any new information that contradicts our existing views.”

Research has revealed that confirmation bias is one of our most pervasive vulnerabilities. We are wired to continue seeing things the way we always have even when there is compelling contradictory evidence. During times of crisis, this tendency is exaggerated, moves us toward an extreme point of view and then locks us in. When clients seek advice for navigating their investments during the next phase of the COVID-19 pandemic, you must see what’s actually happening rather than what your brain prefers to believe.

3) Engage Your “Slow-Thinking” Brain with High-Quality Questions

A good practice to protect your thinking is to write down your analysis of a situation. Don’t just contemplate what others are saying and regurgitate what you heard. Use Benjamin Franklin’s two-column pros-and-cons approach to laying out your thoughts. On the left side of a sheet of paper, write answers to “What are the current causes for concern?” On the right side, write answers to “What are the rational reasons for hope?” Doing so balances your thoughts by activating the “slow-thinking” part of your brain and forces you to be more receptive to new information.

4) Question and Expand the Voices/Experts You Follow

Dobelli reminds us, “Authorities crave recognition and constantly find ways to reinforce their status.…Whenever you are about to make a decision, think about which authority figures might be exerting an influence on your reasoning.”

During these challenging times, it’s important to consider how you make decisions and what decisions you need to make. Slow down and pay attention to your natural patterns, your tendency to drift toward an extreme and to whom you are listening. By spending some time writing down your thoughts and sorting them out, you will be investing wisely in refining the quality of your thinking patterns.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

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