Defining "stress" has always felt a little bit like the famous court definition of "pornography" - you know it when you see it. But if I were forced to define it, the definition of stress that I find most useful is “the loss of perceived control over an event.” Let's face it - most of us are control freaks to some extent or another and none of us like to lose control. The obvious upside of this tendency to want to feel in control is a perception of personal competence, but the downside is that we tend to think we can control random events as well.
Let’s say I offered to sell you a lottery ticket with a 1-in-50 chance of winning a prize. How much would you pay if I assigned you a number randomly? Now, how much would you pay if I offered to let you choose your number among the 50 available, allowing you to pick your daughter’s birthday?
When psychologists run this experiment, people pay $1.96 on average for the tickets that are given to them and $8.67 on average for the tickets for which they are allowed to choose the number. Obviously, the odds are the same in both conditions (1 in 50), but our confidence that we control the universe is such that we are willing to pay 4.5 times more to be in charge.
Another example of our propensity to overvalue our own influence is the tendency of people to over-invest in their own organization’s stock for the stated reason that they, as a result of their travails, have some influence on the stock price. So, Suzie from accounting is going to invest in Coca-Cola because she feels the valuation of the world’s greatest brand lives and dies on the skill of her bean counting. Unfortunately, if you—in isolation—can directly impact the rise or fall of your stock, and make personal investment decisions accordingly, you might be going to jail soon. For the rest of us peons, our daily travails do not matter much one way or the other in the ultimate success or failure of a publicly traded company and it is best not to invest as though they do.
Investing in equity markets is an uncertain enterprise and in a very real sense, runs contrary to our desire to be in control. As a result, we may tell ourselves soothing lies about how much we can know about the future direction of the market and try to control it by watching wall-to-wall financial news or closely monitoring our accounts. Unfortunately, greater scrutiny does not lead to greater control, but that does not mean that we are helpless. Jason Zweig of the Wall Street Journal encourages investors to "control the controllable", meaning to watch fees, save adequately, live within a budget and remain patient. It's not new advice and it's not sexy, but it's the closest thing we control freaks have.
To learn much more about the intersection of mind and markets please check out The Laws of Wealth by Dr. Daniel Crosby - HERE.