Stress & Decisions: A Bad Combination

By David Geller   |   October 9, 2016

Stress and decisions

Remember this famous 1980s anti-drug commercial?

Unfortunately, drugs aren’t the only mechanism that can change how our brains operate and make decisions. Here’s another major one: STRESS.

Stress Affects Brain Function

Under stress, your brain undergoes significant changes. Our prefrontal cortex, our brain’s CEO which is responsible for abstract reasoning, analysis, planning and willpower, goes haywire. Chemicals flood our brain, reducing our ability to analyze information, think creatively and solve problems.

So what’s the #1 thing you should never do if you can avoid it? Make decisions under stress. Here are just a few ways our brains are affected when we experience stress:

Impaired Memory

We forget things and our brain’s ability to connect brain cells that form memories slows down. Stress also affects how we use our memories for higher cognitive functions that we use when making decisions. Even the rate at which our brain makes new cells slows down. And chronic stress can cause long-term changes in our brains.

Surprise: Now You’re 17!

Under stress, we may make decisions similar to those made by our 17-year-old selves. Think about some of the decisions you made as a teenager. How scary would it be to relive them? Yet that’s exactly what Dr. Daniel Friedland, CEO of SuperSmarthHealth, says can happen. Unfortunately, the worst decisions we make in our business when we are stressed have a lot in common with the stupid decisions we made as teenagers.

Don’t Forget Investment Decisions

Not only does stress cause significant physical changes to our brains; emotions and stress also can affect our behavior as investors – with enormous financial and investment implications. Studies conducted by the financial research firm Dalbar over two decades confirm that. In its 21st Quantitative Analysis of Investor Behavior, Dalbar concluded that, “Despite the best of our intentions, it is nearly impossible for an individual to be devoid of the emotional biases that inevitably lead to poor investment decision-making over time.”

Are We Rational or Emotional?

“Traditional economic theory has assumed that people make decisions in a so-called rational way, and therefore, they will calculate costs and benefits, and focus only on decision-relevant criteria,” said Dr. Jennifer Lerner, Professor of Public Policy and Management at the Harvard Kennedy School of Government. “That’s not how people make decisions at all. When we are experiencing emotions, imagine it’s like a weather system: it affects everything.”

Tips

Obviously, we can’t always avoid stressful situations. As Henry Kissinger once quipped, “There cannot be a stressful crisis next week. My schedule is already full.”

Life’s stressful events can happen any time and sometimes we must act immediately in a crisis. But the truth is, we don’t always need to react right away, and much of what we stress over turns out to be wasted energy. Winston Churchill said, “When I look back on all these worries, I remember the story of the old man who said on his deathbed that he had had a lot of trouble in his life, most of which had never happened.”

To help make sure you don’t crack under pressure, understand how stress affects your brain and your body, acknowledge that this isn’t the best time to make a big decision and if you have a choice, delay making crucial decisions until you’ve taken steps to reduce your stress and calm your emotions. Take the skillet off the stove and give it time to cool down.

You can also learn more about this topic (particularly financial decisions) here.

David Geller

About the Author

CEO David Geller co-founded the firm in 1991 and led the creation of Behavioral Wealth Management. Recognized on numerous prestigious "top financial advisor" lists, David is an in-demand speaker for professional groups and JOYN workshops. His writings have appeared in The New York Times, The Wall Street Journal and The Huffington Post.

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