The important role of fear in building financial resilience

As 31 October approaches, you might find yourself streaming scary movies, reading classic ghost stories, or splattering yourself in ketchup and walking through town dressed as a zombie bride. You might ask yourself (the very reasonable question) “Why?”.

Aside from the annual traditions of horror film releases and local trick-or-treating, Halloween raises some important questions about the nature of fear and entertainment.

What happens when we are scared? Why do we feel fear? And why do we sometimes like it?

Fear can be a useful response, triggering our in-built fight or flight response. But it can be damaging too, leading to debilitating phobias and hampering effective decision-making. This can harm all areas of our lives, including our long-term investments.

Keep reading for your look at the nature of fear, and what it can mean for your money and the choices you make.

Loss aversion and the risk of not taking enough risk

Fear is a vital part of our evolution – and survival – as a species. Through the body’s in-built fight or flight response, fear teaches us to run and hide when danger is near.

It can make us jumpy, and emotional. While this is preferable to being eaten by predators or attacked by neighbouring tribes, jumpy and emotional don’t mix well with important financial decisions. They can, instead, lead to biases.

As a species, we feel the pain of losses more strongly than the pleasure of gains. This can cause “loss aversion”, skewing our strategies toward avoiding losses, rather than making gains. The result might be an insufficient level of risk.

In the years immediately following the Covid pandemic, as inflation soared, we all witnessed the risk of not taking enough risk. Scared of the prospect of investment losses, those who held their money in cash saw it lose value in real terms as high inflation and rising costs far outstripped the interest earned on savings.

Early man used scary stories to teach children about potential dangers. These days, our attitudes to money are also formed early. Think about the amount of risk you are willing to take to achieve your goals and how this risk profile was formed. And if you need help, speak to us.

Fight or flight and the importance of unemotional decision-making

When a frightening event occurs – whether it’s a strange tapping in the middle of the night or a newspaper headline warning of a market crash – the amygdala in our brains stimulates the hypothalamus, which in turn releases a flood of hormones, including adrenaline. Through a series of changes to heart rate, blood pressure and breathing, we become more alert, readying our bodies to fight or flee.

According to Dr Charlotte Lawrenson of Bristol University, speaking to the Guardian, “Although we have an understanding of some aspects of neural fear networks and how they coordinate behaviour, there are still many unknowns.”

What we do know is that fear activates two pathways in the brain, one allowing for immediate action, the other associated with reasoning and memory. This second pathway, centred around the hippocampus and prefrontal cortex can supersede this knee-jerk response if the threat turns out to be less severe.

When you see headlines of tumbling markets and huge losses, it can be easy to make a snap decision, but these knee-jerk reactions aren’t always helpful. Instead, it’s important to take a step back and try to be objective. Using the slower brain pathway could help you see past your immediate fear and focus on the long term.

Horror movies, financial resilience, and how to close the gender investment gap

According to Investment Week, the gender investment gap widened to £567 billion in 2023. An increase of £54 billion between January 2023 and January 2024.

Actuarial Post, meanwhile, reports that although most women have a savings account or Cash ISA, men are almost twice as likely to have a Stocks and Shares ISA (30% compared to 17%).

One of the main reasons is perceived risk. As we have seen though, the biggest risk is often not taking enough risk – and a little fear can even help to build resilience.

Fear might strike when we watch a scary film, but it isn’t always the fear we’re craving so much as the rush of endorphins that follows. We know the killer or the giant monster isn’t real, so we can enjoy the initial fight or flight response in safety.

The US National Library of Medicine studied Americans’ reactions to the Covid pandemic and found that horror film fans were more psychologically resilient than those who avoided the genre altogether. Exposure to fear in a controlled environment helped to build emotional regulation and coping skills. This lesson in resilience can be taken into your investments too.

Long-term investment is about managing risk and reward, ignoring the scare stories and short-term shocks of the markets, and focusing on your long-term goals. That means remaining unemotional, keeping fear out of your investment decisions, and avoiding biases that can negatively impact your returns.

Get in touch

If you’re looking for an independent financial adviser in Milton Keynes or Olney, look no further. At Jane Smith Financial Planning we can be your hand to hold, or your sofa to hide behind, so get in touch now.

We’ve been helping clients for 30 years, so contact us at info@janesmithfinancial.com or call 01234 713131 to see what we can do for you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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