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Three Parts of a Brain Affected by Inflation

Inflation is the highest it’s been in 40 years and nearly nine in 10 adults say they’re at least somewhat concerned about inflation.1 Reassurances that inflationary spikes would be temporary proved inaccurate, contributing to the groundswell of financial anxiety that now holds many firmly in its grip.

It’s natural for investors to feel angry, anxious, and even helpless when they see prices continuing to rise. From a physiological point of view, just thinking about inflation can set off a heap of neurological responses which can further inflame clients’ fears about the market taking a plunge. As a result, they can be tempted to make rash investment decisions that will make their portfolio “safer” to avoid losing money. Often, those types of decisions do the opposite and hurt their long-term results (see Figure 1). Fortunately, understanding the science behind how inflation can trigger investors can help us reduce their anxiety.

 

How Inflation Can Affect Clients’ Brains

As clients are exposed to a steady barrage of price increases, millions of neurons fire simultaneously across three areas of their brains: the primal, emotional, and rational brain. The result? Financial anxiety. And with prices seemingly set to rise further, anxiety may intensify.

 

The Primal Brain Sounds the Risk Alarm

Our primal brain (basal ganglia) is the most powerful region of the brain. It’s an unconscious driver of our behavior—a valued first responder and defender of deep-seated survival instincts for security, certainty, and safety.

It’s so sensitive to risk that even small price increases can be perceived by clients as threatening. This response can be triggered by paying more at the grocery store and the gas pump or seeing inflation news coverage. Any optimism about the stock market can quickly fall away. Instead, an investor’s fast-acting primal brain responds by placing their body on high alert, releasing fight-or-flight chemical messengers into the bloodstream that make them hyper-focused and vigilant.

As a result of these chemical messages, an investor’s primal brain will sound the physiological alarm that inflation will result in investment losses and a different part of their brain will step up to influence how they might respond to the warning.

 

The Emotional Brain Activates Fight-or-Flight Responses

After the primal brain sounds the inflation alarm, the emotional brain (amygdala) tells clients what to do about it. Using existing data, such as memories stored in the hippocampus, the emotional brain acts as a control center to determine how to deal with the risks. A client’s emotional brain prefers a quick fight-or-flight response, fueled by the secretion of adrenaline, cortisol, and other stress-reactive hormones. With inflation risk, a flight response could be, “I better choose safer investments now to avoid future losses.”

Baby Boomer clients might feel particularly sensitive to today’s inflation. Why? Because the amygdala-hippocampal relationship can recall distressing memories from inflation in the 1970s. Those memories can influence the assessment of the investment threats today, potentially increasing the intensity of a flight response.

As clients continue noticing price increases, the emotional brain keeps triggering the flight response—much like a driver keeping his foot on a pedal, revving an engine. If clients don’t take action to reduce inflation’s risks to their investments, they can experience further anxiety, fatigue, and insomnia. But their rational brain can be the key to helping them resist the flight response.

 

The Rational Brain Can Help Clients Analyze Situations

When a client perceives a threat, it’s often best for them to remain rational and analyze the situation. Yet, when they’re stressed, their rational brain (prefrontal cortex) can be switched off. They likely won’t be aware of this happening. So why does it happen? 

The rational brain is far weaker than the emotional and primal areas of the brain. It can be easily overruled by their emotions or survival instincts. When investors face a threat, their fight-or-flight response calls for immediate action—not slow, rational judgment. While this hardwired, emotion-first, response may remain ideal in the face of an angry bear, it’s often far less helpful when a client is considering financial decisions in a volatile, inflationary market.

Figure 1. A Fear of Inflation Can Cause Investors to Overlook the Potential for Growth in the Positive Years

The last time inflation reached 10% was in 1980. Back then, investors may have been anxious about both inflation, the economy, and market volatility. This graph illustrates five choices an equity investor could’ve made at that time. While the seemingly “safer” investment choices of bonds, cash, or gold may have reduced anxiety at the time, they fell behind the equity and balanced investors over the long-term.

Source: Inflation–US Department of Labor via FactSet; Morningstar, 2021

 

Switching the Rational Brain Back On

So how can we help clients fight back against the fears of inflation, resist the urge to make short-term investment decisions, and remain focused on long-term results?

First, we can help clients get their rational brain back in charge by helping them find an anchor—a way to bring their anxiety back down to more normal levels. One way to find an anchor is for them to share their concerns with you. Then, you can help them understand how their financial plan is built to help endure inflation and volatility over the long term and the risks of reactive decisions. Engaging in a supportive, constructive discussion can increase oxytocin (a pleasantly stimulating bonding hormone) and GABA (gamma-aminobutyric acid, which plays a vital role in calming anxious minds). This process can switch off the stress response and return their body to a calmer and more relaxed physiological state.

As a result, their primal brain’s fight-or-flight response is subdued. Their rational brain can switch on again, providing perspective about the threats of rising prices and volatility. They may feel that a short-term decision to make their portfolio safer could soothe their anxiety. But, such a decision could hurt their long-term results. While safer investments may prevent short-term losses, they can also detract from long-term gains when the market rebounds. History has shown that often, clients should stick to their investment strategy and not let their primal and emotional brain lead them astray.


ABOUT THE AUTHOR:
Author Headshot

Dr. Elesa Zehndorfer is a financial markets writer and researcher. Author of "Evolution, Politics & Charisma: Why do Populists Win?," "The Physiology of Emotional & Irrational Investing," "Charismatic Leadership: The Role of Charisma in the Global Financial Crisis," and "Leadership: A Critical Introduction." Dr. Zehndorfer is also Research Officer for British Mensa and a Quora Top Writer 2018 & 2017. For more info, please visit elesazehndorfer.com.

Next Steps

While engaging in small talk with clients about current events and family news, assess how well they’re coping with market anxiety, and how they might be behaving in other aspects of their lives (e.g., career, family, purchasing behaviors, etc.). These behaviors may indicate how much anxiety they’re feeling and how active you need to be in helping them cope.

A historical perspective on past crises can help investors persevere when their confidence is tested

 

1 Source: Inflation Is a Worry For 9 in 10 Americans Polled. The New York Times, 2/25/22

The views and opinions expressed herein are those of the author, who is not affiliated with Hartford Funds. The information contained herein should not be construed as investment advice or a recommendation of any product or service nor should it be relied upon to, replace the advice of an investor’s own professional legal, tax and financial professionals.

S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.

Bloomberg US Aggregate Bond Index is comprised of government securities, mortgage-backed securities, asset-backed securities, and corporate securities to simulate the universe of bonds in the market.

IA SBBI US 30 Day TBill TR USD The index measures the performance of a single issue of outstanding Treasury Bill which matures closest to, but not beyond, one month from the rebalancing date. The issue is purchased at the beginning of the month and held for a full month; at the end of the month that issue is sold and rolled into a newly selected issue. The index is calculated by Morningstar and the raw data is from WSJ.

S&P GSCI Gold Index is a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold future. 

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