Don't Let Your Hippocampus Stop You

From Being A Successful Investor

David Thomas Contributor

Why does everything in the press these days seem to be a crisis? A crisis triggers emotions
that have a powerful effect on people. The press has discovered this power and has become
very good at triggering and manipulating emotions. Both the press and advertisers are
fighting for shelf space in your memory. Emotions are a powerful link to memory.

Emotion and memory are closely related. You know this from your own experience. Go to a
party, and meet a bunch of new people. Which faces are you going to remember? The
woman who made you laugh? The man who made you feel embarrassed? Your new boss? —
You remember the ones who made an emotional impact.

Thus, you would not be surprised to learn that the system of the brain that controls emotion,
the “limbic system,” is also in charge of transferring information into memory. From years of
experiments and surgical experience, we also know that the specific location for this transfer
is a portion of the temporal lobe called the hippocampus.

The hippocampus is a small organ located within the brain's medial temporal lobe and forms
an important part of the limbic system, the region that regulates emotions. Psychologists and
neuroscientists generally agree that the hippocampus plays an important role in the formation
and indexing of new memories about experienced events. Part of this function is
hippocampal involvement in the detection of new events, places and stimuli. This is partly
why returning to a location where an emotional event occurred may evoke that emotion.
There is a deep emotional connection between episodic memories and places. The
hippocampus is responsible for processing of long-term memory and emotional
responses. We would not even be able to remember where our house is without the work of
the hippocampus. The hippocampus also encodes emotional context from the amygdala.

When you think of the amygdala, you should think of one word, fear. The amygdala is the
reason we are afraid of things outside our control. It also controls the way we react to certain
stimuli, or an event that causes an emotion, that we see as potentially threatening or
dangerous. The amygdala is a limbic system structure that is involved in many of our
emotions and motivations, particularly those related to survival. The amygdala is involved in
several functions of the body including fear responses, emotional responses, hormonal
secretions; arousal, and memory.
The amygdala is involved in the processing of emotions triggering the fight or flight
response.During the fight-or-flight response, the amygdala takes over. The structure causes
the adrenal gland to release epinephrine into the bloodstream, along with other hormones like
cortisol; signals the heart to pump harder, increasing blood pressure; opening airways in the
lungs; narrowing blood vessels in the skin and intestine to increase blood flow to major
muscle groups; and performing other functions to enable the body to fight or run when
encountering a perceived threat. Many bodily functions take a back seat during the fight-or-
flight response.

The term perceived threat makes an important distinction and brings up a critical point to
remember. As in the case of chronic stress, the body's stress response is triggered repeatedly
on a daily basis in response to actual physical and psychological threats as well as perceived
psychological threats. As a result, the body can become exhausted, and the overabundance of
epinephrine and cortisol can result in lowered immunity and other health
problems. Hyperactivity of the amygdala has been associated with fear and anxiety disorders.

Fear is an emotional and physical response to danger. Anxiety is a psychological response to

something perceived as dangerous. Anxiety can lead to panic attacks that occur when the
amygdala sends signals that a person is in danger, even when there is no real threat.

How do you let fear affect your investment portfolio?

In February, markets were sitting at the top of a bull run that began years ago. Suddenly, the
release of some macro-economic data sparked fears of inflation and higher bond rates. This
fear caused a panic that lead to the S&P 500 dropping from its high at 2872 to 2581, a 10%
drop. Markets had begun to recover into March when the “f” word reared its ugly head
again, this time in the context of a trade war with China. What changed in the market? The
companies were still making as much money. They were still paying the same dividends to
shareholders. The difference was fear and its ability to cause panic selling.

Some investors have positioned their portfolios defensively for a big portion of this nine-year
post Financial Crisis bull market. Some have been afraid that a recession is “just around the
corner” allowing their amygdala to rule the day and missing opportunities for years. A little
bit of research might have helped these investors have confidence in a long-term strategic
portfolio that does not rely on market timing. For example, according to Ned Davis
Research, the stock market has declined 5-10% 77 times in the last 70 years. It is practically
an annual event. On average, the recover from these levels has taken one month, assuming
you did not get scared out of the market.

What would your hippocampus say? The hippocampus and amygdala work in concert to
consolidate our emotions and long-term memories. This process is critical for evaluating
information in order to respond appropriately to situations. However, the amygdala has a
trump card! Whenever a possible fight or flight emotion is perceived, the brain’s nutrients,
blood flow, and oxygen are directed to the amygdala. This saps the other parts of the brain
clouding creativity and rationality. The brain becomes less concerned with painting the next
Mona Lisa when it perceives a possible attack by a lion. Remember this when viewing the
next “crisis” on the news, or the next irrational drop in the stock market. Is this really a
crisis? Are you being manipulated? What would your creative, rational hippocampus say?