We Can Be Certain About One Thing: Uncertainty
During times of market volatility, investing behavior can be affected by stress and anxiety.
|Editor's note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.|
Psychological research has shown that the less extreme we expect an outcome to be, the bigger our emotional reaction to it. So, it's natural that the market volatility caused by the unexpected coronavirus pandemic is leading to strong emotional reactions, as investors ask themselves difficult questions about what's best for their portfolios.
Unfortunately, there's no certain answer. And this uncertainty leaves us uneasy--research shows that dealing with uncertainty might be one of the things we dislike the most.
In fact, there's a strong correlation between uncertainty and negative emotions such as stress and anxiety, which have the potential to bias our decisions. Uncertainty also causes us to become hypervigilant to our surroundings, which increases our stress levels and makes us especially defensive.
To better understand uncertainty and its effects, let's consider how its three ingredients play into the market.
Here's how uncertainty and its ingredients surface in investing decision-making.
How Can Uncertainty Impact Investing?
Uncertainty warps our investing behavior in four main ways.
3 Ways Investors Can Work to Stay Certain When Dealing With Uncertainty
Uncertainty isn't always bad. Here are a few methods to combat its negative effects.
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