Second, one area of the ventral striatum, the nucleus accumbens, is activated when people anticipate monetary gains. After it’s activated, people make riskier choices. In other words, reframing might lead to less risk aversion.
We may think our decisions stem from separate processes, with the amygdala carrying emotions and the prefrontal cortex carrying cognition. This is useful, although assigning a specific function to a specific area is an oversimplification. Networks of areas are involved, and reframing clearly acts at different levels. It doesn’t always work, but it is a powerful tool to move clients in the right direction.
If that fails with a client, other methods known to reduce fear may help (for example, exposing people to small losses to reduce their fear, gradually forming new memories.) Over time, the amygdalae will quiet down. If a client is reluctant to sell a specific stock, perhaps he or she can experiment by selling a small fraction of the total.
The key is for clients to distance themselves from the automatic emotional responses. This requires you to encourage slow, deliberate thinking. Psychology professor Boaz Keysar and his colleagues found an interesting way to achieve this: If you know a second language, make your decision using this language instead of your native tongue. This gives you greater emotional distance and reduces the loss aversion bias. The same process also reduces the degree to which participants in these studies were swayed by the way a decision was framed.
Whatever method we choose, it is important to remember that a rational understanding of the problem alone does not solve it. Even Harry Markowitz, the father of modern portfolio theory, ended up using his emotions when deciding how to invest his retirement money. Financial journalist Jason Zweig once asked him how he manages his investment portfolio. “My intention,” Markowitz explained, “was to minimize my future regret. So I split my contributions 50/50 between bonds and equities.”
Thom Allison, CFP, is the founder of Allison Spielman Advisors in Bellevue, Wash. Andre Golard, Ph.D., is a neuroscientist who offers workshops and coaching on the connection between neuroscience and investing.