Fear and greed
The two strongest forces in the market don't sit in the chart, they sit in your head. They make people systematically buy high and sell low.
When everything's rising and it's all over the news, buying feels safe. When everything's falling and panic sets in, selling feels sensible. The exact opposite would be correct.
That's not a character flaw, it's biology. Our brains are built to join the group and avoid danger. On the savannah, that saved lives. In the market, it costs money.
That's why resolving to stay calm doesn't help much. In the moment of panic, no resolution holds. What works are decisions made beforehand, while things were calm.
In practice that means: a savings plan instead of a buying decision. Fixed rules instead of your mood on the day. And a written sentence for the crisis moment, read during the decline instead of thought through fresh.
The mechanism described gets explained in behavioral economics through two processing systems: a fast, automatic, affect-driven one, and a slow, deliberate, analytical one. Under time pressure, uncertainty, and emotional arousal, the first dominates. Market crises satisfy all three conditions simultaneously.
Empirically, the effect shows up in procyclical fund flows: inflows follow good performance, outflows follow bad. Since performance is partly mean-reverting over time, this pattern produces a systematic return gap between funds and their investors.
The most effective countermeasures are commitment devices that remove the decision from the moment of arousal: automated savings plans, rebalancing dates set in advance, written investment guidelines. Their value lies in removing the option to act, not in eliminating the emotion. The emotion stays, only its effect gets cut off.
Summary
- Buying feels best exactly when it's most expensive.
- Resolutions fail in a moment of panic; automation doesn't.
- Write your rules down while things are calm.
Did you get it?
Why do good resolutions fail during a crisis?
Because under uncertainty, time pressure, and arousal, the fast, affect-driven system dominates.
What's the return gap for fund investors?
Investors earn less than their own fund, because they buy and sell procyclically.
Why do automated savings plans work?
Because they remove the option to act, instead of requiring you to master the emotion.