How fear affects our financial decisions

Consider this. An advertisement features the positive effects of a dietary supplement that provides vitamins which your body currently lacks.

Another advertisement for the same supplement shows a person suffering from bad health because of the lack of this vitamin!

Which advertisement is likely to prompt you to buy the product? If you are typical consumer, you will be swayed by the advertisement that shows the person suffering! Why?

Suppose you are driving when you witness an accident on a highway.

You will most likely cut your speed— an involuntary response after witnessing the accident! You will also be cautious, at least till you reach your destination. Why? The accident you witness activates your amygdale — the part of your brain that triggers fear response. This, in turn, leads to another interesting behaviour.

You fear that the incident may happen to you as well! This fear involuntarily prompts you to cut your speed and become cautious. But the fear is not permanent.

You will most likely revert to your earlier speed, as soon as you forget the accident. Likewise, the fear response in your brain will prompt you to consider the advertisement that shows the person suffering due to lack of vitamins. That could well prompt you to try the product!

Medical insurance

It is the same behaviour that prompts many individuals to buy medical insurance! If you just saw your friend or relative incur heavy medical expenses, you will most likely want to buy a health insurance yourself.

Of course, unless you follow up with an insurance agent and buy one as soon as possible, the fear of having to incur large medical expenses will fade away!

It is no different with your investment decisions. Most people do not plan for their retirement… until it is too late! In an attempt to encourage people to plan better, behavioural psychologists conducted an experiment, where subjects were shown simulated photograph of their older selves. Researchers found that seeing their older self prompted many subjects to act on their retirement plan!

This experiment and similar ones show that we typically act out of fear. It is small wonder that marketers target our fear psychosis to peddle products. You will, for instance, buy a costly, high-quality toy because you are informed that low-quality products have lead content that may harm your child.

Similarly, you will undergo a costly medical procedure if you are advised that not doing so may be fatal. You cannot squarely blame the marketers and experts who offer such advice— you are unlikely to see the virtue of buying a high-quality toy or undergoing a costly-but-important procedure. Blame it partly on your fear!

(The author is the founder of Navera Consulting. He can be reached at >enhancek@gmail.com )

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