Despite all the intellectual effort we sink into investing, our behaviour is almost always driven by emotion. More specifically, our actions are determined a dual force:
FEAR and GREED
And although both sentiments are often regarded as extremes across the spectrum of emotional finance, I believe that they are in fact very closely related.
They are a bit like twins vying for attention. I like to think of them as a couple of wound up toddlers in the back seat of a long car drive. Just like with those twins, Fear and Greed provoke each other and it is often difficult to tell which one ignites the tension that ebbs and flows between them.
Fear can’t live with the idea of losing money nor risking its reputation or career. But fear has a split personality because apart from causing procrastination, it can also trigger sudden (irrational) action.
For example, Fear loves to make us exit investments at the worst possible moments. It’s an emotion called panic, one of the most primitive codes that operates the human condition. This is when our limbic emergency protocol pushes aside our ‘educated’ rational self to grab the wheel.
If that last sentence doesn’t make any sense to you, please refer to the previous article in this series.
It gets a bit more complicated because Fear doesn’t only keep us on the fence, but it can also push us over the line to invest. This is what we call ‘Fear of Missing Out’, also known as ‘FOMO’. Furthermore, too much procrastination can also trigger FOMO. However, this is when FOMO works more like a time bomb.
Just as with cholesterol, there is good FOMO and bad FOMO...
But what about Fear’s twin, Greed? Nothing yanks its chain more than FOMO! Greed is a doer and absolutely hates missing out! Greed also has a service level agreement with rationality. It will justify anything ranging from paying too much, refusing a buyer’s offer or holding onto an investment for too long. And when that happens, unhappy twin Fear stages a comeback and FOMO turns into FOBS (Fear of being the Sucker).
That is when it get pretty loud and messy in that back seat!
It happened to me on a few occasions back in the days when I was marketing funds that some of the major fund buyers broke all their sacred immovable allocation rules because the FOMO summoned the Greed and it’s amazing ability to rationalise any decision.
Everyone will break the rules for the ‘right' (often the wrong) reasons.
Fear makes the rules but Greed has all the privileges to break them!
By now, I’m probably the millionth person to use this quote, but good old Warren Buffet truly nailed it when he said “Be fearful when others are greedy and greedy when they are fearful”.
So what’s the point of this article?
Contrary to what we usually see in the investment world, raising capital from investors probably works better when approached from an emotional rather than from a over-rationalised perspective.
I know this is easier said than done but if you really believe in your business and have enough vested interest in its positive outcome, you’ll be better off by evoking the FOMO right from the onset. If you really believe you are ‘holding a tiger by the tail’, you aren’t doing anyone a favour by making too much room for procrastination (that time bomb!).
I wish I could just give you a formula about how to do that, but if it were that obvious or easy I might as well be writing about why it is important to watch the road when you are driving. This formula, if it exits at all is elusive!
What I do know is that the possibility of figuring this out is what makes me run to work everyday because I’m on a journey of discovery of finding out what really makes investors tick, and if you care to join me, I would be delighted to have you along!