3 Survival Instincts That Harm Investors


I remember as a kid how my inclination toward saving hurt me. One day, during a neighborhood gathering, a boy named Chuck was dispensing malted milk candies to his friends, me included.

The other kids ate the candy as soon as they got theirs, but I ate a few pieces and stored the rest. So, when Chuck noticed that I hadn't consumed my portion, he said he wouldn't give me as much in the second round of candy distribution. (See also: Delayed Gratification and the Secret to Will Power)

Back then, my desire to set aside a gift for another day worked against me. Later, as a teen and adult, saving tendencies became advantageous to my financial well-being.

Similarly, primitive instincts that ensure our survival in some circumstances can work against us in modern-day scenarios. There are three areas in which our natural tendencies, embedded in our psyches from the days of our hunter-gatherer ancestors, may detract from investing success.

1. Consume Right Away

As a kid, I may have been healthier than others by limiting consumption of candy at one sitting. But in leaner times, millenniums before packaged candy and grocery stores were commonplace, eating immediately after trapping or gathering food was essential to survival and strength. Otherwise, items would spoil and the effort to hunt and gather was wasted.

Today, the instinct to consume right away rather than set aside for consumption years or decades later can hurt our investing success, former Wall Street Journal personal-finance writer Jonathan Clements once told me. Put simply, our focus on short-term survival causes us to spend now. As a result, we often don't have money to take care of long-term needs. (See also: Is Instant Gratification Financially Responsible?)

We need to overcome the instinct to spend on immediate and pressing concerns, leaving us the cash to save for financial goals, such as our children's education or our retirement. A first and very important step to successful investing is to consume less than you earn and set aside money for the future.

2. Favor What Is Popular

Many experts point to the "herd instinct" as a detriment to investing success. In Forecasting Financial Markets: The Psychology of Successful Investing, author Tony Plummer explains how this inclination can hurt investors: "On the one hand, their own 'personal' approach to making an investment decision may suggest one course of action; on the other, the lure of the 'herd instinct' may be pulling entirely in the opposite direction." He goes on to say that even professionals can be swayed by popular opinion at times when ignoring the crowd would ultimately be more profitable.

Today, the instinct to listen to the group and follow the crowd is often useful. For example, you may choose a restaurant based on reviews on Yelp, book a room at an inn after referencing feedback on TripAdvisor, or choose a plumber by following recommendations from Facebook friends. (See also: How to Make Facebook Productive)

This instinct to favor what is popular and well-liked among family, friends, and neighbors was crucial in the human race's early days. Clements notes that common group knowledge supported survival. For example, if everyone drank from a certain body of water or ate a strange food and lived happily afterward, then the water or food was deemed safe to consume. Following the crowd simplified decision making, offering an easy and secure way to live.

Today, however, we may suffer harm when we apply such thought processes to investing decisions. That is, favoring what is popular or following the crowd may not be the best way to invest our money. Specifically, we often wrongly chase performance, buying shares of stocks, mutual funds, or other assets based on recent past performance and unloading them from our portfolio when everyone else is selling.

We need to retrain our instincts not to ignore the crowd altogether but to place a much greater weight to a disciplined investment approach.

3. Never Take Risks

In hunter-gatherer days, little was gained by taking risks. There was no upside to trying something new and generally much to lose on the downside. For example, being the first to sample the water of a newly found stream or taste a new food could result in death.

Today, being the first to discover and market a new drug, technology, product, etc. is often associated with greater wealth. For example, being an early investor in a startup that becomes wildly successful could provide rich rewards when the company becomes profitable and its stock price soars. (See also: How to Manage Risk in Your Financial Life)

Further, avoiding risk can actually be risky. That is, if you keep all your money in a low-yield savings account, then you may not be able to earn enough interest to beat the inflation rate. So by not taking on risk in the stock market or other investments, your purchasing power is diminished, albeit slowly over time.

Avoiding loss in the past was a positive attribute and helped people to stay safe and preserve their well-being.

Now, though, the instinct to avoid risk may prevent us from investing at all and reaping gains through these investments. Though we shouldn't be reckless with our lives or our money, we do need to take appropriate risks when needed to grow our investment portfolio.

You don't need to abandon your survival instincts. But you should learn to recognize when to counteract instinctual decisions to save money for investing, take appropriate risks, and stick to an investment plan.

Have your survival instincts gotten in the way of your investments?

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Guest's picture

Very true, Julie! These three instincts definitely do play a large role in investment behavior. But, ignoring these instincts is easier said than done.

Julie Rains's picture

It's definitely easier said than done. The first step is to recognize that such behaviors exist, then try to fight them n the right situations. Thanks for reading!

Guest's picture

It’s sad (but true) that over time, the survival instincts haven’t completely been replaced with wisdom. Instincts work in a tricky way. While it may look completely natural and innocent to do things a certain way, it could eventually work against you. By the way, great post. It really engrossed me from beginning to end. Great job!

Julie Rains's picture

Glad you enjoyed. I liked exploring the idea that instincts are valuable in some circumstances but not as useful in others. It helps me to consider how I might become a better investor.

Guest's picture

Good article, Julie.

I suppose the good news is if you can learn to not follow your instincts when they are harmful it puts you ahead of the curve.