How Emotions Trigger Investment Sell-Offs in Times of Fear, Uncertainty and Doubt

Just a month ago, Bitcoin was worth over $17,000 and the global market cap of cryptocurrencies was sitting past $800 billion. Today, it is less than half the value at roughly $8,000 and $380 billion respectively.

It’s no surprise, coming off the back of an intense wave of marketing hype last quarter. Coupled with the recent negative narrative on cryptocurrencies, the fall in price action certainly worsened. Accelerating the difference in figures we are looking at.

In this current atmosphere of fear, uncertainty and doubt. With the Tether-Bitfinex scandal ongoing, revelation of the Bitconnect scam, governmental scrutiny across the globe and widespread misinformation. Investors will sell.

Even though no one has a definitive clue as to the future of cryptocurrencies. Anyone with money at stake is sure to feel anxiety and stress. Portrayed an abysmal image of what’s to come, who could blame investors for adopting a sell-first mentality.

Emotions At Play

A plunging market can be mentally crippling to the uncertain investor. You can’t seem to take your mind off the price movements. You can’t seem to peacefully go about your day. You constantly doubt your investment decisions. You fear you’ll lose all your hard-earned money.

Hard-pressed by these powerful emotions, can we firmly say that feelings weren’t a factor in selling?

Yet when we finally decide to sell, we suggest logical reasons as to why we made the decision to sell. Attributing our actions to rational justifications that weren’t necessarily the basis of our initial considerations. Pushing aside the emotional forces at play. Discounting the unconscious mind at work.

Its Relationship with Fear and Anxiety

If you are to ask brain experts which brain structure comes to mind when they think of fear, uncertainty and doubt. You’ll find that the amygdala comes up a lot. In fact, it’s central to how we mediate fear and anxiety.

In lab animals whose amygdala was lesioned, their ability to perceive fear-provoking and anxiety-inducing stimuli were reduced. As were their ability to express fear when met with such stimuli.

This is no different from humans.

The amygdala is larger in size with long-term sufferers of post-traumatic stress disorder (PTSD). They are also more sensitive and reactive to fearful stimuli and requires more time to calm down after each exposure. Indicating its role in fear processing.

Wired to Avoid Ambiguity

In a study on uncertainty, participants were recorded to prefer an option of known risk over an option of ambiguity. Even though decision theory posits that ambiguity about probabilities should not affect our choices. Even though subjective expected utility theory posits that confidence on the probabilities of outcome should not affect our choices.

With a deck of red and blue cards in front of them, participants are to either bet on the colour of the top card or take a smaller but guaranteed payout. In experiment A, they are told the distribution of the cards - 10 red and 10 blue. Whereas in experiment B, they are unknown to the probability - a deck of 20 cards - but actually, share the same distribution as experiment A.

As shown in functional brain imaging, the amygdala and orbitofrontal cortex (OFC) were more active in experiment B. Areas involved in “reaction to emotional information (amygdala)” and “integration in emotional and cognitive input (OFC)”. While showing no correlation in experiment A.

Instead, the dorsal striatum was activated when probability was known. An area involved with rewards prediction. Telling us that “ambiguity lowers the anticipated reward of decisions” and hence, less likely to go for such decisions.

Results outside this pure risk vs pure ambiguity experiment returned the same conclusions. In the next treatment, familiar facts and events were pitted against unfamiliar facts and events as a yes-no question. Placing the risk to ambiguity ratio across a spectrum as opposed to the former.

In another, participants are matched up against opponents. As was set up in experiment B with the deck of cards treatment, your bet was simply the colour not picked by your opponent. If you were to take the risk option over the guaranteed payoff.

For the option of added ambiguity, the opponents are more “informed”. They get to sample 3 cards from the deck of 20 to induce a condition that corresponds with ambiguity aversion. Even though the opponents weren’t any more informed than they were after the sample, the participants acted as if they were.

How Does Fear Translate to Selling?

With the uncertain climate surrounding crypto, we are unfamiliar with the facts and events. We are unsure of its future. We are unsure of what its next price will be. So we pick the guaranteed payoff (or loss) to escape the aversive emotions.

We see people present themselves as informed individuals. We hear people express opinions like informed individuals. And in a state of fear, uncertainty and doubt, we believe these people to be informed individuals. Unwilling to bet against them.

All while thinking it was our deliberate, autonomous decision to sell.

Our unconscious has more control over us than we give it credit for. Yet we aren’t as attentive to it as we should be and are even dismissive of it on occasions. We need to grow more aware of our emotional self and learn about the influences it can exert on our investment decision process. Only then can we become more successful.

As a final note, the concepts are transferable to buying with the fear of missing out (FOMO). Remember to keep to your investment objectives and stick to your investment strategies. Don’t let your emotions sway you the wrong way and cause you to lose more!