Coping With Scary Times

Whether or not it's a Great Recession, it's scary – for investors and for investment advisers.

How to cope? You might consult a shaman, like the spiritual-healer/wealth-manager The Washington Post magazine profiles in Voodoo Economics. (Read the Editor's Note, too.)

For those seeking a more scientific approach, neuroeconomist Gregory Berns explains how fear impairs decision-making. We're up against what Berns calls "the 'endowment effect,' the innate tendency to value things you own more highly than everyone else does."

The cause and effect have not been fully sorted out, but the implication is that when our brains sense pain, or anticipate loss, we tend to hold onto what we have. When everyone does this at once, the result is a downward economic spiral.

To help their clients cope, investment advisers should avoid undue pessimism and help clients tune out "media that fan the emotional flames." For clients in their 40s and 50s, times when stocks are marked down 40% should logically be greeted as a rare opportunity, not cause for panic. Do they really believe the stock market is Going Out of Business?

Berns advises against waiting for the economy to get back to normal:

I don't care what your business is, but if you think it will eventually come back to what it was — your brain is in the grips of the fear-based endowment effect. What I am doing is looking for new opportunities.

What opportunities should corporate fiduciaries be exploring? The answer may involve finding ways to bring fiduciary-standard investment service to more people or different organizations. Or maybe it means becoming a provider of education and insight rather than mere portfolio management. Or . . . [you fill in the blank].