The Dungeon: Cortisol and the Confirmation Bias

Are you more discouraged and anxious than usual these days?

Is your mood darker than normal?

Does it feel like you are waiting for something bad to happen?

Where others call you a cynic or a pessimist, do you consider yourself to be a realist?

Cortisol is your body's main stress hormone. It works with certain parts of your brain to control your mood, motivation, and fear. When you perceive danger, cortisol is released from your adrenal glands and triggers a range of physiological responses to help you either fight or flee. Cortisol is a helpful thing, and it allowed our species to survive. However, too much of a good thing is bad.

The Mayo Clinic writes:

The body's stress response system is usually self-limiting. Once a perceived threat has passed, hormone levels return to normal. As adrenaline and cortisol levels drop, your heart rate and blood pressure return to baseline levels, and other systems resume their regular activities.

But when stressors are always present and you constantly feel under attack, that fight-or-flight reaction stays turned on.

The long-term activation of the stress response system and the overexposure to cortisol and other stress hormones that follows can disrupt almost all your body's processes. This puts you at increased risk of many health problems, including:

• Anxiety
• Depression
• Digestive problems
• Headaches
• Muscle tension and pain
• Heart disease, heart attack, high blood pressure and stroke
• Sleep problems
• Weight gain
• Memory and concentration impairment

That's why it's so important to learn healthy ways to cope with your life stressors.

If you are reading this, you deserve better.

We live in stressful and frightening times. Perhaps the symptoms above describe you or someone you know. There has been a significant increase in reports of symptoms like these since the start of the COVID-19 pandemic, and the hyper-politicization of our culture contributes to the milieu of hopelessness. We are all drowning in bad news, and there has been so much of it, constantly, from all directions, over the past several years.

What if elevated levels of cortisol are not being triggered by the external environment, but from within the mind itself due to a runaway negative mental schema? I'm not a therapist or a physician, but I am interested in how a pessimistic mental framework can undermine investor behavior and confidence.

We reflexively reject information that conflicts with our beliefs. This happens without our intention and beneath our awareness. We call this "confirmation bias". Perhaps your worldview has become increasingly negative- that the bad things that are happening are unprecedented and that we are moving inexorably towards the end of the world as we know it. If so, you will subconsciously reject conflicting evidence that we are not at the end of the world and that things might just work out. The notion that the crises of the present will pass will sound like deluded naïveté, and the only information that sounds correct enough to be accepted at face value is that which confirms fears and deepens anxieties. You might feel hopeless and powerless. Even the times when things appear to be okay become reasons to hold your breath and wait for the other shoe to drop.

It is very hard to see and understand what is really going on if you are subconsciously and automatically rejecting information. Any worldview that is biased such that some inputs are automatically rejected cannot be a complete worldview.

The combination of cortisol and confirmation bias can create a vicious binary feedback loop and a kind of emotional and psychological dungeon. Stress begets cortisol, and cruelly, cortisol begets stress. Eventually, our minds become walled into a perpetual state of spiking cortisol and mental air raid sirens. We become chained into it by our addiction to evidence that reinforces the sense of being threatened and simultaneously blinded to information that might alleviate our fears.

If someone is trapped in this psychological dungeon, the first step to freedom is addressing the confirmation bias, repairing the ability to perceive positivity, and enabling oneself to see something other than threats. I am absolutely not saying that we should just cheer up and try to look on the sunny side. I'm not saying that things are going to get better from here - I wish they would but I still can't predict the future.

What I am saying is that a unilaterally pessimistic worldview must be just as incomplete as an unconditionally optimistic one; therefore, pessimism should not be confused for realism. It's not that negative opinions are invalid, it's that optimal decision-making cannot be exclusively negative or positive. On a similar note, having a physiological response to a threat is not bad; being in a constant state of fight or flight as your physiological baseline is bad. A predominantly negative mindset is profoundly unhappy and leads to the mind prison that I have just described.

Here is the reality:

1. There are a lot of bad things going on, as always. There are also a lot of good things going on, again as always.
2. All our knowledge is about the past, but all our decisions are about the future. History is the best indicator we have of what the future will look like. Unfortunately, nobody can predict the future with enough precision to create actionable strategy. This means that predictions that the stuff is going to hit the fan are just as useless as predictions that it will not hit the fan. Those facts do not waive our agency. In the face of frightening uncertainty, we still must decide what to do.
3. Unprecedented things happen every day. The future is going to surprise us, and we are going to be wrong about many of our guesses. We do not live in a world that moves from crisis to calm, but we live in a world that goes from crisis to crisis to crisis. In fact, it is exactly this uncertainty and volatility that gives the market its ability to generate excess returns over time. This is what we mean when we say Risk Equals Reward.
4. Pessimism is costly and irrational as an investment strategy. Being optimistic and then being wrong sometimes is far less costly than being pessimistic and wrong sometimes. If you're optimistic, you give yourself the chance of being rewarded for being right. If you're pessimistic, you can only ever be right in the short run and all of your long-term outcomes are degrees of loss. Therefore even if we fear that things might not work out, we should always invest as though they will. This is not magical thinking; this is as rational as it gets.

If you have been working with me for any length of time, you know that we continually stress test your financial plan. Remember that your financial plan incorporates the expectation of volatility and stressful times so that you don't have to worry about them as much or adjust things in response to them when they happen. I think it is remarkable that some of the most financially secure people that I work with are often the most stressed out. The people who are the least vulnerable to external stressors are sometimes the most vulnerable to internal stressors.

Disciplined investors behave in ways that we know to be rational and in line with our long-term goals even if (or especially when) that behavior is at odds with our emotions. This is not easy to do; long-term returns are the just compensation that we earn for the emotionally demanding work of investing.

No matter how things go, you won't have to go it alone. Please know that I know how you feel. Believe me when I say that I see all the bad things happening too and that I regularly yell at my TV and the radio in my truck.

Liberating people from the cortisol and confirmation bias mind prison is an Acadium specialty. We are here to help you pursue a happy and fulfilling life; managing wealth and financial planning are important parts of that endeavor but so is listening and if necessary, helping you to see the bigger picture and think as an investor.