Why Fear and Greed Aren’t Your Friend
Warren Buffett isn’t a therapist. But he recognizes the value of emotional awareness when it comes to money. He brilliantly illustrated the importance of emotional acumen in his New York Times op-ed during the Great Recession. In 2008, Buffett famously wrote: “Be fearful when others are greedy, and be greedy when others are fearful.” Sure, Buffett was speaking to the potential value of contrarian investing when others exhibit a herd mentality. But he seems to be hitting on a deeper truth — that emotions often drive our financial behaviors.
Are we better off for it? Do our emotional instincts improve our financial outcomes? Unfortunately, the answer is often a resounding, “NO!”
Let’s look deeper into the emotions Buffett highlighted: fear and greed. These emotions have been crucial to the survival of our species. Feeling the emotion of fear may prevent us from taking a risk. And a risk-free day usually means you live to see the end of it.
On the other hand, greed may propel action. While fear restricts activity, greed may inspire it. Seeing others increase their collection of resources may drive us out of our safety zone to also pursue the accumulation of resources. So, at the most basic levels, fear and greed can be quite adaptive.
However, when it comes to our money, fear and greed can be portfolio killers. An obvious example is the flow of capital of individual investors during market cycles. If Investing 101 had an official tagline, it would be, “buy low and sell high.” However, when you look at what investors actually do during market peaks and valleys, it’s the opposite. Thomson Reuters Lipper documented how $235 billion flowed out of U.S.-domiciled equity mutual funds from 2007 into 2012. This period includes the bottom of the Great Recession in March 2009. In hindsight, March 2009 would have been the best time to “buy low,” but investors were doing the opposite. And they did the opposite for several years, even as the market was recovering.
Improving Outcomes With Gratitude
If emotions like fear and greed are natural, and if these emotions hurt our financial wellbeing more than they help it, are we financially doomed? Thankfully, the answer is “no.” Fear and greed may be our first instincts when it comes to our finances, but we can intentionally foster a much more helpful emotional experience around money: gratitude.
Gratitude is an emotion with endless benefits. It improves happiness (Seligman, Steen, Park, & Peterson, 2005), wellbeing (Lin, 2017), and self-esteem (Rash, Matsuba, & Prkachin, 2011). It can fight depression (Seligman et al., 2005) and high blood pressure (Shipon, 1977). It improves your sleep (Kackowska, Brown, Ronaldson, & Steptoe, 2016) and overall physical and psychological health (Hill, Allemand, & Roberts, 2013).
And one of the best aspects of gratitude is that it’s not just a passive emotion people can feel from time to time — it’s also a character trait that can be strengthened with practice (Jans-Beken et al., 2020). Just as a bodybuilder can strengthen his or her muscles with exercise, you can strengthen your tendency to experience gratitude.
Gratitude brings benefits to your financial life as well. Money is a significant source of stress for many couples. But the practice of expressing gratitude toward your partner can improve the quality of your relationship (Algoe, Fredrickson, & Gable, 2013).
Gratitude can also help you make better financial decisions. While fear and greed can result in impulsive decisions (or even subconscious behaviors) that may hurt your financial outcomes, gratitude helps to reduce impatience and improve decision-making (DeSteno, Li, Dickens, & Lerner, 2014). This happens because gratitude helps you put less emphasis on finding immediate gratification and, instead, shifts your focus to better long-term outcomes.
Fear and greed are zoom-in emotions. Fear zooms in on what could go wrong. Greed zooms in on what you do not have. Gratitude is a zoom-out emotion. Gratitude helps you focus on what is going right and what you do have.
So, whether you’re gathering with friends and family around the table at Thanksgiving or recapping your day by yourself at bedtime, remember to practice gratitude. Your portfolio may thank you.