🧠 Getting a handle on our complex emotions is a superpower.

Managing our emotions in helpful ways can do wonders for us, whether at home, in relationships, or in the stock market.

It’s not easy. Fortunately, we can turn to all kinds of research. That’s why today, we'll discuss emotions and what investors can do to better understand them with Lisa Feldman Barrett, a world expert in the psychology of emotion and author of the sensational book, How Emotions Are Made.

All this, and more, in just 6 minutes to read.

— Matthew

Quote of the Day

"Investing is an easy game if you can control your emotions."

— Warren Buffett

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What Else We’re Into

📺 WATCH: How to think about risk with Howard Marks

🎧 LISTEN: The paradox of high-volatility alternatives ft. Alan Dunne

📖 READ: What could be behind Ajit Jain’s Berkshire Hathaway stock sale

Trivia

How Emotions Are Made With Lisa Feldman Barrett

Howard Marks has said, “Emotion is one of the investor’s greatest enemies.” Many years earlier, Benjamin Graham said basically the same thing: “The investor’s chief problem – and even his worst enemy – is likely to be himself.” 

Hard logic, a high IQ, and advanced degrees might help in financial markets, but success doesn’t often hinge on raw intelligence. It usually depends on something far more elusive: emotional intelligence.

Clearly, handling our emotions matters. Warren Buffett, Charlie Munger, Graham, Marks, Todd Combs—the list goes on—all say investing is more about emotional management than IQ. They consistently emphasize a truth that many overlook: Our feelings play a large role in our financial decisions, for better or worse.

But why are emotions so crucial in a field dominated by numbers and data? And how can understanding and managing our emotional responses lead to better investment outcomes?

Lisa Feldman Barrett is here to help. The psychologist and bestselling author of How Emotions Are Made discussed her book and how investors can better manage their emotions. This interview has been edited lightly for brevity and clarity.

Much of investing involves regulating our emotions. Before getting into the weeds, let’s start at the high level. What comes to mind when considering investing, which can be an emotional roller coaster for many? 

Investing is inherently uncertain. The stakes are high, and there's a lot of uncertainty. Uncertainty is metabolically expensive, so investing can be very metabolically expensive, just like exercising or learning a new skill or language. 

Charlie Munger has said, “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw irrational emotion under control.” What does temperament mean to you?

When people talk about temperament, they're really talking about mood. They're talking about how easily perturbed are you? Are you somebody who floats tranquily in the sea of life? Your mood might vary a little, but you’re not perturbed a lot. Whereas other people are treading water, and their mood is always up and down. 

So, yes, temperament is a real thing, but it's linked to how easily you are metabolically perturbed. If you are easily perturbed by everything, you basically have a more expensive nervous system. There's just no other way to say it. What you will experience is more stress and more fluctuations in your mood.

If you're somebody who's less perturbed, it means that your mood is not as variable. It's not necessarily a good thing to not be perturbed, and it's not necessarily a bad thing to be easily perturbed. It really depends on what you do and how you manage it.

An investor can panic, but if you don't act on the panic, it may not be so terrible for you.

I also think that feeling bad doesn't necessarily mean something is wrong. I can work at a very high level of efficiency even though I'm feeling like shit for a really long time. So the point is that sometimes you feel bad because you're doing something hard, not because something is wrong.

People use the word panic in a very, very cavalier way. Real panic is when you can't breathe, and your heart is racing. But when most people talk about panic, they just mean high, intense arousal that is unpleasant. 

Thank you for making that important distinction. Generally, how do you personally invest? Just a 401(k)? Stocks?

I certainly have a 401(k). My husbnd and I do have a portfolio we actively manage, too. 

How aware do you feel you are with your investments and related emotions? Do you follow investing news? Do you monitor your investments a lot?

I grew up in a family of extremely limited means. I worked two jobs, sometimes three, to put myself through school. I’m lucky that I grew up in Canada, where it costs relatively little vs. the U.S. for college education. So it would be easy for me to fear money and anything related to investments. 

When I started, I had no background in this at all. I never owned a house, but when I got a job, I scraped together money to buy a house I couldn’t afford, so I had to take in a roommate. But I just thought it was a way of building equity.

I’m not a risk taker by any means, and it’s inherently hard to be risky about financial things. But there are rules I stick to, like keeping a balanced portfolio. I’m not really driven by greed. There are certainly moments when I wish I had more money, but I try to resist both fear and greed and just treat the whole thing like there’s a lot of arousal and uncertainty. 

We follow financial news, but we don’t check it multiple times a day. 

Yoga, exercise, and time outdoors help me regulate my emotions. What do you recommend for all of us?

We have a choice: Will we experience arousal as anxiety or will we experience it as determination, or uncertainty? Will you experience unpleasantness as anger or fear? You have a choice. 

Another way to manage your emotions is to manage the regulation of the body. Your brain is always regulating your body and your body is always sending signals back to your brain, which you experience as mood. If you do things to make it easier for your brain to regulate your body, you will have fewer ups and downs. Do you get enough sleep? Are you exercising sufficiently every day? Are you eating healthily? These all sound very boring. 

But from a neuroscience standpoint, it's really serious. Are you drinking enough water? A big predictor of work productivity is about making it easy for your brain to manage your body. I think of it as body budgeting — your brain is running a budget for your body. It's not budgeting money, it's budgeting glucose and salt and oxygen and so on.

Another thing you can do is regulate attention. The basis of all lived experience is really driven by what you are paying attention to. You can walk to a different room or go for a walk. You can also change what you’re paying attention to. 

I do all of this, including exercise and sufficient sleep. I also try to spend time only with people who allow me to be my best self. 

My husband invented a concept I use: When someone is irritating you or making you concerned, you can remember that their thoughts, feelings, and opinions of you are just electrical activity in their head. That helps the stress dissolve. 

Fascinating stuff. 

You can also exercise the brain in the same way that you would exercise your body. You can give your nervous system a break when you need it. A decade ago, I decided I would practice “awe” five minutes a day. I started with easy things like the sky, the birds, the ocean. Then I moved to other things that were a little harder, like the sound of crickets at night. Eventually, I got creative and would find the dandelion poking its little head out of a crack in a sidewalk. I could experience awe at the power of nature to be unconstrained by humans, despite humans’ attempts to control nature.

Now when I'm in a very stressful situation, if I feel like I need a break, I can just take a mental step back by experiencing a moment of awe. Really, I don't have to go anywhere. I don't have to change what I'm looking at. I can just do it by finding something to focus on just for a moment that will allow me to have a break in my experience.

A visualization of sorts, right? How can investors use what many see as “negative” emotions like fear and greed in a useful or productive way?

Emotions can feel pleasant or unpleasant, but they're never inherently negative or positive. Even an unpleasant emotion can have a productive outcome.

Also, you can’t just talk yourself out of a feeling or mood. That’s not possible. No one has control over their nervous system like that. You can try to breathe, which could slow your heart rate, though it doesn’t work for everyone. 

Many people can change their physical state. Sometimes, if I’ve had a bad day, I feel like the world is ending, and everything just seems wrong. Those are days I just need to get a hug from someone. I may need to go for a walk and breathe fresh air, or look at the sky, or go to bed. Usually, tomorrow will be a better day.

Often, no matter how bad things are, if you get to sleep and start fresh in the morning, things don’t look as bleak as they did the night before. That might sound trivial. But the physical state is powerful. 

When you’re activated, you might see the world a certain way, but that’s just how you're experiencing yourself in the world at that specific moment. The emotions are temporary. That’s the first step that might help investors: Everything you feel is temporary and will change. It may not feel that way, but it will change.

Some people (and investors) like to think of thoughts and feelings as floating in the sky, like clouds passing by.

Yes. And you can harness the arousal of anxiety to energize your actions. The trick is knowing when to push through and when to give yourself a break. I don’t have a good recipe for that; we all have to figure out it for ourselves. 

Any parting thoughts on emotions and investing?

The interesting thing about money is that it's a social reality. For many people, I think money’s not even about wealth and buying things. I think it’s about competition. People may accumulate wealth — however you’re quantifying wealth — like it’s a game. You might get on a treadmill where you forget why you’re doing it. I think that’s when it all becomes fundamentally unhealthy. 

Maybe the point here is to simply understand why you’re doing what you’re doing as an investor; remind yourself of that “why” often. 

The goalposts do tend to keep moving. 

Here's the fundamental thing that I have up on my wall, printed out: Spending time is not a metaphor. You spend it and cannot get it back. When time is gone, those moments are gone forever. So use them wisely.

Dive deeper

For more, read Lisa’s book, How Emotions Are Made, or her other book: Seven and a Half Lessons About the Brain. You can check out her website here.

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