Have you ever thought about how emotions affect the decisions we make? Have you ever spent an unplanned amount of money right after receiving unexpected good news? What about fear…have you ever made a knee-jerk reactionary decision right after receiving unexpected bad news? I have myself and I’m pretty sure you have as well. Several years ago, I became familiar with a mathematical concept that helped me see how it’s possible to put a fear into a context and, in the process, intentionally limit ourselves from making bad reactionary decisions following a negative personal event. The below may seem a bit abstract for some, but let me try to give you something to think about from a perspective you may not have thought of before.
I myself am somewhat of a stock trader, although I’m far from a professional. In my years of studying and following the markets, I’ve learned that basically every up or downtick in the markets is directly a matter of emotions in the macro-sense. Bear with me here, I am going to take a mathematical computation used in the stock market and attempt to show how I believe it can be applied to our daily life issues with the purpose of revealing that the emotion of fear has limits. Once we realize the way fear and emotions operate, we can actually see that they are constrained within a “cage” and we can actually predict where they will go.
Leonardo Fibonacci was an Italian mathematician born in the 12th century and he either discovered or popularized a concept that we now call “Fibonacci numbers”. Without going into a lengthy explanation, let me quote directly from Investopedia:
“‘Fibonacci numbers’ are a sequence of numbers where each successive number is the sum of the two previous numbers.”
Using the above formula, we get a sequence beginning like this: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Going the next step, we can use that number sequence to derive a subsequent mathematical calculation which gives us a way to compute the movement of a stock price based on its previous history. For the purpose of this blog post, since we are talking about fear, I am zeroing in on what happens when a stock starts dropping and people begin panic-selling.
Professional traders look for specific price levels where they expect a stock price to stop on the way down during a correction or crash. These levels (called “retracements“) are used to determine what to do with the money they have in a stock – whether to sell or start buying. At this link, you can see the exact mathematical formulas used to create retracement levels using the above sequence. The result of these formulas are “key Fibonacci ratios” which are: 23.6%, 38.2%, 50%, 61.8% and 100%. When a stock starts dropping, it generally hits on or near these price levels.
Using these Fibonacci retracement numbers, we can fairly accurately predict a limit on how fear will carry the price action in the event of a correction; the important key here is that you can actually predict where a stock is most likely going. All you need to make this calculation is the recent highest price level of the market and the most recent major low. Anytime a market looks like it may drop, you can use this calculation to determine in advance how far it most likely will go. Let me show you a real recent example of this…
S&P 500 Correction
Take a look at a chart of the price action during the recent S&P 500 market correction. I was amazed how perfectly this worked out. Here, I have displayed the Fibonacci levels on the far right side of the chart with both percentages and price levels. The calculation was made based on the highs from May to July 2015 and the low of October 2014. Notice how each of the four point drops nearly hit right on the exact levels (except the 50% retracement mark in this case). These predicted Fibonacci retracement numbers were near perfect. Even in such an uncertain situation like this recent market correction, it was absolutely possible to calculate in advance where the S&P was headed; therefore there really was not any reason to panic when this began happening, even though the chart looked very ugly. [Click the image to enlarge.]
Ok, so that’s how fear can actually be calculated and predicted in the stock market. Remember, the entire market is driven by the dual emotions of fear and greed. So how do we take a mathematical calculation for an emotion-driven stock market and apply it to our personal life? This is where I say the abstract line of logic comes in. Just as the stock market can have predictable moves during seemingly unpredictable crashes, so can our actions be predicted during personal “crashes” of negative life events.
Respond vs React
Now, take all this and think about how it applies to personal life situations. I don’t want to go into an exhaustive list of situations but rather just let you just apply this on your own. Personal health situation? Relationship catastrophe? Laid off from work? Your actual stock investments? Think about how you handled the last time you received unexpected negative news. Did you react in a panic or did you respond using wisdom? Here’s a major distinction: responding requires wisdom but reacting is typically very negative and emotion-driven. Often, our response (or reaction) will have a direct effect on how well things go for us after the dust settles.
Remember that fear can only have so much of a negative effect on you. Just like in the chart above, the panic selling eventually stopped. So too, your personal storm will blow over and blue skies will emerge again. During the time of your storm it is critical that you DO NOT make any drastic decisions or do anything extreme. Do not let fear run you over and control you!
What About Your Beliefs?
Do you have access to a higher power during your life storms? In my case, I can point to specific principles that are like a solid rock foundation which to stand during any storm. You may have different beliefs than I do but here’s what I’ve learned as a Bible-believing Christian. In the New King James translation of the Bible, the word “fear” occurs 358 times. Sometimes it is used for the “fear of the Lord”, other times it is the fear of a negative situation and still other times, it is used by God Himself in telling a person to “have no fear”. The point is that fear is a very big issue and God has some things to say about it.
For God has not given us a spirit of fear, but of power and of love and of a sound mind.
(2 Timothy 1:7 NKJV)
There is an antidote for fear in the Bible. Fear tries to exert power over people, but there exists a much higher power than fear. God has given His people power, love and a sound mind to overcome fear. Danny Silk said it best, “never accept the counsel of fear.” God makes many promises to His people concerning financial matters, health, guidance for personal decisions in relationships and careers and every other life situation. The more we understand God’s true character and His positive view of us, the more we can put our confidence in Him. As we stand on this knowledge, we are then equipped to shut off the irrational voice of fear.
Ok, I hope you’ve been able to follow my line of abstract thinking here. I tried to keep it short so you may have had to read between the lines a little. Do your own homework now and see how you can apply this concept to your personal life. I thought this was an interesting way to show how something like fear in the stock market can be mathematically calculated in advance with the possibility of practical application outside that realm.
- You do not have to agree with fear; it is an irrational emotion that rarely points to a wise solution!
- If we can calculate the effect of emotions in the financial realm, what does this say for our personal situations?
- Consider how fear can only have so much effect on you before a personal storm blows over.
- Responding to a negative situation is much more effective than reacting to it; the way you handle these events will have a direct impact on your life afterwards (be careful!)
- Learning how to combat fear using God’s truth will increasingly result in more positive outcomes based on His perfect wisdom.
He who has knowledge spares his words,
And a man of understanding is of a calm spirit.
(Proverbs 17:27 NKJV)