How Does Financial News Impact Your Brain?

Copyright © 2011 National Public Radio®. For personal, noncommercial use only. See Terms of Use. For other uses, prior permission required.

ROBERT SIEGEL, host: We've been hearing a lot of bad financial news. There's the U.S. credit downgrade, trouble in the European economy, the up-and-down markets and all that in turn has a direct effect on what people do or do not do with their money. NPR's Sonari Glinton reports on how the coverage of the markets affects the markets and your brain and eventually your portfolio.

SONARI GLINTON: It's been hard to avoid all this scary financial news - really, really hard.

(SOUNDBITE OF VARIOUS NEWS BROADCAST)

UNIDENTIFIED WOMAN #1: This is a big, big psychological thing that's just happened.

UNIDENTIFIED WOMAN #2: Panic selling on Monday causing U.S. markets to take a big plunge.

UNIDENTIFIED MAN: The economy stinks. Unemployment is above 9 percent.

UNIDENTIFIED WOMAN #3: It's as if the world largest economy was walking around with a broken leg and two broken arms, and then, someone came along and punched it in the nose.

GLINTON: All that news has an impact, not just financially, but even physically. All I had to do was walk outside my office to test that theory, didn't have to go far. James(ph) and Anna Marie Conley(ph) were feeling the markets.

ANNA MARIE CONLEY: Oh, financial news, oh, it makes me feel horrible - horrible. Oh, the last week has been just painful - painful.

JAMES CONLEY: I was sick for the first time in 14 years.

(SOUNDBITE OF LAUGHTER)

CAMELIA KUHNEN: When we find information that induces anxiety and fear in us, this does change the way we think about our financial decisions.

GLINTON: Camelia Kuhnen is a professor at Northwestern University. She has two fields of study. One is corporate finance.

KUHNEN: And the other one is on neuroeconomics or neurofinance.

(SOUNDBITE OF LAUGHTER)

GLINTON: OK. You're going to have tell me what neurofinance or neuroeconomics is.

KUHNEN: What we're trying to do in this area is to use knowledge from neuroscience and psychology to understand how people think about financial risk and reward, how they think about forming their portfolios and how they make economic choices in general.

GLINTON: Kuhnen says when we hear bad financial news, we become more risk averse. For instance, if the stock market is tanking, we're more likely to buy bonds than stocks, even if that's the wrong thing to do. The way we hear the news affects us also.

KUHNEN: When we're presented news in this very emotional way, very bombastic way, it's in our nature to pay more attention to it.

GLINTON: Not only do we pay more attention to the emotional bad news but the more recent the news the more it affects our decision-making. Kuhnen says this is not the time to be making financial decisions.

KUHNEN: I'm trying to tell people to just chill out. They should calm down. They should really just sit down and understand what is new today.

GLINTON: She says if nothing is new or different, don't do anything, don't buy into the massive freak-out. But is it even possible for us to take a collective chill pill? Adam Galinsky is one of professor Kuhnen's colleagues at Northwestern. He says freaking out is kind of built into us.

ADAM GALINSKY: I think probably one of the most fundamental laws of human nature that's enduring across all cultures is that - and in fact is probably true across species too - is that losses are more painful than gains are pleasurable.

GLINTON: It's about survival. It's more important for our survival to avoid the bad than seek the good. Let's imagine we're prehistoric hunters and gatherers, and we come across a group of dancing people.

GALINSKY: If you go into the field and dance, you get a little bit of pleasure for that day. If you don't follow the herd as they're running away from a tiger, you get eaten and your life is over.

GLINTON: So in that way, panicking is good. You don't get eaten by the tiger. Fast-forward to modern times, most of our bad information isn't so cut and dry. It's surrounded by uncertainty.

GALINSKY: When we find ourselves in uncertain situations, we look to see how other people are responding. We see them freak out that makes us freak out more. They freak out more because they're looking at us, and we get this situation where you get a collective freak-out.

GLINTON: Now add the news media to the freak-out.

GALINSKY: They're like a nuclear bomb. The technology is advanced that they can make these things move so much more quickly and so much more faster than they would have otherwise.

GLINTON: Am I making it worse by doing this story?

GALINSKY: I mean, I think it could make things better, but it could also make things worse. It could make things better by providing perspective.

GLINTON: And Galinsky says it could make things worse by focusing on the scary information that caused the freak-out in the first place. Sonari Glinton, NPR News.

Copyright © 2011 National Public Radio®. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to National Public Radio. This transcript is provided for personal, noncommercial use only, pursuant to our Terms of Use. Any other use requires NPR's prior permission. Visit our permissions page for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR's programming is the audio.