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The emotional core of our brain, the Amygdala, has the primary role of triggering fear responses. Information that passes through the Amygdala is tagged with emotional significance . If the market continues to decline, an investor could be under the influence of what is referred to as the “red-effect” by Elliot et al. (2007). Further research shows that even a two second glimpse of color red can have an important influence on our cognition, and behavior, and processing this color can undermine our intellectual performance – this phenomenon is called the “ semantic red effect ” [Lichtenfeld, Elliot et.al. (2009)]. Going beyond traditional finance, new research now combines neuroscience, psychology, economics and behavioral science in an attempt to explain how people make economic and portfolio decisions under uncertainty.In an earlier blog on Trader induced Volatility and Market Correction , we defined excess market volatility, a concept that some academicians termed as “animal spirits”. The behavior of volatility during an environment when fundamentals are weak could be different from volatility-clustering – the tendency of volatility to persist in clusters, as a natural result of price formation process with heterogeneous beliefs across traders. Long term investors naturally focus on long-term behavior of prices, whereas traders aim to exploit short-term fluctuations. Although CBOE VIX® Index, the Fear Gauge of the market may have spiked, the absolute level is still low compared to the previous markers in 2018, let alone in 2008. Asness of AQR indicated in his recent post , this just ain’t a big number compared to the historical levels. 
However, when an investor engages in “short-term thinking with long-term capital”, it becomes the classic “Fight or Flight” scenario with the Amygdala. An investor becomes impulsive and sells his or her investments in order to avoid further losses, does excessive trading, or attempts to recoup losses by investing in high-risk investing strategies.In the scholarly paper by Brinson et.al (1986), the authors argued the importance of asset allocation and concluded that asset allocation explained an average 93.6% of the variation of returns, whereas timing and security selection explained the reminder of 6.4%. In addition, the contributions from timing and security selection to active returns, were in fact, negative, which suggested that investors who tried to time the market were not rewarded on an average. Despite the empirical debate on the importance of asset allocation over market timing or security selection, the conclusion is pretty clear that sidestepping from a disciplined investment strategy e.g. Strategic Asset Allocation, Tactical Asset Allocation or a Target Date Solution won’t bring an extraordinary reward. When investors, under the influence of “fear”, decide to engage in an active, or an impulsive investment decision, they must assess the costs, skills and informational efficiency associated with those decisions. It is important to remember the goals associated with an investment strategy rather than an attempt to time the market, which is more considered gambling than a legitimate investment strategy .Seasoned portfolio managers stick to their guns because of their conviction, and it is important to ensure that the investment process is “disciplined” and “repeatable”. In social parties, I often hear the excitements of a few who boastfully declare their smartness by indicating their success of selling out of a position before it declined by x%. I would buy these geniuses at any cost if they can prove this outcome repeatedly. As seasoned financial market professionals, we all know the infamous Efficient Market Hypothesis (EMH), which suggests that stock prices incorporate all relevant information making it impossible to predict and consistently earn excess returns over a long period of time.Related: The Recent Market Decline and Human Behavior It’s a very common psychology to derive conclusions from examining history. This results in people engaging in Confirmation Bias – looking for data that confirms past beliefs and ignoring new information that contradicts existing perceptions. One could look at the historical data and come to the conclusion that we should see a decent rally ensuing from very oversold levels and highly bearish sentiment at the indication of the first leg of a bear market , or we are already in a bear market that preludes to full-blown recessions, which is expected in 2019 .Currently, we may have a case of what we indicated in our previous blog that this December may prove to be the worst December in the history of 44 years. This could suggest that you better sell your portfolio positions now, and claim your brilliance in social parties next year if the history repeats itself, i,e. if 2019 repeats the history of 2008, or something worse. Or, one can believe in the Fed hypothesis, as it released from its December 19th meeting , “ consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced …” Although the Fed reduced its forecast for 2019 rate increases, from three quarter point rises to two, given rising risks across the global economy, from U.S. , Europe to Asia, it noted that the federal funds rate target range is only touching the lower bound of neutral.