• Aaki Vora

Break the Emotional Circuit

What the heck is a stock market circuit breaker and what does it have to do with life?

On October 19, 1987, a day now fatefully known as Black Monday, the Dow plunged 508 points. Hysteria and panic were brought on by the single biggest one-day percentage drop -- an astounding 22% -- in history.

In the wake of the crash, the NYSE implemented circuit breakers. Circuit breakers are mechanisms to keep the markets, as well as gains and losses, in check. Stock markets are volatile: new information, positive or negative, directly influences investor sentiment and causes panic buying or panic selling. For example, news about the rise of coronavirus in mid-March caused panic among American investors causing the Dow to fall about 13% in one day.

To avoid market crashes, regulators curb trading for a short period of time when indices (like the Dow and S&P 500) fall, or rise, over a certain amount. In the US, a 7% drop (increase) in the S&P 500 triggers the first 15-minute halt in trading. When trading resumes, if the S&P drops (rises) further to13%, trading is halted for another 15 minutes. If the S&P continues to fall (rise) to 20%, trading is halted for the rest of the day. In India, the circuit breakers are kicked in at 10%, 15%, and 20% drops or gains in the NIFTY or the SENSEX (whichever hits the limit first).

Aside from preventing a crash, there is a rational explanation behind the circuit breakers. Stacey Cunningham, the president of the NYSE explains it best,

"[circuit breakers] are designed to slow trading down for a few minutes, to give investors the ability to understand what's happening in the market, consume the information and make decisions based on market conditions."

Circuit breakers are implemented to get investors to chill out, slow down for a minute, process information in a rational manner before making a decision. While I can tell you that the last time the circuit breakers kicked in, I sadly can't remember a time where my own circuit breaker was triggered. Because I don't have one.

Life is full of uncertainty, now more than ever, and uncertainty gives rise to volatility. Stock market indices move up and down as new information comes to light, taking away uncertainty or adding some more. Life is the same. My future, like millions of others, seems uncertain at times, especially during this pandemic. My emotions rise and fall like the S&P 500 or NIFTY every time I hear a new piece of news.

Emotions are hard to control, near impossible some would say. Emotions are a physical and psychological reaction to some environmental stimulus. You can't choose how you experience emotions - it's hard not to feel sad when you realize that someone ate the last piece of cake that was lying in the fridge. But you can choose the behavior that ensues the physiological experience of emotion - you can either bring the roof down about how there's no cake or you can calmly order another cake and eat it all in one sitting so that you don't have to share it with anyone else.

Simply put, there's a difference between reacting and responding when you experience some emotion. Reacting involves letting your physiological emotional experience control your actions and responding involves taking a step back, noticing and accepting your emotions, and then making an active choice about how to act.

It is so much harder to respond to situations than react to them, at least for me. I react when the cake is over - my emotional index (the AVEI) plummets and it's just all south from there. I assume responding is harder for others too, else the NYSE wouldn't have implemented circuit breakers. Circuit breakers nudge investors to think about the information they have just consumed, reducing their likelihood of making rash decisions. Hitting pause seems like an effective way to give yourself a chance to respond rather than react.

Therefore, I am going to take a page out of the NYSE's playbook and am implement circuit-breakers in my own life. 7-minute breaks from everything when things are awry, 13 minutes when sh*t totally hits the fan (even positively), and a total halt when the cake in the fridge is gone.


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