Financial investment disaster

What You’ll learn:

  • The surprising behaviour by most people in catastrophic events
  • Why the normalcy bias is the most dangerous thing that can affect your investments
  • Investment services like Questrade and IB aren’t there to alert you on future financial turmoils
  • Investment skill advice to help combat disastrous news

Imagine sitting on an airplane with several other passengers. When you look up, however, you see the top of the craft has been torn off, revealing a deep blue sky and calm tranquility outside. Columns of smoke and flames consume the cabin. To your left and right are holes in the sides of the airliner that lead to your freedom. How would you react?

This seems like an easy hypothetical, right? Maybe you think you’ll quickly get to one of the nearby exits. Or, maybe you see yourself cowering and freaking out in the corner. Statistically, you’re likely to do neither of those things. You are more likely to do something far weirder.

In catastrophic events like raging hurricanes, shooting rampages, sinking ships, volcanic eruptions, or even terrorist attacks, extensive research has discovered that you are more likely to become so overwhelmed by the flood of unexpected and ambiguous information during a perilous event that you will do absolutely nothing at all. Moreover, you are likely to experience an intense need to feel safe and secure. If it becomes clear this is impossible, then you will drift into a daydream where it is. And if no one comes to rescue you, you could die within the chaos.

Survival psychologist, John Leach, identified that 75% of people find it impossible to reason during catastrophic events. They freeze because of the immediate stress. The remaining either have a heightened awareness to act or they freak out in an uncontrollable panic.

What’s going on here?

The Normalcy Bias

The normalcy bias is a built-in survival mechanism. It is nature’s self-soother. It’s purpose is to give you the ability to continue to engage in your normal habits, still see the world as if nothing bad is happening, even if your surroundings says otherwise. It’s there to ensure your anxiety stays in check. In short, this bias is a state of mind where your brain is attempting to make everything seem normal by believing it still is.

Because of this, unfortunately, people underestimate the possibility of a disaster actually happening and its effects on their lives. They refuse to believe terrible events will ever include them. The assumption being that if a disaster has never occurred, then it will never occur. The reality of the situation, though, is that if events do escalate quickly and profoundly, then it can potentially overwhelm the brain so completely that it could result in a freeze — the brain gets stuck in an internal struggle — in search of a solution that never materializes. It leads to paralysis by analysis. And so, your brain does everything it can to keep you distracted as long as possible by saying “Don’t worry about it! Everything is OK!”, so you can avoid this very real, very dangerous cerebral deadlock.

Unfortunately this wired trait of ours doesn’t stop at natural disasters. It can, and does, plague us in real-world investment decision making as well. This is why the normalcy bias is considered one of the deadliest things that can strike an investor. By assuming things will always be fine because they have always been fine, you are putting blinders on to issues and not preparing yourself for change that is most likely coming.

No one thought the Great Depression would happen, nor the stock market crash of 1987 or 2008. But they did! All the signs were there, but people chose to ignore them.

An Investment Disaster Waiting To Happen

In 2007 Warren Buffett said the ideal candidate to replace him at Berkshire Hathaway needs to be “someone genetically programmed to recognize and avoid serious risks, including those never before encountered.”. He was referring to someone who won’t fall into the traps of the normalcy bias.

This shows that it doesn’t matter the level of experience one has in investing. The normalcy bias can afflict anyone. Investors who exhibit the normalcy bias behaviour, however, typically ignore negative news in the hope that the problem will simply go away. This can obviously have a dramatically negative impact on their investment portfolios.

Further, experts found that these types of investors tend to interpret warnings optimistically, often times clinging to ambiguities to justify their carelessness.

The consequences of the normalcy bias can therefore have these adverse effects on your investments:

  • Major Losses by Avoiding The News: If market news indicate your investment is unlikely to rebound, then ignoring this critical information can result in significant losses.
  • Missed Market Opportunities: Market bad news typically brings an opening for new and positive investment opportunities. By avoiding bad news entirely one also loses out on their potential upsides.

Surviving and Thriving

Doing your research is the first line of defense in protecting yourself from this bias. Leach discovered that those who survive a catastrophic event and prosper were the ones who prepared for the worst case scenario ahead of time. They’ve done their research, or performed the drills, or built that protective shelter. They’re always the ones looking for the exits on the airplane and imagining what they’d do.

The same applies to your financial investments. If you have no idea what you would do in the event of, say the unexpected bankruptcy of a blue chip company as was the case for GM in 2009, you are more likely to suffer from analysis paralysis, which can slow your actions and expose you to serious financial losses.

It’s critical then that you visualize various pessimistic scenarios that could happen and prepare for them. Of course, the point is not to belabor it to the levels of paranoia, but to simply have realistic plans of action in place to address these problems if and when they do arise. The objective then is to at least mitigate and contain the damage that the issue could cause on your investments, and if you’re lucky, even profit from this downturn in the process.


  1. You got me intrigued @Eric Strauf. Way back when I was in school I did a big project on historic disasters. Some interesting things that relate to this post:

    • When officers aboard the Titanic became aware that the ship was sinking, very little was done to prepare for evacuating passengers. Compounding on this, people refused evacuation orders because they drastically underestimated the odds of their worst-case scenario and minimized the potential impact.
    • The same case was true for the Bridge Creek–Moore F5 tornado event. It caused some people to not seek shelter. Despite tornado warnings being issued, several just assumed it was someone else’s problem. And more often than not, those seeking shelter were shamed for doing so, as a way to deflect any attempts at deflating non-shelter seeker’s need to continue like there was no danger.

    It’s definitely a very strange phenomenon! A cruel reminder that we are all biological evolution’s children.

  2. Yea the the scenario you put forward about the plane was indeed a real-life event that actually occurred in 1977. It is known as the Tenerife airport disaster, and it involved Pan Am 1736 taxiing off the runway while KLM 4805 was in the middle of taking off.

    Most passengers died — many of which from smoke inhalation, not from the jets impact. Those who perished from smoke inhalation could have escaped, but they didn’t.

    Definitely they suffered from the case of the normalcy bias. Truly sad.

    Thanks for the fascinating read.

  3. Warren Buffet says it best…

    “You shouldn’t own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.”

    You can interchange stocks with index funds, but the meaning is the same. You need to expect the volatility and not hide from it. If you expect it and plan for it, then your emotions won’t run wild when the value of the investment does decrease.

  4. I can see where you are coming from @doug, and you are right, but i guess it depends on what kind of investor you want to be. For people with high risk tolerance and yearn for the highest % yields they will more than likely not diversify as much and go all in. I think for those types this is where the normalcy bias could strike the hardest since so many, oddly enough, don't do any research or prepare for a devastating downturn.

    Their ego's are either too big or too small to want to handle the realities that the research might reveal.

  5. You know I never realized it until I read this article but yes I can now see the direction correlation to how natural disaster relate to investing. Interesting.

  6. This is why so many people prefer to diversify their holdings and just tuck it away for decades. Even in bad times, if their portfolio is diversified properly enough, and rebalanced routinely, then one can hide the normalcy bias away forever.

    It may not be gone permanently, but long enough for most people to not have to think about it. It doesn't solve the problem since they aren't actually "doing the research" to combat this bias, but they at least are taking a path of least resistance to keep it at bay for a long time.

  7. If anyone watches The Animal Planet channel and seen how the prey freeze when the predator attacks them you are looking at the same thing as when we freeze and drop into a day dream state in these disasters. It's definitely a genetic trait that all animals, which includes us, have.

    It's a real shame this trait interferes with us in the modern world now that we've moved away from the dangers of the savanna.

  8. It's safe to say that everyone has experienced the normalcy bias in some experience even if they have not acknowledged it.

    When I began investing I was definitely the type that would listen to the buzz around my neighborhood and invest in that way. But most times I lost all of my money horribly, but as it was happening I justified it that things would get better because others around me weren't sweating it. 🙁

  9. Wow 75%? I'd like to think if i was on such an airplane that i'd take action and get out. And i still think that but if the science is right it's really strange. I do admit that i have never practiced to prepare for the worst though.

  10. Did Buffett successfully find his successor? Seems unlikely he'd ever find a quality replacement to replace The Oracle.

  11. This is incredibly interesting. I also have to say that unfortunately I too suffer from this bias. Despite being somewhat of a day trader and deeply involved in cryptocurrency exchanging I have definitely found myself avoiding the bad news.

    Right now, although its been a heck of a roller coaster with bitcoin trading I really should prepare for what could be a collapse. I have not done much research into its value because I am more interested in riding the wave of profit taking.

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