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How to Avoid Financial Ruin in a Crisis

Jun 30, 2020
5 min Read
Investing in Crisis


When the Dow Jones is taking a nose dive and everyone around you is frantically selling amidst dire economic forecasts, how do you keep your composure and rely on rational reasoning rather than emotional reaction?

Brad Klontz, PsyD, CFP®, associate professor of practice in Financial Psychology and Behavioral Finance at Creighton University’s Heider College of Business, answers this very real, very timely question in his installment of the Business Bites luncheon webinar series, developed in partnership with the Greater Omaha Chamber

Klontz studies psychological biases in financial investment behavior and counsels his clients on the role behavioral biases influence money decisions, including investment decision making. He offers these seven tips to maintaining financial equilibrium even in the most economically tumultuous times.


  1. When we are emotionally charged, we become rationally challenged.
    Mistakes occur when we react emotionally, which is often immediately. In a crisis, the brain experiences what Klontz calls “emotional flooding.” The brain’s prefrontal cortex shuts off, and the brain often reacts emotionally. The herd instinct kicks in because there is safety in numbers. So, if many of your colleagues are selling when the market dips dramatically, you think you should as well. Resist the urge to react immediately. Give yourself 20 minutes to calm down. Take deep breaths; consult with a professional. Put time between your impulse and your action.
  2. Avoid catastrophic thinking.
    It’s a knee-jerk reaction to think of worst case scenarios: “The markets will never recover.” and “I will lose all my money.” This type of thinking occurred in 2008 and every other time we faced financial crisis, Klontz says. So, we need to challenge that catastrophic thinking with calm, rational thinking. Revisit how you reacted and what you did the last time you faced market volatility. How did it work out for you? What would you do again? What would you do differently? This kind of reflection invites productive decision making.
  3. Harness caveperson thinking.
    Harnessing cave person thinking means engaging in mental accounting. Your finances aren’t an “all or nothing” proposition. Compartmentalize your finances into separate buckets to differentiate which areas, or “buckets,” are doing well and which have suffered a setback. For instance, if your portfolio is a combination of 25% stocks and 75% bonds, only a quarter of your portfolio feels the impact of a sharp decline in the stock market. The majority of your portfolio is holding steady. By separating your finances into buckets, you avoid catastrophic thinking (TIP 2).
  4. Expand your frame of reference.
    Your frame of reference is your perspective. It’s the set of criteria you use to make judgements. For example, are you a short-term or long-term investor? If you are a short-term investor, perhaps saving money for a house, you are more concerned with market movements. If you are a long-term investor, saving for your retirement 30 years down the road, short-term market volatility is not as unsettling.
  5. Try the worst-case scenario exercise.
    The biggest source of stress in the United States for the past 10 years is financial stress – this despite being the richest country in the world. There is a disconnect here, Klontz says. The financial situation of the vast majority of the U.S. population is not life threatening. However, the financial stress we feel is. The worst-case scenario exercise helps us recognize that, while certainly worrisome, our financial situations are rarely life-threatening. It asks an initial question, such as “What’s the worst thing that could happen if you lost your job?”, and then has you run down the rabbit hole of possibilities. “We’d lose our house.” “We’d have to relocate.” “We’d have to move in with my parents.” “I’d have to go back to school to get a new degree.” In the end, we come to the realization that the worst thing that could happen to us financially is not as dire – or deadly – as we think. We’ve gained perspective.
  6. Find the opportunity.  
    Where is the opportunity? “If you walk away with anything. I would love for you to just have this incredible mindset,” Klontz says. It’s incredible because it only requires a shift in perspective to yield great results. The pandemic has us shut up at home with our kids, perhaps testing our teaching as well as our parenting skills. Where is the opportunity? Maybe it’s the chance to connect with our children in ways we hadn’t before, a chance to see what school subjects make their eyes light up with curiosity, to cook as a family, to relax in the park instead of trudging off to yet another soccer game. If you’ve lost your job, maybe now is the time to start that business you always wanted to establish or go back for the degree you were too busy to pursue. Where is the opportunity?
  7. Your future self exercise.
    Life right now is difficult. There is much uncertainty and attending stress. Sleep for many of us is allusive. But, though new to us, pandemics are not new to humankind. This pandemic is going to pass. The economic volatility it has wreaked is going to pass. So picture yourself five years from now, looking back on today. How do you wish you would have handled this? What do you want people to say about you and how you conducted yourself during this time? Is your current behavior a match?

This content was developed as part of our Business Bites series, a virtual education opportunity sponsored by the Heider College of Business in partnership with the Greater Omaha Chamber. Request the full interactive Business Bites session to learn more.

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Bradley T. Klontz, Psy.D., CFP® is an expert in the science and practice of financial psychology, financial planning and applied behavioral finance. He is an Associate Professor of Practice at Creighton University Heider College of Business, Co-Founder of the Financial Psychology Institute™ and a Managing Principal at Your Mental Wealth Advisors™. Dr. Klontz is co-author/co-editor of Facilitating Financial Health (NUCO, 2008; 2016), Financial Therapy: Theory, Research & Practice (Springer, 2015), Mind Over Money (Broadway Business, 2009), Wired for Wealth (HCI, 2008), and The Financial Wisdom of Ebenezer Scrooge (HCI, 2005; 2008).


Read more about Creighton University’s offerings in financial psychology.