By Dr. Rikki Racela, WCI Columnist

Wouldn’t it be great if, as investors, we could increase our risk tolerance? The ability to stay 100% equities and not worry about 30, 40, or even 90% losses without blinking an eye would be an amazing talent. And such a talent would lead to a surefire way of reaching financial goals and never committing the cardinal sin of selling low in a bear market. But is risk tolerance something that can be modified? What would be the mechanisms where our brains learn to increase risk tolerance? Is this even possible? What evidence do we have to indicate that our human brains can modify such an intangible characteristic as financial risk tolerance to maximize returns?

Dr. Jim Dahle and others say that yes you can!

There seems to be consensus in the personal finance blogosphere that risk tolerance can be increased. In the September 2021 WCI monthly newsletter, Jim mentioned five ways to increase risk tolerance (if you missed that newsletter and want to make sure that never happens again, you can rectify that here):

  1. Understand Financial History
  2. Don’t Look in a Downturn
  3. Put on Handcuffs
  4. Invest in Less Liquid Assets
  5. Need the Money Less

He then recited one of his favorite quotes by Phil DeMuth, “People's comfort with investment volatility is dependent on their current state of mind. When the stock market is racing up, people are comfortable with volatility.”

This idea that risk tolerance changes with changing conditions is also agreed upon by FI Physician in his article on risk tolerance and asset allocation. However, in another article, he says that 50% of risk tolerance might be set in stone, just like happiness. So, is risk tolerance really as malleable as some believe? Follow me as we delve into why neurology says YES!, that risk tolerance can be increased.

(Warning, nerd alert: I will be going into some neural evidence and pathways here, but that's what happens when you read a column written by a neurologist!)


Lessons from Pavlov’s Dog

My fellow physicians may remember learning about Pavlov’s dog in medical school. If you don't already know the story, Pavlov’s dog refers to instinctual learning. When a dog is presented with food, they will start to salivate as a natural, ingrained response. But in an experiment, Pavlov modified the scenario. Not only was food presented to the dog but a bell was rung at the same time. Every time the dog was presented with food and the bell was rung, the dog would salivate. Trials of this were run over and over again. Pavlov found that after enough repetitions if only the bell was rung but there was no food, the dog would still salivate. Ha! Learned behavior! Pavlov demonstrated that animal instincts are not hardwired at all. They are highly adaptable—even something as basic as a reaction to food can be modified.

Let's apply this observation to our finances. Many of our visceral and central reactions to the stock market in the form of risk tolerance are likely highly modifiable. Despite Pavlov demonstrating this phenomenon in dogs, human brains are much more complex and dynamic in terms of learning and adaptation. Our brains—which have enabled us to explore space, contemplate our own existence, and make atom bombs—have a larger chance than a dog’s to modify even the most ancient of our behaviors.


The Molecular Basis of Learning

OK, just when you thought we couldn’t get any more neurological, we are going to dive even deeper. Again, I am a neurologist and I majored in molecular biology in college. Skip this section and move on to the next one if this is getting too far down the science rabbit hole.

How does your brain accomplish behavior modification at the cellular level? Neuroscientists believe that the basis of learning involves a process called long-term potentiation. This is the process by which the neurochemical glutamate is secreted by a neuron and activates receptors on postsynaptic neurons called NMDA and AMPA receptors. The NMDA receptor is not initially activated on the postsynaptic neuron. Instead, the AMPA receptors first respond to glutamate. When that happens, the postsynaptic synapse depolarizes in response, and that activates the NMDA receptor to be ready to react to glutamate.

Voltage-gated channel, anyone? As more and more glutamate is secreted in the synapse and more and more AMPA receptors are activated, then more and more NMDA receptors are activated. The downstream signals from the activated AMPA and NMDA receptors lead to the production of more NMDA and AMPA receptors as well as the creation and growth of more synaptic connections, reinforcing a major neuronal response pathway. This positive feedback loop leads to learning. A behavior is learned because a brain’s response to a stimulus activates neurons that become highly active because of the increased density of NMDA and AMPA receptors and synaptic connections. If all this is a little confusing, here is a nice quick summary of what I’m talking about.

More information here:

Visualizing Your Way to Wealth


So . . . Is the Boring Stuff Over?

Whew, that was rough! Swinging back to finance, how does this discussion of glutamate secretion and long-term potentiation relate to increasing risk tolerance? Well, as Jason Zweig mentions in his book Your Money and Your Brain,

“The reflexive system is primarily headquartered underneath the cerebral cortex that most of us visualize as the “thinking” part of the brain. Although the cerebral cortex is also a critical part of the emotional system, most reflexive processing goes on below it in the basal ganglia and the limbic areas. A knotty bundle of tissue in the core of the brain, the basal ganglia (also known as the “striatum” because of their striped or banded appearance) play a central role in identifying and seeking almost anything we recognize as rewarding: food, drink, social status, sex, money. They also act as a kind of relay station between the cortex, where complex thought is organized, and the limbic system, where many stimuli from the outside world are first processed.

All mammals have a limbic system, and ours works much like theirs—as a kind of flashpoint of the mind. If we are to survive, we need to pursue rewards and avoid risks as quickly as possible. Limbic structures like the amygdala (ah-MIG-dah-lah) and the thalamus snatch up sensory inputs like sights and sounds and smells, then help evaluate them on a basic scale from “bad” to “good” with blazing speed. Those evaluations, in turn, are transformed into emotions like fear or pleasure, motivating your body to take action.”

Guess where many of those glutamatergic neurons I discussed ad nauseam project to? Yup, right to those limbic structures that Zweig mentioned that form the System 1, or the reflexive portion of the brain. This includes the striatum, amygdala, and thalamus as seen in this picture.

When you think about it, the ability to modify our most ancient responses is vital to our survival. Back in caveman/cavewoman days, it was essential we learned where and when predators attack, and we had to adapt our System 1 to be activated based on what we learned. It is through this mechanism that we can adapt System 1 so that we increase our risk tolerance and become better investors.

More information here:

6 Ways to Increase Your Risk Tolerance


Back to Jim’s Advice

risk tolerance modified

Now that we have reviewed the above neurology, we can see how Jim’s advice works in our brains to increase our risk tolerance.

  1. Understanding market history involves glutamatergic neurons originating from the frontal lobe (which is the part of the brain that does higher cognitive processing, like studying market history) that synapse on the amygdala, the brain’s fear center. This pathway will be activated and solidified so when you see the S&P tanking, your reaction will be, “Ehh, whatever.” Glutamate secretion on the amygdala will mute its fear and get-out response. Without knowledge of market history, a tanking S&P will set off your amygdala with a vengeance and cause you to react and sell.
  2. Not looking in a downturn is also a learned behavior where now your glutamate pathways are dumbing down the signals from both your amygdala and nucleus accumbens, reinforcing an “I am not gonna look” response. You might already know that the nucleus accumbens is the reward center, so why would this structure be involved in a market downturn? In Zweig’s book, he mentions, “. . . the possibility of loss makes the hope of gain even more tantalizing.” The temptation to look at the market on our phones is a double-teaming of amygdala and nucleus accumbens signals. If you force yourself not to look, you will activate glutamate neurons to learn to decrease this temptation signal.
  3. Putting on handcuffs in the form of a written plan reinforces glutamate neurons to stop the output from your limbic structures—almost like a hard stop.
  4. Investing in less liquid assets is a way to avoid activating emotional limbic structures to begin with.
  5. Needing the money less dumbs down the response of the amygdala in response to market downturns. The glutamate neurons connecting to the amygdala will downregulate its response to a market downturn, because you learn there is no immediate danger when you have no immediate need for the money.


Additional Ways to Increase Risk Tolerance, Rikki Style

I have taught myself additional techniques to increase risk tolerance, utilizing the neural pathways above.

  1. Gamify staying in the game. During bear markets, I think of falling markets as a game where I don’t sell. In fact, I have fellow white coat investors who I “compete” with to see who can stay invested and not sell. I text my friends bragging that I am not selling during a bear. In fact, I brag about putting more money in! This can be a powerful way to increase risk tolerance because, again referring to Zweig, “Researchers have found that when players do well at a video game, the amount of dopamine released in their brains roughly doubles, and that this surge can linger for at least a half-hour afterward.”
  2. Reward yourself during a bear market. During a bear market, I start performing activities that bring a sense of well-being so that I associate good feelings with the bear. I text my aforementioned WCI friends, “Stocks are on sale! This is awesome!” I go out with my friends to hang out and celebrate. I go out for a nice dinner. I text my wife that I love her. I give my children hugs and kisses. I watch Wedding Crashers. Now, you might think this is utterly stupid, but so is selling during a bear market. Just like Pavlov’s dog, I am rewiring my brain to a stimulus, so now my natural reaction during a bear market is a sense of happiness, excited anticipation, and well-being. I am salivating when I hear the bell, not when I see the food.
  3. Visualize not attaining your goals. If you sell during a bear market, there is a risk of not just monetary loss, but the loss of attaining your goals. Basically, you are teaching your brain to piggyback on loss aversion with this technique. Instead of the red S&P line moving straight down activating your amygdala and tempting you to sell, your amygdala will fire when you try to hit the sell button as you visualize not retiring, having to work until you're 90, and staying in debt until you hit the grave.
  4. Think of a bear as a jackpot! This technique piggybacks on our System 1 activation of the nucleus accumbens during an anticipated reward. This is the main reason we gamble, with the potential of a huge win. Well, we know when the market tanks, it will eventually go back up (with a long enough time horizon). And I can’t wait until it goes back up! Now, every time I see a bear market, I picture how it will go back up, neurologically having my glutamate neurons communicate and activate my nucleus accumbens.
  5. Remember you only lose money when you sell. Though technically you do lose real money when your investments go down, you actually have to sell your stock index funds to lock in the loss. Framing it in your mind that you only lose when you sell low, you have taught your brain to activate your amygdala before hitting the sell button, again utilizing loss aversion to your advantage.

More information here:

My Financial Plan Calls for Me . . . Being Hung by My Fingernails????


Can I Really Fool My Brain When I Know I’m Fooling It?

You might be asking yourself, “How can I fool my brain if I know I’m trying to fool it?” It's kind of a philosophical question, and like all higher-level questions, it relies on the System 2 part of our brain. What we are doing here is modifying System 1, the automatic circuitry that has no capacity to acknowledge that it is being fooled with but, at the same time, has such a powerful emotional influence to overcome System 2.

This is not a novel concept that we are utilizing to make us better investors. Any complex learned task—such as learning to ride a bike, taking up a new sport, or studying how to paint—all are using System 2 circuitry to modify System 1 circuitry. With time, there is no System 2 but only System 1 when you jump on that bike, when you place your hands catching that football, and when you hold that paintbrush. And with time, there will only be a System 1 celebratory dance when you see VTI tank 90%.

(For those of you who are closer to retirement, your System 2 will eventually kick in and then you freak out. But then again, your System 2 should have made sure your asset allocation was appropriate for your risk capacity. But I digress—that’s fodder for another post.)


There you have it. These are the ways to increase your risk tolerance and how the dynamic circuity in your brain makes risk tolerance modification possible. This may not be as important to those whose need to take risks is fully aligned with their risk tolerance. But for those whose risk tolerance is below the actual risk they need to take to accomplish financial goals, these techniques can be very powerful to get through bear markets with a riskier asset allocation and lead to their desired financial destinations.

And if you were skeptical that risk tolerance is modifiable, I hope I proved, supported by neurological evidence, that it is not set in stone.

What do you think? Is risk tolerance modifiable? Do you agree with the proposed science behind risk tolerance? Comment below!