I heard a behavioral finance expert Jay Mooreland say something very insightful on a podcast. 

He said, “A few years ago, I went skydiving with my daughter. I had obviously thought about what the experience would be like before getting onto the plane. I knew we would climb to around 12,000 feet. I knew the door would open. I knew I would be strapped to an experienced instructor. I knew we would jump out of a perfectly functioning aircraft and fall through the sky before the parachute opened.

I knew all this intellectually.”

However, knowing what was going to happen and knowing how it would feel when it happened turned out to be two completely different things.

“When we reached altitude and that aircraft door opened, everything changed. The wind rushed into the plane. The noise was deafening. I looked outside and suddenly the earth seemed impossibly far away. For a few moments, pure fear went through me. A part of me genuinely wanted to turn to the instructor and say, “I don’t want to do this.”

There were people around me, and more importantly, my daughter was there. I certainly did not want to be the guy who backed out at the last moment.

So, I jumped… It was extraordinary.

A couple of years later, I decided to skydive again. This time I thought the experience would be completely different. After all, I had already done it once. I knew exactly what was going to happen. Surely the fear would be substantially lower because there was no longer any uncertainty about the experience.

Then we reached altitude… The door opened… The wind came rushing in… Almost instantly, the fear returned… Not some distant memory of fear. 

The real thing.

I almost froze. The instructor was telling me to move towards the door, and my body seemed unwilling to cooperate. I remember being genuinely surprised by my own reaction.

I had done this before.

“How could I possibly have forgotten what it felt like?”

Jay was talking about a psychological concept called affective forecasting, which, put simply, describes our difficulty in accurately predicting how we are going to feel in the future.

Now think about investing. One of the biggest mistakes investors make has nothing to do with predicting markets.

It is incorrectly predicting themselves.

Before a market crash, almost every sensible investor knows what he is supposed to do. He has read that markets periodically decline. He understands that volatility is the price of long-term returns. He knows that bear markets eventually happen. His financial professional may have explained repeatedly that a 20 or 30 percent fall should not cause him to abandon a well-designed investment plan.

Ask him during a calm market what he would do if equities fell 30 percent and the answer will often sound reassuringly rational.

“I would stay invested.”

“I might even invest more.”

“I understand markets go through cycles.”

He may genuinely believe every word of it. The problem is that he is answering the question while sitting inside the plane with the door closed. The cabin is quiet. There is no wind rushing past his face. Nobody is asking him to jump. The earth is not 12,000 feet below him.

Then the market falls 30 percent… The door opens… Suddenly the experience bears very little resemblance to the scenario he had calmly imagined.

This is what makes affective forecasting such an important concept for investors. We imagine future emotions from the emotional state we occupy today. When things are calm, we imagine fear calmly. When markets are rising, we imagine losses while surrounded by gains. When our portfolio is at an all-time high, we try to picture how we would behave after watching years of accumulated wealth disappear in a matter of weeks.

However, imagining fear and experiencing fear are completely different things.
You can understand a market crash intellectually without understanding what a market crash will do to you emotionally.

During an actual crisis, the numbers on the screen are only part of the experience. The television is filled with frightening headlines. WhatsApp groups suddenly contain experts predicting something far worse. Friends who were enthusiastically discussing stocks six months earlier are talking about getting out. Every day seems to bring another decline. The portfolio that took years to build appears to be shrinking by amounts that once represented several years of savings.

Then the mind begins doing something fascinating… It starts demanding action… Do something… Sell something… Move to cash… Stop the pain… Wait until things become clearer.

We tell ourselves we are making a rational decision in response to new information, but sometimes what we are really trying to do is scratch an emotional itch. The brain is uncomfortable with uncertainty and desperately wants us to take some action that makes the discomfort disappear.

This is precisely why investing behavior during a crisis can look so different from investing intentions before one. The investor did not necessarily lie when he said he would remain calm. He simply didn’t forecast accurately how he would feel.

 There is another fascinating part of this phenomenon. Having lived through a previous crash does not necessarily make us immune to the next one.

That was the lesson from Jay’s second skydive.

He knew what was coming. He had survived it before. He had even enjoyed the experience once he was through the terrifying first few moments. Yet when that door opened again, his body did not consult his résumé.

Fear arrived anyway… Markets can work in much the same way.

Someone who invested through 2008 may imagine that he will be completely prepared for the next crisis because he has seen one before. Someone who lived through the COVID crash may believe he now understands volatility. But memories of emotions are not emotions themselves.

We remember that we were afraid…We don’t necessarily remember the full intensity of the fear.

Also, because extreme market environments occur relatively infrequently, the emotional memory gradually fades. Years of rising markets slowly rebuild confidence. Portfolios grow. Recent experience begins telling us that everything will probably be fine.

Until the aircraft door opens again.

This is one reason I believe risk questionnaires, while useful, can never fully capture an investor’s real capacity for risk.

Imagine answering a question that asks, “How would you react if your portfolio declined by 30 percent?”

You might choose, “I would remain invested.”

Perhaps you would.

But there is an enormous difference between ticking that box when your Rs. 10 Crore portfolio is worth Rs. 10 Crore and living through the experience when the same portfolio suddenly says Rs. 7 Crore. Rs. 3 Crore has disappeared from the screen.

Markets are still falling and nobody knows where the bottom is. Someone on television is explaining why this time is different.

Now answer the question again.

This is also why investors sometimes discover their true risk tolerance only after taking too much risk. Risk tolerance is easy to overestimate because optimism is free when nothing bad is happening.

The bull market investor says he can tolerate volatility because volatility has mostly been upward. The aggressive investor says he has a ten-year horizon because ten years sounds reassuringly long. The concentrated investor says temporary declines do not bother him because his favorite investments have been rewarding his conviction.
Then circumstances change. Suddenly ten years feels very far away. Temporary declines feel frighteningly permanent. Volatility stops being a statistical concept and becomes a number on a screen representing your children’s education, your retirement, your home, your freedom or thirty years of accumulated savings.

This is why good investing cannot depend upon our ability to behave perfectly when emotions become extreme.

We need to design for the imperfect human being who will eventually show up. That person is us.

The purpose of a thoughtful investment plan is not simply to determine the mathematically optimal allocation when everything is calm. It is to create a portfolio we have a reasonable chance of staying with when circumstances become emotionally difficult. There is little value in constructing a portfolio that looks brilliant on a spreadsheet but becomes psychologically impossible to own during the very period when discipline matters most.

This is one of the most overlooked dimensions of portfolio construction. The best or the perfect portfolio is not necessarily the one with the highest expected return. It may be the one whose worst moments you can survive without destroying the plan.

It also explains why financial life planning should not merely ask, “What do you need money for?”

It should ask something far more human.

What kind of pain can you live through without abandoning the strategy?

Because every investment strategy eventually asks something emotionally difficult from its owner. 

Equities ask you to tolerate frightening declines.

Diversification asks you to watch something you don’t own outperform something you do. 

Rebalancing asks you to sell part of what everyone loves and buy something everyone has begun doubting.

Long-term investing asks you to remain patient while somebody else appears to be getting rich faster.

Even a conservative portfolio extracts an emotional price when aggressive assets are soaring, and you begin wondering why you are being so cautious.

There is no emotionally free portfolio… There are simply different forms of discomfort. Affective forecasting tells us that we are not particularly good at estimating in advance how those moments will feel.

This is where a thoughtful financial professional can add enormous value.

The role is not simply to remind an investor during a crash that markets have recovered historically. The deeper role begins much earlier, when everything is going well. It is to help the investor build a portfolio that recognizes his future emotional self before that person arrives.

That future investor may be frightened… He may experience FOMO… He may desperately want to sell… He may desperately want to buy whatever has just gone up… He may suddenly question principles he has believed in for twenty years.

A good plan anticipates this.

It does not assume that intelligence will overpower emotion. It builds guardrails around the reality that emotion will occasionally overpower intelligence. That is the deeper lesson of affective forecasting.

We spend enormous amounts of time trying to forecast markets when one of the hardest things to forecast is ourselves.

We ask where the Nifty will be next year, what interest rates will do, whether gold will continue rising, whether small caps will outperform and which asset class will lead the next decade. However, we should occasionally ask a different question.

How am I likely to feel if I am wrong?

How will I feel when my portfolio is down 30 per cent?

How will I feel when markets have fallen for twelve months and everyone around me sounds pessimistic?

How will I feel when the asset I refused to buy doubles?

How will I feel when the investment I was most confident about disappoints for three years?

How will I feel when everybody seems to be making money except me?

Those questions matter because investing happens not only inside portfolios. It happens inside human beings. The greatest danger is believing that the person making calm promises today will automatically be the same person making decisions when the door opens at 12,000 feet.

We can study every historical crash. We can look at charts showing previous recoveries. We can remind ourselves that volatility is normal and promise that the next time markets collapse, we will remain perfectly rational.

All of that is useful but none of it guarantees how we will feel when our own money is falling, the headlines are frightening and uncertainty is everywhere. Mature investing begins when we stop pretending that our future self will suddenly become more rational than our present one. 

We build portfolios with humility about our own behavior. We create processes before emotions arrive. We accept that fear and greed are not defects that disappear once we understand investing well enough. They are part of being human. The objective is not to eliminate them. It is to make sure they do not get to make our most important financial decisions.

When markets are calm, staying invested can sound like the easiest thing in the world.
Then the door opens… That is when we discover whether we merely understood the plan, or whether we had built one we could live with.