BOSTON -- If you're a buy-and-hold investor and looking at your battered portfolio has you whimpering, you may be at the point of "learned helplessness." That's a psychological term which basically suggests you've been beaten into a cowering, quivering mess. At that point, however, learned helplessness becomes an investment strategy -- a bad one. Does learned helplessness describe your frame of mind? To find out, you need to understand the concept better. Without getting too technical, the premise comes from the study of canine behavior. Most everyone knows the story of Pavlov's dog, where the dog responded positively when a signal was given a positive stimulus. Ring the bell at dinnertime and the dog starts to associate the bell with dinner and starts salivating when the bell rings even when there's no dinner on the table. Other studies have focused on reaction to negative stimulus. Remove the bell and the dinner and put the dog in a situation where there's no reward with the stimulus, but rather pain or discomfort. The dog has no way to improve its situation, so when it sees the stimulus -- the equivalent of the bell ringing -- it loses emotional control, stops responding and starts whimpering. Emotional control The theory applies to humans because people want some measure of control in order to feel emotionally stable. "When people lose control, they become emotionally anxious, and while you never really have control over the stock market, right now many people have lost any illusion they may have held about their ability to control things," said Donald MacGregor of MacGregor-Bates Inc., a Eugene, Ore., firm that researches judgment and decision-making. "When you don't know who to trust, when you don't have any basis for setting your expectations, you can't take action," MacGregor added. "When you can't take action, you become disengaged -- and that's where millions of investors are." Yet there's a fine line between buy-and-hold and feeling helpless, and investors shouldn't try to overcome the feeling of futility by changing strategies hastily. That's a recipe for being whipsawed -- for selling low and buying high, mistakenly thinking that what happened in the market today will repeat tomorrow. Mind you, the market-timers and market technicians, the active investors and traders, the gold bugs and cash hoarders, have all been following a strategy that does not involve doing nothing. They may trade themselves into oblivion, but they won't cower; they'll use their strategy to fight to the end. Experts in investor psychology say dedicated buy-and-holders should fight to the end too. That means hanging on, betting that the nation's economy will bounce back. Reality check Even then, there are people for whom the potential for further loss is more than they can bear. Unable to control a market that keeps going down, these investors have to decide what comes next and not throw everything away in a panic. Terrance Odean, a professor at the University of California at Berkeley, says that part of what has gotten investors to the point of learned helplessness now is that they mistakenly thought they were in control all along. He noted that financial advisers, when first signing up a new customer, ask "Would you be able to handle losing, say, 50%?" "The client hears that and says 'It would be tough to lose it, but I could do it,'" Odean said. "The problem is that they made a static decision, thinking 'That's all I could lose.' But now they have lost that 50% and the same question applies, because no one can say the market won't go down from here." Odean added: "The right question to ask would be 'What would happen if you lost 50% and you had no idea what would happen next?' It turns out that's what we are living through right now and nobody was planning for that outcome at all. That's why they're frozen now over what to do." To get past that, investors need to look at where they are now -- no matter how ugly the situation is -- and say "What do I believe is the best course of action now?" Maybe you stick with long-time holdings, ride the index funds or reaffirm strong sentiment that certain stocks will be long-term winners. Or you pull back to a point that's more emotionally and financially comfortable. But giving up is not an option. "Learned helplessness means the individual is exhibiting no real behavior at all; they are not engaged," MacGregor said. "This market is where you are," he added. "You can lament that you didn't get out a while ago, but what really matters is what you do from here, and a lot of people are now so scared that they're not doing anything. That's not a plan of action." Copyright © 2009 MarketWatch, Inc.  | 
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