from Neuromancer, not really related
Most decisions we make about money, after a certain level, are not based on logic or facts. Emotions, hormones and ego play a bigger role than is usually imagined.
As a response, analysts are becoming introspective, they are questioning the axioms of existence, they are turning to neuroeconomics; an emerging field and uses techniques from neuroscience with theories from psychology and economics to study financial behavior.
Most of the thinking behind this deals with how and why we make decisions as human beings, surprisingly not a lot of decisions are made purely based on logic and facts, go figure. This is basically relevant to anyone who uses money.
Why We Can’t Let Go of Our Losers
Blind optimism is sneakier than you think. We are always convincing ourselves we’re OK when actually we’re on the losing side. It’s an ego thing more than actual loss. We just can’t take the mental blow. This article looks at why US investors, despite the market taking a deep tumble, are still not selling.
Selling an ..asset, says Mr. Odean, “isn’t primarily about economic loss, it’s about emotional loss.” Once you sell below your purchase price, he believes, you can no longer tell yourself, “I still made a good choice, and it’ll come back.”
A study.. found that people are much worse at estimating whether a bad investment will produce mild or severe losses than they are at predicting whether a winning investment will generate small or large gains.
What hormone levels say about financial performance.
A lot of buying and selling decisions, especially in high rollers, is quite influenced by hormones; namely testosterone and cortisol. Testosterone can generate mental and physical energy, while cortisol, produced in response to stress, decreases sensitivity to pain, and heightens our memory functions. High levels of these can cause irrational behavior.
…They found that higher levels of testosterone tended to be predictive of trading success: but as the variance (unpredictability) of a trader’s returns increased, so did his cortisol levels.
“During the dot-com bubble, people who were working with me displayed all the classic symptoms of mania: They were euphoric, delusional, and overconfident; they couldn’t put a coherent sentence together; and they were unusually horny”
So keep it in the pants.
Same Brain Circuitry as Cocaine
When we make financial decisions, supposedly based on logic and fact, we are actually using brain circuitry usually used in a largely non financial environment like when you snort cocaine and get attacked not necessarily at the same time. But on the bright side, moderate emotional involvement seems to support a rational decision. Everything in moderation.
Financial gain activates the same reward circuitry as cocaine. Risk-taking activities resulting in a series of lucky gains may induce a potentially destructive positive feedback loop.
Financial loss appears to activate the same ﬁght-or-ﬂight circuitry as a physical attack, sidestepping higher brain functions (“rationality”) in favor of emotional processing and elevating heart rate, blood pressure and alertness. Once triggered, this circuit overrides most other decision-making components and is very diﬃcult to interrupt.
*In case you didn’t know. Europe is in the middle of a debt crisis, and its bigwigs can’t agree on what to do about it. The US sat back and smiled for a while, it could afford to, the dollar was up and consumer spending was moving, but that temporary pick up has chillaxed a bit. On the other hand, China appears to be a little woozy, and is predicted to hit a crisis this may happen or not happen. No one really knows how all this will affect emerging markets like Sri Lanka yet because no one can imagine, or wants to imagine, the worst that could happen.