Investment Psychology – How the brain helps invest

Reason is on guard of money: we understand how brain chemistry interferes or helps to invest money correctly and how character traits affect investment success.

Scientists from the California Technical Institute, studying the brain of traders who successfully maneuver between market bubbles, found markers of two different features..

One of them was a bit of an alarm. Successful traders, defined as those who profitably sold their stocks until close attention to the bubble appeared, felt awkward. It was caused by the perception of uncertainty. They had higher than usual activity in the area of ​​the brain known as the islet (islet lobe). She tracks how the body feels in a particular situation, says Colin Cammer, professor of behavioral economics and finance. In conditions associated with financial risk, it is the islet lobe of the brain that is activated.

For those who in the end were not successful in investing and seemed to pursue profit, the activity of the islets was reduced. Cammer considers this as an independent conviction of a person that the price is following the very right path of growth and the level of risk is not high.

The value of emotional control

investment psychology

These findings are just a small part of the information that is now distributed in the investment industry due to neuroeconomics. Over the past few decades, a lot of work has been done on behavioral economics and investment psychology, which led many experts to talk about the devastating effect of emotions on investor behavior. The picture arising from neuroeconomics, which relies not only on observation of behavior, but also on brain scans, is more complex.

At the California Technical Institute, researchers found that not only islet activity puts successful traders at the forefront. There is also a peculiar ability to act on the basis of general information, as opposed to how others act. During the research, another group of people was discovered that also felt anxious, but did not make decisions based on it. Such people usually say:

“I felt that something was going wrong, but I didn’t do anything.”

This experiment examined approximately 20 traders who owned risky assets over 50 trading periods..

“People who are well versed in emotional regulation — in other words, able to overcome anxiety in the fight against the herd — tend to invest better.” – says Camellia M.

Kuhnen, an assistant professor of finance at the Kenan-Flagler School of Business, mentions a very understandable statement that largely defines the psychology of investments:

“If you are the person who can jump with a parachute or dissuade yourself from acting, for example, from selling assets, under the influence of panic, then you are in good control of emotions.”

Why the ability to empathize is an additional advantage for the investor

investment psychology

However, emotional control is not the only thing necessary for success..

“It turns out that in order to move forward you need to be well versed in the emotions of other people.” – says Kuhlen.

Other studies have shown that good investors, in addition to composure and judgment, have a strong theory of thinking. This ability develops in people aged 2-3 years and allows us to understand that all people around are different, motivated by various reasons, and these reasons can be predicted. In general, the theory of thinking is strongly associated with empathy..

What is your risk IQ?

investment psychology

The conclusions of this article make sense, given that the market is unpredictable and, in fact, is randomly built from billions of investor actions.

If you are interested in becoming a do-it-yourself investor, you need to think in advance whether character traits and temperament will harm it. Will your personality warehouse help in this matter? How much are you willing to work on your emotional and rational ability to make good investment decisions? Let’s give some tips based on data from neuroeconomic studies.

Study yourself

investment psychology

How well do you recognize your own feelings and situations that motivate them? If you track your feelings in response to market movements, you can use them as an indicator.

“Many of the world’s best investors have mastered the art of interpreting their feelings as reverse indicators. The excitement is a signal that it is time to think about selling, while fear tells them that the time has come for a purchase, ”writes Jason Zweig in“ Your Money and Your Brain, ”a recent book on neuroeconomics.

The more you practice understanding your own emotions, the more you actually regulate them. Such an assumption was put forward by Kuhnen, relying on the results of one study. It showed that experienced traders have fewer physiological signs of fear in response to such unusual events as, for example, a fast beating heart or sweaty palms..

You can also study your theory of thinking, which reveals your investment psychology..

Build a support system that will facilitate decision-making when you need to act “against the herd”

investment psychology

Some people, by their own nature, behave this way, so they consider this behavior to be natural. But most still look at their peers, acquaintances, friends and seek social support in making fundamental decisions. If you want to develop your own ability to act against conventional wisdom, you can try to consult with people who already possess it, innate or developed.

In addition, you can record your own opinion on various issues (presumably, having studied them well) at certain time intervals. This will allow further analysis and tracking of changes that have been made under the influence of the public majority. If they are clearly expressed, continue to keep such a diary, but try to think more and make decisions yourself.

Take it easy before making investment decisions

Studies have shown that when people are excited, they tend to act on the basis of their emotional background. “If a person is in a violent state, he will take more risks,” scientists say..

“People at the casinos in Las Vegas are constantly excited. They are offered free drinks and food. In fact, these are “accelerators of excitement”. They trap the brain and emotions because they are perceived as rewards..

Kamelia M. Kuhnen also draws attention to neuroticism. This is a personality trait characterized by emotional instability, anxiety, and even autonomic disorders. The psychology of investment does not accept such behavior. If such a trait is characteristic of your family, it may turn out that “do it yourself” investing is not for you. A specialist’s study showed that people with a gene that is associated with neuroticism are less likely to invest in stocks, and when they do this, make investment decisions not actively.

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