To Atul, neurofinance research reinforces a common-sense lesson: One should stop and think before making a big trade. If nothing else, the findings of brain researchers have made him more aware of his emotions and motivations, he says.
But its underlying premise was right: Investors make mistakes, and the more we can understand about why and how, the sooner we can correct them.He says he's confident neurofinance will catch on among other investors. Now, I want to dig deeper into the brain to better understand what is going on and see if we can refine our applications in the real world.He concluded that greed and fear played a big role in the traders' decisions and that inexperienced traders were the most likely to make emotional mistakes.
When we make trading decisions, our brain's centers for pleasure and angst wage battle. The first seeks profit; the second tries to avoid loss. Subjects who showed high activity in the anterior insula were 20 percent less likely to invest in a stock that had lost money before, even when the odds were good that they would profit. Such people might sell impulsively when markets turn against them, Atul says.
Our brains lust after money, just like they crave sex. Deep inside each subject's head, electrical currents danced through a bundle of neurons about the size and shape of a peanut. Blood was rushing to the brain's pleasure center as Atul executed mock stock and bond trades. In other words, stocks, like sex, sometimes drive us crazy. When it comes to money, logic prevails, that intellect matters in investing. People make economic choices based on all the information available to them and learn from their mistakes. As a result, their expectations about the future --- from the price.
Or so the theory goes. In practice, of course, investors do foolish things all the time. Some gamble away fortunes on money- losing investments, doubling down when logic tells them to fold, or letting winnings ride when the rational person would cash out.
Always yours
Atul Sikrai
Sr Vice President (wiTdom inv advisory)
Founder ( Brand Diagonal )
Chief Mentor ( Esteem MeLife)
