Tuesday, July 26, 2005

Better Investors are Brain Damaged

A recent study found that people with brain damage where emotion centers were impaired averaged 13% more returns than emotional-normal investors.

Risk-aversion (therefore survival) may be a trait of the mentally healthy, but seems also to give you less bang for your investment buck. Could being a "heartless" trader (not traitor) actually be a benefit? The answer, superficially, appears to be yes.

Why would this be? Many emotions factor into investing: fear of losing, fear of failure, inability to trust information, institutions or people making recommendations, desire to get at least some return (the something is better than nothing theory), previous loss sensitation (people are pain averse and more pain actually sensitizes you, rather than de-sensitizes you to it), and there are probably more emotions I'm not thinking of here.

Bottom line, when to buy and sell is complicated neurobiology. The chemical soup that sways our emotional states affect our decision making and in almost every other study I've read have been beneficial to our success rather than a detrimant. This is encouraging because it calls into question the idea that robots will take over the world.

But the researchers on this study say something different (for what it's worth, a recent study published in the latest Journal of American Medical Association said that 30% of research articles published are directly contradicted!). They say that lack of emotion (which some equate with logic and I vigorously deny that false assumption) relates to higher risk-taking and less remorse over losses thus the ability to get back in the game.

Perhaps emotionally-normative people can step back and act brain damaged. If we choose to jump back in the game, recognize a loss for the bump in the road it is and hang with a winner long after all sense would say "sell", maybe we'll up our profits, too.

Then again, maybe not. Why don't you run an experiment and try this theory out? Let me know if it works. Link
More blogs about the woodlands rita.