Are You Trading or Gambling

We should know that too much of anything, even a good thing, may prove to be our undoing We need to set definite boundaries on our appetites. During the lunch break at a mutual fund industry conference, I mentioned to my neighbor at the lunch table that I'm an investment psychologist. I was overheard by someone a few seats Andrew was seated across the table, and it was apparent that he was interested in my profession. He got my attention and said, Let's talk. Sure, I responded. He stayed seated...

Extraverted Open and Conscientious Investors

Extraverts report that they tend to have exit plans in place for all market contingencies, they sell when their positions appreciate a lot, and they reported higher total returns than introverts. Extraversion was inversely correlated with the results of Questions 65 (hold too long) and 68 (leave open). Keep in mind that this means introversion was positively correlated with those biases. Extraverts deny that they hold their losing positions too long, and they deny leaving winning positions open...

Biological Effects Of Stress

The biological effects of stress are many. Atrophy of the hippocampus, due to severe stress, results in poor concentration, short-term memory loss, increasing impulsivity, and difficulty delaying rewards (time discounting). Chronic stress impairs immune system functioning and increases susceptibility to viral and bacterial infections.11'12 Weight gain and high blood pressure can result from chronically elevated stress hormones. Behaviorally, passivity follows from stressful experiences. High...

Age Sex and Culture

Zhao, and J. Gabrieli. 2002. Sex Differences in the Neural Encoding of Emotional Experiences. Proceedings of the National Academy of Sciences 99(16) 10789-10794. 2. Hamann, S., and T. Canli. 2004. Individual Differences in Emotion Processing. Current Opinion in Neurobiology 14 233-238. 3. Shansky, R. M., K. Rubinow, A. Brennan, and A. F. Arnsten. 2006. The Effects of Sex and Hormonal Status on Restraint-Stress-Induced Working Memory Impairment. Behavior and Brain...

Overconfidence and Hubris

Is There Life after Nobel Coronation Nobel Web. 2. Byrne, J. A., W. C. Symonds, and J. E. Siler. 1991. CEO Disease. Business Week, April 1 52-60. 3. Lenzner, R. 1998. John Meriwether, Former Salomon Brothers Trader, Uses Leverage. Investing Archimedes on Wall Street. Forbes, October 19. 4. Dreman D. 1977. Psychology and the Stock Market Investment Strategy Beyond Random Walk.New York AMACOM, p. 78. 5. Biais, B., D. Hilton, K. Mazurier, and S. Pouget. 2002. Psychological...

Neurochemistry

The Adderall Me My Romance with ADHD Meds. Updated Tuesday, May 10, 2005, at 7 26 a.m. ET. Slate.com. www.slate .com id 2118315 . 2. Aghajanian, G., and E. Sanders-Bush. 2006. Serotonin. Neuropsycho-pharmacology The Fifth Generation Process. www.acnp.org Docs G5 CH2_15-34.pdf. 3. Grace, A. 2006. Dopamine. Neuropsychopharmacology The Fifth Generation Process. 4. The Top 300 Prescriptions for 2005 by Number of US Prescriptions Dispensed 2006. RxList The Internet Drug Index....

Markets on the Mind

I'd be a bum on the street with a tin cup if the markets were always efficient. Even though trillions of dollars change hands in the financial markets every day, most active investors cannot find an edge over their competition. They are vulnerable to psychological biases that impair their investment decisions, and their profitability is eroded. Consider the fate of Internet-era day traders. Day traders typically aim to earn money from small intraday price movements and trends. Most are not...

Stress

Stress is the condition that results when personenvironment transactions lead the individual to perceive a discrepancy whether real or not between the demands of a situation and the resources of the person's biological, psychological or social systems. Stress arises out of the discrepancy between where one is and where one imagines they should be - a conflict between their expectations and reality. If that difference is too large, for too long, chronic stress will physically wear them down,...

Why We Eat Dessert First

Our favorite holding period is forever. Warren Buffet in Letter to Berkshire Hathaway How many people actually complete their New Year's resolutions It shouldn't be difficult, but year after year, whether it is to maintain their ideal weight, save adequately for retirement, or otherwise accept short-term pain for a long-term benefit, very few people can stick to the plan. They simply cannot defer gratification. The difficulty people have in delaying pleasure is a result of time discounting.1...

Too Much of a Good Thing

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities that is, continuing to speculate in companies that have gigantic valuations relative to the...

Brain Basics

Emotional Intelligence Why It Can Matter More than IQ. New York Bantam. 2. Damasio, A. 1999. The Feeling of What Happens Body and Emotion in the Making of Consciouness. New York, Harcourt Brace amp Company. 3. Beer, J. S., R. T. Knight, and M. D'Esposito. 2006. Controlling the Integration of Emotion and Cognition The role of Frontal Cortex in Distinguishing Helpful from Hurtful Emotional Information. Psychological Science 17 May 448-453. 4. Bechara, A., A. R. Damasio, H....

Introduction

This introduction contains three vignettes about famous financial mishaps the late 1990s hedge fund Long-Term Capital, Sir Isaac Newton and the South Seas bubble, and Samuel Clemens a.k.a. Mark Twain and the 1860s silver fever. There is a lot to be learned from such financial failures both in the accounting facts and historical circumstances, but also in the psychology underlying the protagonists' faulty decision making. Reading the stories that follow, take note of the investment choices of...

Acknowledgments

1 wrote this book over several years. So many people influenced its production that I cannot possibly do justice to their contributions here. I am very appreciative of my family and friends, who provided their love and encouragement. Thanks especially to Sarah, my amazing wife, for her unflagging optimism and patience during the writing of the book. My gratitude is profound. I am extremely indebted to the efforts of hundreds of researchers and research assistants whose experiments form the...

Seeing the World in Black and White

Brain Scans Men And Woment

Selling companies that are doing well and purchasing ones that are faring poorly is like watering the weeds and cutting the flowers. JR. Simplot is an American eighth-grade dropout and a self-made multi-billionaire. He made his fortune through saavy investments in potato farming and french fry production. Currently, he owns the largest ranch in the United States, the ZX Ranch in southern Oregon. His ranch is larger than the state of Delaware. Despite his tremendous wealth, Simplot is a modest...

The Effects of Probability Ambiguity and Trust

Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we're trying to do. It's imperfect, but that's what it's all about. Warren Buffett, speech given at the Berkshire Hathaway Annual Meeting in 19891 In 2000, during the run-up to the June Mexican presidential elections, an outsider was poised to overturn the PRI political legacy that had ruled Mexico for more than 80 years. Vicente Fox, candidate of the PAN...

GABA Acetylcholine and Omega3 Fatty Acids

GABA is found virtually everywhere in the brain. The GABA chemical is a small protein fragment an amino acid derivative . GABA slows down electrical activity globally in the brain. Most anticonvulsant medications, used in epileptics for preventing seizures, increase the brain's saturation with GABA to reduce neural excitability and thus prevent seizures . Additionally, many anticonvulsants are used as mood stabilizers, because they decrease the excitability and mood swings of bipolar disorder...

Learning to Cut Losers Short

The people who are successful in this business are the people who are willing to lose money. I'm not better than the next trader, just quicker at admitting my mistakes and moving on to the next opportunity. Some investors fall in love with a stock or a position. Maybe they love the stock because it has had a high return thus far, or they love the idea behind the company, or they work for the company and enjoy owning shares. In any case, when investors become...

Dopamine

Dopamine Reuptake Inhibitor

Dopamine was originally thought to be the pleasure chemical of the brain. A more accurate, modern view is that dopamine is involved in numerous cognitive and motor functions, including being the substrate of desire, motivation, attention, and learning. Illegal drug use is perhaps the most common public association with dopamine. All known addictive drugs act, in part, through dopamine release in the brain. In fact, the word dope, used to describe illegal psychotropic drugs, was derived from the...

What Are Great Investors Like

Investment philosophy is really about temperament, not raw intelligence. In fact, a proper temperament will beat highIQ all day. In the 1983 movie Trading Places, Eddie Murphy a wily street con artist and Dan Aykroyd an Ivy League heir and investor had their identities reversed by two wagering millionaires. Could Eddie Murphy, with no prior experience, succeed in the trading pits Could Dan Aykroyd pull himself out of poverty and homelessness with nothing but his own smarts The comedic pair...