THE BLOG
05/09/2010 05:12 am ET Updated May 25, 2011

Are You Compelled to Make Bad Investing Decisions?

Here's a question I have always found vexing:

Why do so many intelligent people act so irrationally with their investments? It turns out that we may be programmed to do so.

According to an article in the Wall Street Journal, an MRI of the brains of investors chasing stock returns is the same as those anticipating a chocolate truffle, sex or (for drug addicts) cocaine!

Researchers in neuroeconomics have found that our brains are programmed to look for patterns. When we find one (or even the prospect of one) the neurochemical dopamine kicks in with the equivalent of a shot of heroin to the brain. We are almost compelled to take risks, even though a dispassionate view of the data would indicate that we are investing irrationally.

This process also affects investor behavior in uncertain times, like those we are currently experiencing. Even a hint of bad news will cause our brains generate a sense of "anxiety and dread" driving investors to overreact.

For more studies about these issues, I highly recommend Jason's Zweig's excellent book, Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich.

Brokers and the financial media understand this process. How else can you explain the popularity of live TV shots showing the frenetic activity on the floor of the NYSE, when this background is irrelevant to most investors? Or the high testosterone personalities of financial pundits and many brokers, who breathlessly report on financial news, or call to give investors the latest "hot tip" on the short term prospects of a stock or the next top performing mutual fund?

Those who study finance regard these activities as counter-productive and calculated to enhance the wealth of the securities industry and deplete the assets of investors. Most investors need no reminder that this is precisely the way the system has been working -- and most likely will continue to do so in the future.

Perhaps investors need the equivalent of drug rehabilitation to reprogram their brains so they can rationally assess the overwhelming data indicating that reliance on the traditional securities industry for investment advice is no different than relying on a drug dealer for advice about kicking a drug habit.


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