Ethics

A Reason for Imprudent Investments...(Madeira)

By Jody Madeira

I recently found a story on neuroeconomics in a financial planning newsletter that arrived in my mailbox.  Its conclusions are not staggeringly brilliant or novel, but timely in light of the current economic forecast.  At any rate, it was more interesting to me that the first quarter outlook for 2008.

Apparently, mapping the brain activity of people participating in financial decision making experiments has revealed that certain areas of the brain act in a manner that mimics the same physiological reactions of fear or pleasure.  These "quick reaction" brain activities assist in survival skills, but can lead us to make imprudent investments.  Experiencing a successful investment triggers the release of the pleasure signal dopamine, while experiencing a decline prompts fear; over time, anticipating a success or decline will stimulate these same chemical reactions.  Thus, before we know it, unrealized fears of declines or anticipation of gains can unduly influence our decision making abilities. 

From this point on, the brief article becomes somewhat humorous.  It advises me to "avoid making investment decisions when . . . in the throes of emotion."  Granted, that's not the mindframe in which I usually tackle investment decisions.  One is not usually locked in the passionate embrace of blue chip stocks.  It also counsels me to "tune out the source of your overstimulation" such as by reducing the amount of time I watch CNN (none) and to stop checking my portfolio every hour (again, I'm blameless there).  My favorite words of wisdom, however:  it is impossible to accurately predict the future.  Darn.  Foiled again.

Full post as published by Neuroethics and Law on March 07, 2008 (boomark / email).