Do You Have a ‘Risk-Taking’ Brain ?
This time of year, many investors are looking at their asset allocation, and stock selection.
Perhaps they should be asking themselves, “How dense are my dopamine receptors?”
As it turns out, some people process the brain’s “reward” chemicals differently, depending upon the number of receptors they have,
The BBC reported on a recent study by Professor David Zald
of Vanderbilt University. They noted:
“Scientists say they have found physical evidence of brain differences which may drive “thrill-seekers” to act impulsively or dangerously.
A small study from Vanderbilt University in the US found the biggest “risk-takers” processed a brain “reward” chemical dopamine differently. Scans spotted fewer “receptors” for the chemical on the cells which make it.
The Journal of Neuroscience study could help explain why some are vulnerable to drug abuse and other addictions. . . . Just as in animals, a propensity towards thrill-seeking, spending money freely, and spontaneity, could be linked to lower levels of autoreceptors.
As it turns out, the same cells that produce the dopamine also have a self-regulating system respond to rising levels of the hormone by reducing its production. Preliminary research now suggests that those of us with lower levels of autoreceptors have tendencies towards greater risk taking — spending money freely, thrill-seeking, engaging in spontaneous actions.
What does this mean for investors and traders?
A few things. It goes back to one of our favorite trader admonitions: Know Thyself. All investors should have a good handle on their own personalities, and adjust their strategy and tactics to their own personality, risk tolerances, and natural tendencies.
Rather than make resolutions you won’t keep, try something different this year. Figure out your own brain tendencies — including personality type. Don’t try to become something you are not, and instead, adapt to your own physiology. If you are impulsive, map out an investment strategy that includes handling this part of yourself.
Some people have had success setting up a sequestered, smaller, “thrill” account for trading. Any impulsive trades should be in the fun account, measured in percentages, not dollars. Keep your dopamine-seeking trades here — put and call options, hail marys, shots in the dark — and make sure these trades remain separate from your long term retirement monies.
Your investment returns will thank your brain chemistry for it.
>
Previously:
Apprenticed Investor: Know Thyself
The Street.com, May 03, 2005
http://www.thestreet.com/_tscs/comment/barryritholtz/10221284.html
Sources:
Evidence of ‘risk-taking’ brain
BBC, 31 December 2008
http://news.bbc.co.uk/2/hi/health/7802751.stm
Professor David Zald
Vanderbilt Faculty Home Page
https://sitemason.vanderbilt.edu/site/js36bS
Midbrain Dopamine Receptor Availability Is Inversely Associated with Novelty-Seeking Traits in Humans
David H. Zald, et. al.
The Journal of Neuroscience, December 31, 2008
http://www.jneurosci.org/cgi/content/abstract/28/53/14372
Dopamine Transmission in the Human Striatum during Monetary Reward Tasks
David H. Zald, et. al.
The Journal of Neuroscience, April 28, 2004
http://www.jneurosci.org/cgi/content/full/24/17/4105
January 3rd, 2009 at 8:39 am
Barry,
Excellent suggestion….but I looked up the companies the fellow in the illustration was thinking about…and he’s not much of an investor.
January 3rd, 2009 at 8:50 am
I have one of those objective psycho brains that are good for trading. I can disassociate my emotions from the numbers and turn it all into math on a page. Not perfectly but better than average. Thus my losses and gains don’t register the same for me as for others and that gives me a competitive edge. It is what makes me a good contrarian thinker. It makes me a terrible mate though. Women don’t like those who tend to fade the herd. I can be sacrificially frugal too…another thing the ladies dislike. Maybe it’s just my BO. Well, when the bank account gets large enough I’ll know for sure.
January 3rd, 2009 at 9:24 am
Need to verify this with a psychologist, but when this phenomenon–the constant need for thrills and risk taking–becomes extreme it can result in anti-social personality disorder, or what is more commonly known as sociopathology.
Thrills and risk taking aren’t very importnt for most people. For the vast majority the aversion to financial ruin far outweighs getting rich, safely and security is more important than thrill seeking.
This presented a huge problem for the finance industry. As Benoit Mandelbrot explains in “The Misbehavior of Markets,” markets inherently entail not only risk, but extreme risk. For this reason there has been a deliberate, concerted effort on the part of the finance industry for the past 30 years to somehow, magically make the risk in markets disappear. But as in all magic acts, all their machinations were mere illusion.
Was the finance industry just giving people what they wanted? Is an extreme aversion to risk in a world replete with risk not also pathological. I think it was Octavio Paz in “The Labyrinth of Solitude” that commented on how Americans think they can avoid death and old age by banishing them from the public sphere and pretending they don’t exist. Maybe Americans employ the same mechanism to make their lives more risk-free than they really are, or ever really could be, in the real world.
January 3rd, 2009 at 9:41 am
DownSouth:
You’re awfully well-read for a Southerner
January 3rd, 2009 at 9:55 am
For me the peak in this economic cycle would be reached when we’d all have to wear a helmet while out on a leasurly walk and being bombarded with ads trying to convince us that old is beautiful (nearly got there with Dove ads).
January 3rd, 2009 at 10:01 am
As a life scientist, I find it amazing that people even bother reading these articles. They are about tickling your brain, get you interested in science. But here’s the caveat, rarely do the results get adequate explanation in popular press. Why read primary literature? I’ve published articles in scientific journals where I couldn’t recognize my own work, once it ended up in popular press. I spent two years studying that?
I did enjoy reading Robert Schiller’s irrational exuberance back in the early 00’s.
January 3rd, 2009 at 10:07 am
“In order to understand how humans invest requires more than the study of economics; one also needs to comprehend behavioral psychology. Combining both cognitive science and behavioral economics can yield powerful insights into the conduct of investors.
I recommend Cornell professor Thomas Gilovich’s book How We Know What Isn’t So to investors all the time. ..”
–from the 1st link, above..
BR,
these are great topics..as well, much of the stuff that you did for TSC is Gold..
on the ‘old’ site, .typepad, you had a link to that body of work..I haven’t seen it on the ‘new’ site..
[BR: Next update . . . ]
~~
w/this: “For the vast majority the aversion to financial ruin far outweighs getting rich, safely and security is more important than thrill seeking.
This presented a huge problem for the finance industry. As Benoit Mandelbrot explains in “The Misbehavior of Markets,” markets inherently entail not only risk, but extreme risk. For this reason there has been a deliberate, concerted effort on the part of the finance industry for the past 30 years to somehow, magically make the risk in markets disappear. But as in all magic acts, all their machinations were mere illusion.” Down South, above
Yes, that’s where EMH came from, along with “Diversify, Diversify, Diversify”–tonics offered to calm the senses of the cautious..it’s really twisted, from the same Claque you’ll hear that ‘covered-Call writing’ and/or ‘Put buying for ‘insurance’ purposes’ is tooo Risky..
http://www.thefreedictionary.com/claque
Contra the Claque, this: “All investors should have a good handle on their own personalities, and adjust their strategy and tactics to their own personality, risk tolerances, and natural tendencies.
Rather than make resolutions you won’t keep, try something different this year. Figure out your own brain tendencies — including personality type. Don’t try to become something you are not, and instead, adapt to your own physiology.”– strikes me as Sage advice..
January 3rd, 2009 at 10:27 am
super_trooper Says: January 3rd, 2009 at 10:01 am
s_t,
no doubt the ‘popular press’ is thoroughly enstupified..
but, just to point out, BR, offered links, above, to : “The Journal of Neuroscience”.
this: “Why read primary literature? I’ve published articles in scientific journals where I couldn’t recognize my own work, once it ended up in popular press.” -though, is something Everyone should see for themselves–once you see/understand the content Delta, let alone the Time Lag, from the Primary, to the ‘Popular’…
January 3rd, 2009 at 11:32 am
BR, Thanks for the link to the apprenticed investor series. It is great info and I did not know it was there. Lots of reading for the next week. Good luck to all in 09 and thanks for allowing me to learn from your knowledge…
January 3rd, 2009 at 11:54 am
This is one of my favorite topics and suggest a look at this book as well: “Inside the Investor’s Brain” by Richard L. Peterson.
January 3rd, 2009 at 1:19 pm
A rational humanist who would rightly scoff at alternative medicine, acupuncture and astrology… ridicule the scribblings of a Jean Dixon… mock the phoniness of a Deepak Chopra …but would treat prognosticators and stock pickers as scientific, value-added gurus. Don’ t forget your mantra.
January 3rd, 2009 at 4:03 pm
Woo! The primary investigator of the neuroscience lab I work at, at Harvard Med, (ie, he’s my boss), is also the editor of the Journal of Neuroscience.
It’s always kinda weird when one of my blog haunts collides with another aspect of my life, be it real life, or another, orthogonal blog interest.
January 3rd, 2009 at 4:14 pm
Interesting.. I wonder if there are any structural differences between brains of ‘thrill-seekers’ and ‘troubleshooters’… Solving problems can be as addictive to troubleshooters as skydiving is to thrill-seekers..
January 3rd, 2009 at 7:34 pm
Tx for that sage advice. Henceforth my flutters – calls, 3x short Etf, whatever – are limited to $1000. I can still get up and say, “Oh, yeah, made 15% last week. One week!” without anyone being the wiser
January 4th, 2009 at 12:45 am
I’ve published articles in scientific journals where I couldn’t recognize my own work, once it ended up in popular press.
The do it on the ‘letters’ page too
January 5th, 2009 at 1:43 am
Some research also suggest that addiction is a result of the same brain differences. This is why thrill seeking types of jobs also have much higher rates of addiction, i.e. pilots, race-car drivers, etc…
I wonder if alcoholism/addiction is higher amongst financial types than other industries. My experience says yes but there is little hard data to be found.