Investor Minute
The Science Behind the Addictive Nature of Speculation.
“I want a new drug . . .” sang Huey Lewis in the 1980’s hit song. “One that makes me feel like I feel when I’m with you.”
Mr. Lewis is describing a drug that gives him the same feelings as being in love. But according to neuroscience, he can get those sensations without taking any medications if he indulges in reward-seeking behavior such as gourmet eating, gambling, and speculating in stocks.
When we fall in love, neuro-chemicals such as dopamine and oxytocin flood our brains in areas associated with pleasure and reward, producing a number of physical and psychological responses. Among them are feelings of calmness, contentedness, and a tendency to be more trusting.
These are feelings we want to experience again and again. And pursuing these pleasurable emotions can lead to addictive behavior, such as speculating in the stock market.
Richard Peterson, who studies how economic behavior affects the brain, explains that brain scans of people engaged in short-term investing (an immediate reward-seeking behavior) show a significant increase in levels of dopamine.
Their feelings of pleasure are highest during the period when they anticipate their payoff. In fact, the larger the anticipated reward, the more dopamine floods that region of the brain. Looking forward to the reward is a much stronger stimulant than actually receiving the reward. And feelings of mild depression can follow once it’s been received, even if it’s just what they expected.
Losses, on the other hand, are emotionally much more potent. They cause a drop in serotonin, a chemical associated with feelings of well-being. Decreased serotonin levels in the brain are associated with anxiety, depression, irritability, and increased impulsivity. Unfortunately for investors, research has shown that losses carry twice the negative emotional weight as gains.
As you might imagine, this urge to shrug off painful negative feelings and get back to positive feelings can lead to a cycle of addictive behavior. When you speculate in stocks and lose, you immediately want to get rid of those bad feelings. So you invest again, briefly enjoying the anticipation of your imagined gains, until it again becomes a stinging loss, and the cycle perpetuates.
Financial educator Patrick Geddes explains that contributing to this behavior is the faulty belief that we can predict what the market will do.
“That bias makes us easily seduced by the pitches from active stock managers,” he writes, “whose track records on average fail to beat the stock market or index funds over longer time periods. In spite of the odds against beating the market, we still are prone to fall in love with the romance of unrealistically high returns.”
This has all the ingredients for a “bad romance,” to quote another pop singer.
Realizing that acting on emotion, positive or negative, can hinder long-term results, the prudent investor will instead follow a plan carefully tailored to his or her unique situation. Additionally, they will trust their advisor to hold them accountable to stick to that plan when strong feelings are urging them to take short-term action. Click this link to schedule a free call with us today.