Brain scans explain DIY investing
September was “hell on earth” for Walter Ribeiro. A 29-year-old resident of Dublin, Ribeiro is heavily invested in Brazilian stocks that were slammed last month. A 21% gain for his portfolio year-to-date turned into a 10% loss.
“I really started to doubt myself: Why did I do that? Am I really doing the right thing,” said Ribeiro.
This is why people hire financial advisers -they help shoulder the stress. At the same time, they can be expensive, they can have conflicts of interest and it’s hard to know which ones to trust.
Fortunately, the services and tools available for do-it-yourself investors are better and more useful than they’ve ever been. New research is helping investors understand what drives their financial decisions, so they can prevent emotions from costing them money .
The new field of neuroeconomics is giving investors insight into the brain chemistry behind their market moves. When volunteers for a lab experiment contemplate risky investments, brain scans show it lights up their anterior insula, the deep part of the brain that processes fear and anxiety .
Other studies show the more anxious a subject becomes in a lab -anxiety can be induced more conveniently with scary images than with junk bonds -the less confident they are in identifying investment opportunities.”
So even contemplating investments can make people basket cases -and then their moods undermine their decisions.
“It’s a double whammy ,” says University of North Carolina finance professor Camelia Kuhnen.A stressful day at work, or a fight with a spouse, can make an investor overly cautious.
And research on the brain chemical dopamine and the so-called “reward center” of the brain shows that the opposite is also true: A great meal or successful date can push investors to pile on the risk.
Genes may even play a role, says Kuhnen. Some people have a gene that predispos es them to be more anxious investors, while others have a gene associated with risk-taking.
Without some radical and very stupid surgery , there’s no way to turn off the anterior insula or the dopamine. But if investors don’t trust themselves to stay cool, they have more online tools today to help them keep emotions in check.
These tools prevent do-it-yourselfers from screwing up by limiting how many decisions they have to make. Target-date funds, for example, automatically buy fewer stocks and more bonds as retire ment approaches.
Online brokers can take clients through a questionnaire, suggest an appropriate portfolio of cheap index funds or exchange-traded funds and then re-balance those funds regularly – all without more than a few clicks of the mouse -for little more than you’d pay if you bought the funds on your own.
Those who want more active control of their money need to accept that they’re not as rational as they think, and work harder to master their emotions.
A small but growing group of men tal health professionals, financial planners and academics is trying to help through a field they call “financial therapy.”
Therapists can teach calming techniques. They can also plumb a patient’s past to help him understand why he behaves irrationally about money .
A parent’s credit card problems may leave an adult child petrified of debt, for example. People find it easier to change their behavior when they understand what’s really motivating it, says Kristy Archuleta, a Kansas State University professor and editor-inchief of the four-year-old Journal of Financial Therapy .
Ribeiro doesn’t have a therapist. But he does occasionally email about investing with a former teacher. Those conversations helped him hold on to his stocks rather than panic and sell at what might be a bottom. “I’m trying to stay calm,” he says. He reminds himself he’s saving for retirement, not trying to make a quick profit.
That’s smart. It’s also a difficult attitude to maintain when markets are crashing and savings are evaporating.
The upside is that it gets easier the more you do it. And mental stamina -the discipline to stick with well-laid investing plans -is a big part of being a successful investor.
The article first appeared on Time of India