03 September 2005

On Bad Investments

Have you ever made a bad investment? Do you know what constitutes a bad investment decision?
New research appearing in the Sept. 1 issue of Neuron identifies two brain regions that are activated before people make certain types of investment mistakes.

The upshot seems to be that, for better or for worse, emotions play a larger role in financial decisions than is currently recognized.

"These areas of the brain are fairly deep and not associated with math and taxes. They're more associated with emotions or how people feel before they're about to do something," said senior author Brian Knutson, an assistant professor of psychology and neuroscience at Stanford University. "Anticipatory emotions may have some role in decision-making and even financial decision-making."

Anticipatory emotions are only rarely included in economists' calculations of how people make decisions, Knutson said.

Before participants made "risk-seeking" mistakes (such as investing in a stock with a "bad" history), an area of the brain called the nucleus accumbens (NAcc) was activated.

These findings may also explain why casinos employ "reward cues" such as free drinks and surprise gifts as anticipation of other rewards that may activate the NAcc and lead to changes in behavior, Knutson added.

[ Forbes.com ]

A sound advice is not to make financial decisions abruptly. Think it over. If it takes you days before coming up with a final decision, do so. Losing a lot of money because you decided erratically usually entails remorse and regret later on.

5 reactions:

JMom said...

I really am beginning to believe there is truth in this, Doc. I've been reading Suze Orman, and her ideas about our relationship with money is like what you stated, it is an emotional relationship. If you treat money with respect and honesty, like a spouse, it can be good to you. Your fears and insecurities drives money away.

Dr. Emer said...

True, JMom. That's why I think it is only appropriate that emotional considerations be included (on both parties) when making financial calculations.

bayi said...

Interesting. I used to work for a company that operated a couple of casinos.

I have referred my ex-colleagues to this post. :)

Toni said...

How very timely. I just got off the phone with a very persistent telemarketer. The offer sounds good in the beginning but after a couple of days, you end up realizing it's not that good an offer after all. One should remember this during such situations... and window-shopping!

Dr. Emer said...

Bayi: Thank you, my friend. :)

Toni: Do you get those credit-card offers with free resto gift certificates? Soulmate just got one herself and it took her weeks to get the gift certificate. Fancy promotions which are nothing but hot air. Be careful.