3 MIN PERSONAL FINANCE READS
Research Study: Why Investors with Brain Lesions Had Amazing Investment Returns
Emotions + liquidity is a dangerous combination
Don’t invest when you feel intense emotions.
Unlike buying your own business or real estate, investing in the stock market is a highly liquid investment.
Meaning with a few clicks, you can buy whatever stock you want or sell your whole portfolio. In theory, quickly accessing your money is a good thing; but it’s also dangerous.
That’s why it’s probably not a great idea to make investment decisions when you are feeling intense emotions like fear, greed, or anger.
A 2005 paper found that investors allow their emotions to impact their decisions on investing in a company. How an investor feels about a particular company plays a significant factor in their decision to invest.
This is basically how the “meme-stock” movement was born. A bunch of investors got together during COVID and decided to pour huge amounts of money into companies with crappy business models — but which they had a strong emotional connection to, like GameStop and AMC.
I also have fond memories of going to the mall to buy a new video game and eat at the food court, but that does not make for a rational investment hypothesis.
A truly fascinating research study compared the investment performance of people with lesions on their brains that prevented emotional reactions to randomly selected people who could process emotions normally.
The investors with brain lesions had better returns.
The researchers found that when the typical person with typical emotional responses enjoyed a good investment return, they were less likely to continue investing for fear of losing what they had won.
Those with brain lesions that blunted their emotional reactions were more likely to stay invested — fear did not enter into the equation. The longer they stayed invested, the more money they were likely to make.
This aligns with what we know about the stock market; the longer you stay invested, the more wealth you will likely build.
A 1999 paper looked at how stress and negative emotions impacted investment decisions. They found evidence that investors who make decisions while feeling stress dramatically underperformed investors who were in a calm emotional state. They found evidence that stress and negative emotions can reduce an investor’s self-control and ability to delay gratification, which leads to short-sighted decisions.
Friends don’t let friends trade while stressed.
This was another installment of a new series of quick-read articles called “3 Min Personal Finance Reads,” where we focus exclusively on one single idea about money.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
