Saturday, September 01, 2007

Emotion Can Make You a Bad Investor

When investors experience a monetary loss or gain, what kind of physical effect does it have on the body?

The brain processes expectation in a much more intense way than it processes the actual experience. So, the hope of making money often feels better than actually making money does, and the fear of losing money often feels worse than actually losing money. And those are the two states that often drive your behavior.

Why do our brains respond so powerfully to money?

The human brain developed to solve the very simple problems of finding food and shelter, courting mates, and avoiding danger, and our ancestors had to make simple calculations about risk and reward, all in the absence of money. In the modern world, almost every risk and reward that a human being faces is either symbolized or mediated by money. Money is not a reward in itself, but there are very few rewards you can get where you don't need money. Money taps into the most ancient and powerful emotions that the human brain can experience, and because of that I think a lot of people, when they are making financial decisions, really feel they are thinking and deliberating. What they often don't realize is they are really deciding with their emotion.

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Source: Mayank Sharma

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