Science Rules!
Fantastic developments in neuroscience, behavioral finance, and neuroeconomics have occurred during the past thirty plus years. Brain chemistry and money behavior are inexorably in synch!
Emotions and brain chemistry mediate everything that happens within us, between us (our relationships), and everything that we do. We are a marvelous combination of feelings, brains, and actions.
As shareholders we need to appreciate the “scientific facts of life:” within ourselves, our CEOs, our boards, our managers, and our brokers. Developing an appreciation of this data can only enhance our awareness, our tolerance, and our ability to survive and prosper in the money-mad world of Wall Street.
A primer follows presenting some basic data on developments in the field. The information is drawn from a variety of sources and channels.
Several Essentials (for now)
- Oxytocin is a neurotransmitter in the mammalian brain. It is the chemical of trust, love, and pair bonding. It was isolated and synthesized by Vincent du Vigneaud in 1953. He received the Nobel Prize in Chemistry in 1955. Fast track. Researchers have created a paradigm called the “Trust Game.” Synthetic oxytocin is sprayed into the game room, and “players” start to turn over huge sums of money to strangers to invest. Human beings want to believe what they are told.
- David Laibson, a Harvard economist, discusses the contrast between the “emotional brain” which does not value delayed rewards, is intuitive and, at times, impulsive. The “analytic brain” is patient, calculating, and capable of delaying gratification. The implications for both client management and money management are abundant here.
- Brian Knutson, Northwestern University, has found that individuals are more likely to make risky investments after being emotionally stimulated and/or seduced. Arousal appears to empower people and enables them to engage in “more challenging and exciting” risk behavior. MRI techniques have played a major role in assessing arousal/excitement.
- As Andrew Lo, an MIT finance professor, aptly notes: “investors are human.” So are CEOs, board members, managers, and shareholders. Understanding how the human brain works vis-a-vis money is critically important for investors and shareholders alike. The amygdala, part of the brain’s limbic system, mediates fear. It’s, therefore, important for the investor to avoid panic, and images which provoke it like screaming traders, closing bells, and stock tickers!
- Jason Zweig, author of “Your Money & Your Brain” contends that the thrill of the chase lubricates greed which can be a very dangerous proposition. One can chase and chase and chase, and then suffer the ultimate crash. Seemingly “great ideas” can tank at when least expected: Celera Genomics is a painfully poignant example.
- “Individual differences” theory has always baffled, and intrigued, psychologists. Not everyone wants to be rich. Brain chemistry impacts motivation and money lust. PET scans have found that motivated, ambitious workers have higher release rates of dopamine in the brain. It appears that dopamine is quite important vis-a-vis reward.
- Hot off the press: Claremont Graduate University researchers have confirmed that “Coupons” make people happier and more relaxed!
Such are the joys! The beat goes on…
To contact Christopher Bayer directly, please email Christopher.Bayer@TheShareholderActivist.com.
