Behavioral Finance

I ♥ Investing

Around here we always say "your brain can trick you.

Around here we always say "your brain can trick you." The main task of scientific discipline is to create a framework blocking our natural subjectivity in favor of verifiable, testable facts. Nothing is more expedient in investing—brains simply weren't made to do capital markets so we desperately need a system of objectivity to help us make the right choices.

But emotions are not something to be gotten rid of. Famous sociologist Marvin Minsky says emotions define precisely what it is to be human. Emotions encompass meaning and the drives of life. Without them we're zombies. (For more, Minksy's new book The Emotion Machine is full of excellent insights about the brain and emotions.)

But most people don't understand what an emotion is. It's not just something you "feel," and it's not just a psychological thing churning in your consciousness. Emotions are the drivers of human motivation and activity and they take scores of forms biologically.

For instance, hunger and Love are both emotions—and they're actually pretty similar. (Maybe that's why love and chocolate are always so closely associated.) When your body needs food the brain and stomach communicate via a feedback loop of nerves and neurons. The brain receives the message and puts out orders to release a hormone that makes you hungry. When you "feel" that hunger, your consciousness knows you need to eat.

Well… just about the exact same thing is true for love. If you encounter your significant other (or a potential candidate for such lofty status) your brain initiates a feedback loop with the rest of your body, where a wide range of hormones are sent out…all of it telling you to be with this person. Thus, you "feel" the emotion of love.

Emotions, then, all have a biological and neurological path and signature—they're visceral things just as much as psychological. Today neurologists can track the path of every emotion via MRI scans in the brain and have discovered that most all emotions are similar biologically in humans. Viewed in this way, we see that we have dozens…hundreds…if not thousands of emotions all wired into our systems, all of which are acting upon us at any given moment.

Loving With All Your...Brain
By Elizabeth Cohen, CNN
http://www.cnn.com/2007/HEALTH/02/14/love.science/index.html

Emotions are strategies of evolution. It's a truly ingenious invention of nature to impress biological imperatives on us in the form of hormones and chemicals to get us to act in ways that are (usually) advantageous to our survival. Emotions are mechanisms of natural selection and therefore supersede and pervade our consciousness—often overriding any notion of free will. This can cause a number of irrational biases and strange subjective views.

Even our language is an impediment to understanding emotion. Think about this: the Indian language has dozens of words to classify the multivalent facets of love's bewildering enchantments. The Greeks and Romans explained love with highly nuanced metaphorical mythic characters to account for love's numerous situations and subtleties: Eros as the god of romantic love, Demeter as the love of the mother/parent, and so on. Many poets refer to love as "madness," a sheer abandonment of reason itself! (Romeo and Juliet killed themselves over it!)

Is It Love or Mental Illness? They're Closer Than You Think
By Tara Parker-Pope, The Wall Street Journal
http://online.wsj.com/article/SB117131067930406235-search.html?KEYWORDS=love&COLLECTION=wsjie/6month

But the English language is truly pathetic when it comes to love: we've got just that one word as a catch all for everything. (Seriously, is it really such a great idea to use the exact same word in reference to your affection for your dog and your feelings toward your spouse? True, we "love" both. But do we really love them in the same way? We sure hope not. Can't we come up a few extra words to solve the problem? But we digress…)

People get a big dose of dopamine and a range of other good feeling hormones to their brains when they're romantically involved….and, many of the same hormones flood your system when you make a successful investment.

We generally refer to things like "regret shunning," and "accumulating pride" in very sterile, clinical ways when thinking about investments. But to see them in action is something else entirely:

It's Not U ... :(

Jeff Zaslow, The Wall Street Journal
http://online.wsj.com/article/SB117141957058407986.html?mod=hpp_us_at_glance_columnists

Amazingly, scorned lovers behave in very similar ways to a scorned investor with a tanking stock.

So while you're munching those heart-shaped chocolates with your sweetie this evening, think about the biology of emotion, how love can completely change your brain chemistry and your actions, and remember that similar emotional responses happen all the time with money and investing. It's all emotional; it's all biological; and it's all human.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.