Investing: Why do we enjoy chasing potentially enormous returns?
PUBLISHED: 09:26 02 October 2020 | UPDATED: 09:26 02 October 2020
The gratification we get from achievement, physical or otherwise, helps motivate us further, says finance expert Peter Sharkey.
Much has been written lately regarding the impact of lockdown on the nation’s mental health. Given the radical changes we’ve encountered over the past six months, it’s undoubtedly true that more people have taken time to examine how they live, their priorities and ambitions. Regrettably, it’s also correct to say that not everyone will emerge from lockdown mentally unscathed.
The overwhelming majority will probably take a different view of life post-lockdown, perhaps recognising a need for regular mental de-cluttering and exercise, a practice ideally combined with physical activity. Of the many likely benefits to accrue from this is a more constructive and potentially valuable approach to how we invest. Let me explain.
Not until I joined a swimming club more than four years ago did I even begin to understand what endorphins are, how they’re produced and what they do. Swimming builds endurance, lowers both blood pressure and cholesterol levels, all vitally important when you’ve turned 50. But I discovered there were even more benefits.
Before I began swimming regularly in 2016, like most people, diving into a pool and successfully completing half a dozen lengths was something I had grown used to doing on holiday, usually as a precursor to having a drink.
Delighted with my first attempt, when completing just a few dozen lengths represented the extent of my water-based endurance, I spoke with a friendly lady of certain age afterwards and was brought down to earth upon learning that she had covered a distance three times further than me. There was only one way forward: build endurance by swimming more frequently.
Fortunately, regular exercise results in the body releasing chemicals called endorphins which interact with receptors in the brain and effectively stifle the perception of pain. Endorphins also trigger a positive feeling in the body, commonly known as a ‘runner’s high’, usually accompanied by a euphoric, energising sense of achievement. It is a fantastic feeling and if, for some reason, I miss my early morning swim, I feel sluggish and lethargic all day.
The gratification we get from achievement, physical or otherwise, undoubtedly helps motivate us, whether that involves getting up at some ridiculous hour of the morning for a dip, or persuading us to tackle further challenges. Something similar happens when we invest.
Scientists have identified the brain’s frontal cortex as the area responsible for complex functions, recognising it as the ‘thinking’ part of the brain, although it’s not solely responsible for making investment decisions. It transpires that the men and women in white coats discovered that the possibility of financial reward boosts activity in the nucleus accumbus, also known as the brain’s ‘pleasure centre’.
Apparently, the prospect of recognising an attractive investment return causes the brain’s thinking and pleasure areas to be stimulated simultaneously. However, numerous studies have proved that investment decisions determined even in part by emotion can backfire spectacularly.
A research paper published in 2004 found that when the brain’s thinking and pleasure areas are activated simultaneously, the investment outcome is rarely successful. The paper concluded that most brains are more responsive to the possible size of future rewards than to the probability of achieving them.
In other words, the research reinforced earlier evidence which suggested that humans are instinctively drawn towards ‘investments’ that come with the possibility of providing outsize returns. This probably explains why, when collecting our morning newspaper, we’re often tempted to buy a Lottery ticket too. The potential jackpot return on investment is colossal. Yet to counter this, looking on the bright side of life has paid enormous dividends – as longer-term equity investors would confirm. And someone has to win the Lottery.
Post-lockdown, perhaps the more mentally robust investor will acknowledge the often conflicting role our brains play when investing and avoid an over-supply of emotion into the process.
There’s nothing better than backing a winner, be it a share or a horse, as it boosts our neurological senses, in much the same way that an early morning run or swim can make us feel so much better about ourselves. It surely follows that if the more we exercise, mentally and physically, the more we improve at our chosen activity, it’s a conclusion that also applies to investing
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