“This is your brain on drugs.” A study from Laurence Tancredri, entitled “Hardwired Behaviour, What Neuroscience Reveals about Morality,” showed that “there is a resemblance between the brain of someone predicting a financial gain and that of a drug abuser. A dopamine ‘buzz’ is created by the cue, which prompts us to be more aggressive with our money. When acting on the cue fails to produce a reward, the dopamine level still increases dramatically, leaving us in a profound funk. The result: you overreact and prematurely remove your money from the market. If enough people did that, the market would inevitably drop precipitously.”
Lorne Zeiler, vice-president and associate portfolio manager at TriDelta Financial, would also argue that your behavioural drive often dictates your investment decisions. That’s why Lorne travels the country to educate people about their own brains. Don’t do drugs, kids. Seriously, though, this is how Lorne opens his presentation, “What You Don’t Know Can Be Harmful to Your Investment Returns”: “Have you wondered why your investment returns have been below your expectations? Why others seem to be able to take advantage of buying opportunities, while you sit on the sidelines? Have you sold stocks that seem to continue to go up, while holding on to securities that continue to go down in value? This is because emotion often has a much greater impact on investment decisions than most people realize.” You’ll also learn from Lorne why women make better investors than men. Pretty controversial.
Behavioural Finance: the study of how human behaviour affects our thoughts, decisions, and effectively, our performance in the markets.
Capitulation: the point at which investors “give up” in the market. Usually this occurs at the tail end of a huge market decline or bear market. The investor erroneously sells low.
Duration Management: measure of the sensitivity of a fixed-income investment to a change in interest rates.
Hedge: to offset risk in one investment by investing in another (e.g., one can hedge a decline in the U.S. dollar currency with an investment in gold, since it is seen as a store of value).
See the conclusion on Lorne Zeiler for behavioural finance defined terms and concepts.