CHAPTER 4

Neurochemistry

This Is Your Brain on Drugs

 

 

 

“Depressives have Prozac, worrywarts have Valium, gym rats have steroids, and overachievers have Adderall.”

—Joshua Foer, Slate.com¹

 

 

The chemical components of foods, herbs, medicines, and illicit drugs can profoundly alter financial decision making. Some substances, such as alcohol, are well understood in their effects on financial judgment—so much so that casinos offer alcohol free of charge to weaken gamblers’ self-control. However, the behavioral effects of some foods and herbs are little known outside obscure medical journals.

Many pathological mood states (such as depression, mania, anxiety, and obsession), neurological conditions (such as Parkinson’s disease and Alzheimer’s disease), and impulse-control disorders (such as kleptomania, compulsive shopping, and pathological gambling) are known to affect financial decision making: depression is associated with risk aversion, mania with investing overconfidence, anxiety with “analysis paralysis,” and compulsions with overtrading. Interestingly, the financial symptoms of these illnesses can be reduced by medications.

In this chapter, we examine how such chemicals change the perception, processing, and judgment of risk-related information. For investors, the financial effects of ingested chemicals is not an academic issue. With trillions of dollars exchanged daily on global markets, optimal judgment is crucial. A minor improvement in decision-making accuracy can reap millions of additional dollars in profit.

The chemicals discussed in this chapter alter neurotransmission. Neurotransmission refers to how signals travel between neurons. For most people, healthy levels of neurotransmitters such as dopamine, serotonin, norepinephrine, and stress hormones can be maintained using a balanced diet, a supportive social community, spontaneous play, regular exercise, and prayer or meditation. In some people, substance abuse, medications, overwhelming stress, or innate genetic propensities lead to chemical imbalances. It is for those states of imbalance that a fine-tuning of brain chemistry can have its most beneficial effects.

INTRODUCING THE NEUROTRANSMITTERS

What is the use of learning about neurotransmitters in a book about investing? Each individual is uniquely affected by financial ups and downs. They have different expectations and widely varying needs for stimulation, excitement, and security, and their differences are largely a product of their unique biology, including their neurochemistry.

Neurotransmitters are the molecules that carry communication signals between neurons in the brain. One’s personal neurotransmitter endowment is based on (1) genetics and (2) past experiences. In this section, we’ll look at correlations between neurotransmitters and those behaviors and emotions that are relevant to investors.

Some neurotransmitters are active in the cerebrospinal fluid, which bathes the brain’s cells. Small fluctuations in their overall levels lead to profound alterations in the frequency and intensity of neural signaling.

Other neurochemicals are secreted from the ends of neurons, transmitting signals directly to downstream neurons. They act on specific receptors (see Figure 4.1). They fit into these receptors like a key fitting into a lock. These transmitters stimulate a fast electrical or slow genetic response in the second neuron (see Figure 4.2). Neurotransmitters are recycled from the synapse by the neurons that released them.

Very rarely is one neurotransmitter responsible for creating a particular emotion or behavior. Instead, there is vast network of neurons releasing many neurotransmitters, most stimulating or inhibiting the activities of each other. Furthermore, many neurotransmitters act on multiple receptor subtypes (there are currently at least 12 known serotonin² and five known dopamine receptor subtypes³ ), and there are currently 108 identified neurotransmitters. Five of those neurotransmitters act throughout most of the brain: Histamine, serotonin, dopamine, gamma-aminobutyric acid (GABA), and acetylcholine. Of those five, we’ll be discussing serotonin and dopamine in depth, and histamine, GABA, and acetylcholine in brief. Additionally, local actions of opioids, norepinephrine, stress hormones, and omega-3 fatty acids affect behavior and decision making. And if that weren’t enough, common medications, street drugs, and foods also should be considered for their neural effects on judgment.

FIGURE 4.1 The principles of neurotransmission. Neuron A sends signals to Neuron B via its axon.

FIGURE 4.2 A synapse. Neuron A releases neurotransmitters into the synaptic cleft. When they fit into receptors on Neuron B, they activate ion channels and genetic processes, which represent the intended signal.

Serotonin

Since the introduction of the antidepressant Prozac, serotonin has become a household word. In 2005 in the United States, over 150 million prescriptions were filled for serotonin-increasing antidepressant medications.⁴ Brain levels of serotonin are blamed for everyday maladies from premenstrual syndrome (PMS) to severe depression and suicide. Serotonin is a neurotransmitter, and when its concentration or receptor sensitivity changes, judgment is altered.

In the 1970s, researchers discovered that people who committed violent suicide appeared to have lower levels of brain serotonin than people who died by other means. Scientists then developed chemicals that blocked the presynaptic neurons’ natural recycling of serotonin molecules. These serotonin reuptake inhibitor medications (SSRIs) delay the natural clearance of serotonin after it has been released into the synapse. SSRI medications are used for the treatment of several emotional and behavioral disorders. Fluoxetine (Prozac) is the prototype of these compounds.

Since the introduction of Prozac, several other SSRIs have been discovered and marketed by pharmaceutical companies, including brand-name drugs Paxil, Zoloft, Celexa, and Lexapro. SSRI medicines were found to decrease the severity of the symptoms of several disorders: Depression, anxiety, obsessive-compulsive disorder, post-traumatic stress disorder, and premenstrual dysphoric disorder, among others. Fortunately, the SSRIs have been a phenomenal success in reducing the symptoms of depression and anxiety worldwide. Antidepressants are the third largest selling class of drugs in the United States—$11 billion dollars per year. As of 2003, antidepressant use had been increasing at the rate of 17 percent per year. Other classes of antidepressants exist, but I’ll focus only on SSRIs for simplicity’s sake.

There are weak, but significant, genetic links between serotonin transporter genes and self-reported negative emotion. People who have two copies of the short-form (S allele) of the 5-HTT (serotonin transporter gene) are slightly more emotionally reactive and prone to depression than people with two of the long form (L alleles) of the gene.⁵ Furthermore, individuals with two S alleles show greater amygdala activation (a proxy for negative emotion) on negative emotion-inducing functional magnetic resonance imaging (fMRI) tasks than those with two L alleles.⁶

Experimentally, brain serotonin levels can be decreased by removing an essential amino acid, a precursor building block of serotonin, from the diet. The amino acid tryptophan (Trp) is converted into serotonin in neurons. In order to manufacture serotonin, people must consume Trp in their diets, as their bodies have no way of synthesizing it de novo. When Trp is restricted from one’s diet, brain levels of serotonin should fall (as should levels of melatonin—leading to an impaired sleep cycle). Trp is found as a component of dietary protein, and is particularly plentiful in chocolate, oats, bananas, dried dates, milk, yogurt, cottage cheese, fish, turkey, chicken, sesame, chickpeas, and peanuts. Genetic research shows that mutations in serotonin and tryptophan genes each lead to decreased serotonin effectiveness and increased emotional sensitivity.⁷

Dopamine

Dopamine was originally thought to be the “pleasure” chemical of the brain. A more accurate, modern view is that dopamine is involved in numerous cognitive and motor functions, including being the substrate of desire, motivation, attention, and learning. Illegal drug use is perhaps the most common public association with dopamine. All known addictive drugs act, in part, through dopamine release in the brain. In fact, the word dope, used to describe illegal psychotropic drugs, was derived from the word dopamine.

In a famous experiment in 1954, researchers placed electrodes into the “pleasure center” of rats’ brains. When the rats were given the opportunity to press a lever to electrically stimulate this center (a dopamine way station) they did so compulsively. In fact, many of the rats died from exhaustion. The rats avoided food, water, and sex, preferring to self-stimulate with the electrode. Initially, dopamine received all the credit for the rats’ addictive, pleasure-seeking behavior. Later research revealed that the electrodes were stimulating more than just the brain’s dopamine supply. They were also triggering opiate and endorphin release in the brain.

Nevertheless, dopamine became known as a “pleasure chemical.” Currently, the role of dopamine in the reward system is known to be threefold: (1) to motivate reward pursuit, (2) to enhance learning, and (3) to concentrate attention. Psychological effects of dopamine release in the reward system include improved mood and increased arousal. Dopamine makes people feel good, pay attention, and feel motivated. Dopamine is released in five large neural pathways, but we’ll focus solely on one in this book—the reward system (see Figure 4.3).

Some illicit drugs have direct effects on dopamine release and reuptake. Cocaine and amphetamines are dopamine reuptake inhibitors. These substances prolong the release of dopamine and increase its concentration in the synapses. Following long-term amphetamine or cocaine use, dopamine receptors are desensitized and one’s capacity for pleasure and excitement are diminished (often leading to increased depression vulnerability).

FIGURE 4.3 The reward system begins as a nucleus of dopamine neurons in the midbrain and its axons travel throughout the limbic system and prefrontal cortex.

Medications that affect dopamine receptors are typically either receptor blockers that prevent the transmission of dopamine signals (as in antipsychotic medications) or receptor activators. Dopamine receptor activators are used to stimulate movement and cognition in Parkinson’s disease sufferers. Dopamine-activating medications can improve mood and, in high doses, trigger hypomania (a state of heightened confidence and risk taking), and even pathological gambling. In fact, pathological gambling is a frequently recognized side effect of a dopamine receptor (type 3)-stimulating medication called pramipexole (Mirapex). Other dopamine-stimulating medications such as bupropion (Zyban, Wellbutrin), are used as antidepressants and assist in smoking cessation. It is speculated that bupropion decreases nicotine craving by fooling the brain into believing that there is enough dopamine present in the reward system, so none further needs to be released through smoking a cigarette.

The psychiatric disorder attention deficit hyperactivity disorder (ADHD) is treated with dopamine-activating amphetamines (in a slow-release formulation). By increasing the brain’s supply of dopamine, children and adults with ADHD are better able to focus their attention. Long-acting dopamine agents, such as time-release amphetamines and chewed or steeped coca leaves (cocaine releasing), increase stamina, focus, and confidence without as much danger of addiction as immediate-action varieties.

Norepinephrine

Norepinephrine was historically called noradrenaline. Norepinephrine is released during sudden stress. Norepinephrine itself stimulates the release of the stress hormone cortisol, described below. Norepinephrine causes the rush of tension that people feel when precipitously surprised, and it prepares the body for the “fight-or-flight” response.

During acute stress, people experience psychological symptoms of decreased attention span, hypervigilance, all-or-none (black-and-white) thinking, and increased focus. Physical signs of sudden stress include increased heart rate, sweating, flushed skin, and rapid breathing. Many of these symptoms are the direct result of norepinephrine release in the body.

Panic is a result of sudden norepinephrine release from a deep midbrain region called the locus ceruleus. It takes great cognitive control to prevent panicky feelings from escalating into catastrophic thinking and impulsive “fight-or-flight” behavior.

One physiologic change resulting from repeated norepinephrine release is high blood pressure. High blood pressure is common on Wall Street, and it may be a sign that investors are under excessive chronic stress. Common medications used to treat high blood pressure include beta-receptor blockers, such as propranolol. Beta-blockers act on a subtype of norepinephrine receptor. These medications can manage both the physical effects of chronic stress (high blood pressure) and the brain basis of acute anxiety.

According to researchers, propranolol alters risk/return perceptions in financial experiments: “Propranolol [a beta blocker] produced a selective change in volunteers’ decision-making; namely, it significantly reduced the discrimination between large and small possible losses when the probability of winning was relatively low and the probability of losing was high.”⁸ That is, people who took propranolol saw less risk, but their perceptions of potential rewards were not affected. Propranolol is commonly prescribed to reduce “stage fright” during public speaking, and it is occasionally used in the treatment of other types of anxiety. Propranolol helps people take risk by decreasing their fear of large potential losses.

An investor I know commented that his beta-blocker medications, which he takes for high blood pressure, help him feel more clear-minded when judging risky investments. “Beta blockers help me be more rational and not get so afraid of risk . . .” He uses this effect to his advantage by changing his focus. While most investors are preoccupied with potential risks, he can objectively watch other investors: “I can see whether people are buying risky assets.” He uses these observations to inform a contrarian investment strategy. On days he forgets to take his beta blockers, he feels more anxious and reactive to risk-related news.

Opiates

Opiates are also known as endorphins. Opiates induce positive feelings and reduce pain. Opiates are small proteins that act on several subtypes of receptors on the downstream neurons. When they act on the mu opiate receptor, they trigger the release of dopamine. For this reason, scientists believe that opiate-based street drugs, such as heroin and opium, are addictive via their stimulation of the mu receptor (and thus their ability to cause spikes in dopamine levels and increase endorphins).

For some investors the excitement of quick gains can become addictive. Pathological gamblers, whose disease is an addiction to the “thrill” of risk and opportunity, secrete a large surge of opiates in their limbic systems just before they gamble. Pathological gamblers are most likely to gamble if they are home alone, in the evening, thinking about their finances. These can be depressing circumstances, and endorphin release provides a quick “pick-me-up.”

Stress Hormones

Most investors are familiar with financial stress. Stress hormones flood the body after sudden losses, leading to a number of effects on one’s mind and brain. Stress hormones, such as cortisol, are designed to help us respond to sudden threats, and are longer-acting than other stress chemicals such as noprepinephrine, which was described above. See Chapter 10 for more details about the stress response.

After experiencing chronic stress, prolonged elevations of cortisol can cause depression, fatigue, weight gain, and short-term memory loss. Brain scans show that an area of the brain called the hippocampus (where short-term memories are stored) shrinks in size in people undergoing chronic stress. People who are high in the personality trait of neuroticism have decreased cortical volume (gray matter). This brain shrinkage may be caused by the chemical effects of chronic nervousness—oxidative neuronal damage from chronic elevations in stress hormones.

Caffeine

Caffeine is unusual in its diversity of neurological effects. Caffeine itself promotes vigilance in some people, but a sizable minority of caffeine users experience nervousness and irritability. Caffeine is consumed in coffee, black tea, green tea, energy drinks, sodas, and other beverages. While caffeine increases alertness, improves mood, and facilitates faster task performance in the short term, its role in financial decision making appears unstudied. Two notable findings have emerged regarding both high-dose caffeine use and green tea consumption.

Caffeine causes an increase in stress hormone levels. Lovallo (1996) found a 30 percent increase in cortisol levels one hour following a caffeine dose equivalent to three cups of coffee.⁹ It is not clear whether other chemical compounds in coffee, besides caffeine, also have physiological or psychological effects. Many studies have demonstrated that there are no known adverse long-term effects of caffeine use. Caffeine’s exacerbation of anxiety could feasibly increase financial risk perception, but no studies have documented that effect.

In a study of over 1,000 elderly Japanese, frequency of green tea intake was correlated with a more than 50 percent reduction in age-related cognitive impairment. ¹⁰ Coffee, black tea, and oolong tea consumption did not demonstrate such an effect. Research into the cognitive effects of caffeine consumption has yielded few notable results.

GABA, Acetylcholine, and Omega-3 Fatty Acids

GABA is found virtually everywhere in the brain. The GABA chemical is a small protein fragment (an amino acid derivative). GABA slows down electrical activity globally in the brain. Most anticonvulsant medications, used in epileptics for preventing seizures, increase the brain’s saturation with GABA to reduce neural excitability (and thus prevent seizures). Additionally, many anticonvulsants are used as mood stabilizers, because they decrease the excitability and mood swings of bipolar disorder (historically called manic-depressive illness).

Some medications (such as benzodiazepines and alcohol) increase brain levels of GABA. Common benzodiazepine medications include Valium, Restoril, Klonopin, Ativan, and Xanax (at one time the most widely abused prescription medication). Alcohol is known as a central nervous system depressant due to its effect on GABA receptors. Alcohol may disinhibit some people’s behavior because it relaxes frontal cortex control over impulses arising in the limbic system.

Of course, nothing is simple in neuroscience. There are two types (and further subtypes) of GABA receptors, and both benzodiazepines and alcohol have effects on one subtype that has been linked to their addictive properties. Medications that act on the other subtype exclusively are being marketed as nonaddictive sleeping medications.

Acetylcholine helps the brain to encode short-term memories. Drugs that decrease acetylcholine levels, including over-the-counter antihistamines such as diphenhydramine (Benadryl) and many common pesticides, impair short-term memory encoding and learning. Alzheimer’s disease is characterized by memory loss and behavioral disinhibition. Most medications designed to treat Alzheimer’s work by increasing brain acetylcholine levels, and thus strengthening one’s recall.

Research has showed that people who eat more omega-3 fatty acids in their diets are happier, less impulsive, and healthier than others. Omega-3 fatty acids comprise 8 percent of the brain’s fat content. Omega-3 fatty acids are most concentrated in cold-water fish oil (anchovies, herring, mackerel, sardines, salmon), seeds (flaxseed, pumpkin, and sunflower), nuts (almonds, Brazil nuts, peanuts, pine nuts, walnuts), and sea vegetables (arame, nori). Omega-3 fats improve neuron cell wall flexibility and enhance regeneration after damage.

Omega-3 fats compete with omega-6 fatty acids in a biochemical pathway called the arachidonic acid pathway. Corn oil has become the number one source of fatty acids in the Western diet. The high omega-6 content of corn oil outcompetes omega-3 fats in the arachidonic acid pathway and may lead to proinflammatory changes in the body that exacerbate atherosclerosis (heart disease) and autoimmune diseases. In one study with British prisoners, those given omega-3 and vitamin supplements had a 20 percent reduction in disciplinary infractions, presumably related to improved impulse control.¹¹ Omega-3s are inadequate in the modern Western diet, and fish-oil supplements have been found useful in various studies for improving mood, impulse control, immune function, and emotional stability. In general, investors may benefit from eating more fish or omega-3 supplements.

THE CHEMISTRY OF (FINANCIAL) MENTAL DISORDERS

The neurochemical origins of financial risk taking can be partially understood by an analysis of disordered financial behavior. Some mental illnesses, as defined by the diagnostic manual for mental health professionals, the Diagnostic and Statistical Manual of Mental Disorders IV-TR (2000), result in abnormal financial decision making. For example, acute mania is a pathological mood state typically characterized by euphoric mood and excessive risk taking (including with money). Some manic patients who have access to brokerage accounts will rapidly trade stocks, often until the account is drained. One Web site notes that some manic patients “go on shopping sprees, spend food money to buy lotto tickets, or try to make a killing in the stock market.”¹² Ronald Fieve is a psychiatrist who has collected stories of manic and overconfident investors in his book Moodswing. ¹³

Mania is caused by overactive dopamine and norepinephrine circuits in the brain, including in the reward system. Treatments for mania include antipsychotic medications that directly block or limit the neural stimulation caused by dopamine release. These treatments are often rejected by patients because they also dampen the euphoric high and peak confidence that accompany an acute manic episode.

The lifetime prevalence of pathological gambling disorder in the United States is less than 3.5 percent. ¹⁴ Recent neuroimaging studies demonstrate a hypoactivity of the reward circuitry in these individuals. Pathological gamblers are gambling to feel excitement, which they achieve by activating their uncommonly desensitized reward circuits.

While behavioral therapy is one of the best treatments for pathological gambling, some medications can significantly decrease the frequency of gambling. The most effective medication treatment for pathological gamblers is naltrexone (ReVia), ¹⁵ which is a mu opiate receptor blocker. In the reward system, mu opiate receptors stimulate dopamine release.¹⁶ Blocking opiate receptors with naltrexone decreases dopamine release in the nucleus accumbens, which results in decreased subjective feelings of pleasure. ¹⁷ Gamblers taking naltrexone are not compelled to seek reward system stimulation through further gambling, possibly because they feel reduced pleasure from gambling.

Some subtypes of depression, such as “melancholic” depression, are characterized by decreased dopamine activity in the reward pathway. This reward system hypoactivity leads to several depression symptoms, including difficulty experiencing pleasure, excessive sleepiness, and (importantly for investors) chronic risk aversion. Bupropion (a weak dopamine stimulant) and amphetamines (a stronger stimulant) are often used to treat melancholic depression.

Anxiety also biases financial decisions. When pathological, anxiety is characterized by exaggerated risk perception and hypervigilance. When mild, anxiety may slightly increase individual risk taking (be aware that moderate levels of stress prompt dopamine secretion), and it is often noted in the media that the markets climb a “wall of worry” when investors are nervous. At high levels, anxiety gives way to panic selling as investors run for safety. For an individual investor, a number of factors influence whether panic is triggered, including one’s anxiety-coping strategies, past losses, personality style, and general risk sensitivity.

Two mental disorders on the obsessive-compulsive spectrum merit discussion. Compulsive shopping disorder (CSD) is currently assumed to be a subtype of the obsessive-compulsive disorders. Moderately successful treatment of compulsive shopping can be achieved with the use of an SSRI antidepressant (citalopram).¹⁸ The disorder of hoarding, wherein sufferers accumulate excessive quantities of one type of good or asset, is also considered a subtype of obsessive-compulsive disorder. Currently, only behavioral and psychotherapy approaches have shown success in the treatment of hoarding.¹⁹ While CSD sufferers report tension relief as a result of purchasing, hoarders have a different problem. Hoarders are unable to get rid of items they have already collected.

THE NEUROCHEMISTRY OF FINANCIAL PERFORMANCE

The use of chemicals to enhance performance is controversial. Professional athletes, such as the baseball player Barry Bonds, have been castigated by the media for using steroid precursors to improve their baseball statistics. Lance Armstrong’s teammate Floyd Landis yielded his 2006 Tour de France title following artificial testosterone use. The list of athletes discredited for using performance-enhancing chemicals is long.

As opposed to physical performance, decision making cannot be easily improved with chemicals. Nevertheless, caffeine and alcohol are two of the most widely used mind-altering substances in the world, largely due to their cognitive effects. This section of the chapter suggests that cognitive performance can be improved with certain medications, foods, and illicit substances, but there are no “easy” fixes.

It is currently considered unethical to use medications to enhance mental performance. Such practice has been dubbed “cosmetic psychopharmacology.” I have not done this in my psychiatry practice. Yet the use of substances to improve cognitive performance is already occurring.

The U.S. Air Force gives its pilots “go pills” (time-release amphetamines) to improve their stamina during long flights. However, amphetamines have many potential side effects (including paranoia and anxiety) and are of unknown benefit in dynamic thinking exercises. “Go pills” were investigated as the possible cause of a friendly fire incident in Afghanistan, in which Canadian soldiers were bombed by an American pilot returning from a 10-hour mission. The pilot believed he was under attack from the ground, and he became impatient while awaiting target clearance from his operations base.

As many as 20 percent of college students report having used amphetamines to help them study.²⁰ The consequences of this type of abuse can be tragic. My psychiatrist colleagues have treated Stanford undergraduates in the psychiatric emergency room who became psychotic after inadvertently overdosing on Ritalin and Adderall (amphetamine derivatives used to treat ADHD), which they had been using to improve their stamina during final exams.

One nationally known poker player claims that a time-release amphetamine-derived medication (Adderall) helped him win millions of dollars in tournaments. “With Adderall in my system, I am like an information sponge, able to process data from several players at once while considering my next action.”²¹ The author speculates that it is the increased concentration, wakefulness, and stamina promoted by amphetamines that aids poker playing, especially at the end of a long tournament day. In his case, where the goal is short term and the benefits are clear, amphetamines may improve financial performance.

A new stimulant medication called modafinil has less serious side effects than amphetamines and is nonaddictive. I have known traders who took a low dose of modafinil (Provigil) for ensuring alertness during the trading day, but the results were unclear.

One psychiatrist I met believes that modulation of medications may help some traders perform better. He mentioned that a trader patient of his takes a lower-than-therapeutic dose of lithium for his bipolar disorder. This patient is a currency trader, and both he and his boss want him alert overnight to watch world markets and incoming news. When taking too much lithium, he was merely “average” in his speed and ability, and he slept eight hours per night. When not taking lithium, he quickly became hypomanic—he took too much risk and traded too often. So he, his boss, and the psychiatrist had worked out a system for preventing emotional extremes by taking a low dose of lithium. A low level of adaptive traits remained—a decreased need for sleep, high energy, self-confidence, and risk seeking. These symptoms were present for the 16- to 20-hour workday of this currency trader, and he appreciated the benefits to his trading performance.

SEROTONIN AND MARKET BUBBLES

An article written by psychiatrist Randolph Nesse in February 2000 was headlined “Is This Market on Prozac?” The article noted that prescriptions for psychoactive drugs increased from 131 million in 1988 to 233 million in 1998. The author went on to speculate, “I would not be surprised to learn that one in four large investors has used some kind of mood-altering drug.”²² Nesse remarked that some of his patients on SSRI medications “report that they become far less cautious than they were before, worrying too little about real dangers.” He wondered whether the clear disregard for risk among many investors of the time could in part be attributed to the common use of antidepressant medications.

Some executives refer to Prozac as the “Teflon medicine” because it allows them to look past perceived threats, decide quickly without ruminating, and remain more optimistic during stress. In the best-selling book Listening to Prozac, psychiatrist Peter Kramer frets about the potential use of SSRI antidepressants as “steroids for the business Olympics.”²³

Professor Brian Knutson at Stanford University gave normal subjects therapeutic doses of the antidepressant paroxetine (an SSRI). Knutson’s subjects experienced a reduction in threat perception and an increase in affiliative behaviors.²⁴ In another study, subjects who were administered the SSRI medication citalopram showed decreased amygdala (fear-related) activations on fMRI.²⁵ These characteristics—decreased threat perception and increased social affiliation—mirror the blind optimism and herding of excessively bullish investors. It is as if bubble investors have partial deactivation of their brains’ loss-avoidance systems.

Robert Rogers at Oxford University has performed several studies using Trp depletion to decrease brain serotonin levels. Rogers found that Trp depletion led to an inability to attend to the size of a potential gain—Trpdepleted subjects poorly differentiated between large or small gain sizes. For investors, Trp depletion (and low serotonin levels) might impair the distinguishing of large from small potential payoffs, leading to overtrading for smaller stakes.

Other researchers have found that Trp depletion causes the time discounting curve to become steeper, so investors prefer small immediate rewards over larger, later rewards when their serotonin levels are low. This suggests that low serotonin levels (due to Trp depletion) may, in fact, prompt impulsive reward pursuit and overtrading.

From an evolutionary perspective, the relationship between low serotonin and overtrading makes sense. Investors who have suffered a series of losses want to change their circumstances, if only to get out of the hole they’ve found themselves in. They are willing to accept any possible investment to get out of their deficit, impulsively pursuing small possible gains.

One patient in treatment for depression kept all of her assets in cash. Because of her fears of taking financial risk, she was reluctant to invest even in U.S. government bonds. She was concerned that the U.S. government might default on payments to bondholders. While a U.S. government default is a risk, it is a very small risk. She was paralyzed by her exaggerated risk perception, unable to realistically perceive the risks and rewards of various investment options open to her. Her thought distortions were directly related to her depressive illness and its neurochemical basis—low serotonin. Successful treatment with SSRI antidepressant medications was followed by improved mood and small, tentative purchases of bonds and mutual funds.

RECREATIONAL DRUGS AND ALCOHOL

Numerous drugs of abuse alter financial decision making. In general, drugs such as THC (tetrahydrocannabinol), alcohol, and benzodiazepines have similar effects on risk taking. THC, the active ingredient in marijuana, biases financial decisions. When given a choice between a certain but low-value positive expected value option ($0.01) or a zero expected value option with high return variability, THC-intoxicated subjects preferred the risky option significantly more than control subjects who had been administered a placebo. If they lost money after selecting the risky option, THC-intoxicated subjects were significantly more likely to persist with the risky selection, while controls were more likely to move to the positive expected value option.²⁶

Alcohol similarly promotes needless risk-taking behavior. Alcohol-intoxicated subjects, in the same experimental task described immediately above, were more likely to choose the risky option than controls.²⁷ Researchers have found that alcohol use correlates with decreased loss discrimination. That is, people don’t attend to the difference between large and small losses when intoxicated with alcohol. This is the same effect observed with propranolol and is likely a result of alcohol’s action on the benzodiazepine receptors, which reduces risk perception. ²⁸

Benzodiazepines increase preference for high potential rewards, especially when odds are low, and they increase overall risk taking. In one experiment, a dose of the benzodiazepine Valium increased the number of points wagered in a risk-taking task only in those trials with the lowest odds of winning but the highest potential payoff.²⁹ In the risk-taking task used for both THC and alcohol experiments above, administration of the benzodiazepine alprazolam produced increased selection of the zero-expected value risky option. Importantly, there is evidence that whether an individual is vulnerable to the behavioral effects of drugs of abuse depends on their personality style: “Risk-seeking personality traits may be predictive of acute drug effects on risk-taking behavior.”³⁰

Alcohol

Alcohol, in small doses, is disinhibiting. It decreases anxiety and makes drinkers feel more sociable and confident. Many investors drink at the end of the workday to “shake off” the tension. The social contact involved in drinking is positive, and drinking after work helps investors chemically drown out the nervous feedback from their overstimulated fear circuits. Unfortunately, alcohol use can easily lead to unexpected longer-term decision-making problems.

The problems with alcohol use by investors may be threefold. Alcohol can be addictive and tolerance promoting, and can lead to subtle long-term performance decrements. Alcohol allows investors to avoid dealing with one of the core problems in their investing, which is often anxiety about financial uncertainty. The short-term withdrawal effect (the next-day hangover) of alcohol is characterized by fatigue, mental dullness, and a lack of creativity and productivity. Investors with a hangover have endured a night of impaired sleep and as a result they have impaired learning and impulse control, and are delayed in their response times compared to the usual.

Cocaine

Cocaine and amphetamines have been used historically as energy boosters. South American indigenous people in the Andes often chew coca leaves or drink coca-leaf tea for extra energy and stamina when doing high-altitude physical labor. Yet in rapid-acting forms (such as powder or rock), cocaine causes a rapid spike in dopamine levels and is very addictive.

Cocaine addiction appears to be more likely among those of lower social status. Monkeys who are higher in the social dominance hierarchy have higher levels of brain dopamine and do not become addicted to cocaine as easily as those who are lower in the hierarchy.³¹ Presumably, higher-status monkeys do not need external boosting of dopamine to feel good—they already produce enough dopamine internally to feel confident and strong.³² Investors with low self-esteem, and those who perceive themselves as being less successful than their colleagues, are more likely to abuse cocaine. Cocaine abuse was rumored to be widespread on the floors of major American stock exchanges, especially in the 1980s and 1990s. Cocaine was probably used by floor traders to replenish or boost dopamine in their exhausted reward systems, effectively boosting their confidence and motivation during the workday.

The above studies illustrate that common chemical compounds, both medications and drugs of abuse, can have profound effects on an individual’s risky choice. In particular, frequently prescribed antidepressants and anxiolytics (SSRIs) appear to decrease threat perception and increase social affiliation. Time-release amphetamines increase alertness and smooth the reward system’s reactivity to potential financial gains. Common blood pressure medications (beta blockers) decreased aversion to potential financial losses.

The point of all this information on neurochemistry is that many commonly ingested substances alter neurotransmission and financial judgment. Investors should be aware of how their chemical intake may be affecting their financial decision making.

 

In Part II of this book, the effects of emotions on financial judgment will be described in detail.