Did you know that you are more aroused when you anticipate a gain than when you actually realize the gain? The anticipation puts your reflexive brain into high alert.
Studies using MRI scans show that the part of the human brain that anticipates financial gain is the same area of the brain that experiences sexual pleasure and anticipates food. In fact, it is the expectation or arousal that is the main component of euphoria.
Your brain treats financial gain in the same manner it treats a broader group of rewards such as food, drink, shelter, safety, sex, drugs, and beautiful faces.
Our brains were designed to help us survive through the thrill of anticipation. It is the anticipation circuitry in our brains acting as a beacon of incentive that allow us to pursue longer term rewards. If we did not get pleasure from anticipation we would not be motivated to hold out long enough to earn them.
Anticipation also responds more to the size effect versus the probability of an event. In other words the, how big the reward has a stronger effect than a high probability reward. To quote Zweig: ” when possibility is in the room, probability goes out the window”
Further more, we derive even more pleasure when we have a chance that we may lose money. Think about it, evolution has designed us to pay more attention to rewards when they are surrounded by risks.
So what can you do as an investor to manage your investing arousal (greed). Jason Zweig, in his book “your Money & Your Brain” says that the first thing to know is that your anticipation circuitry will get carried away. He gives some checks and balance ideas to help:
1. Be on the alert for the promise of a big score. Ask yourself : “what does this person know that others don’t” or ” Why is this person letting me in on this great investment secret” and never, never respond to an unsolicited offer.
2. Lock up your mad money and throw away the key. Put 90% of your stock money in low cost diversified index funds that own everything in the market and then put 10% into speculative investments. And, don’t move money from your 90% account into your speculative account.
3. Think twice – making an investment decision while you are aroused by the prospect of a big gain is a bad idea. Go distract yourself for a period of time and let your reflexive brain calm down .