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A study by a group of eminent American academics suggests that star performers on the stock market may be even worse and could best be described as âfunctioning psychopathsâ. In a study of investorsâ behaviour, the team from three US universities suggest that people with brain damage can make better financial decisions than the rest of us.
Market traders may feel slighted, but this study comes from the growing field of neuroeconomics, which investigates the mental processes that drive financial decision-making. The experts found that emotions can make investors play it too safe. They claim the emotionally impaired are more willing to gamble for high stakes.
The US team found that people with certain brain injuries which suppress their emotions could make the best stock market traders. They took a selection of 41 people of normal IQ, 15 of whom had suffered lesions on the areas of the brain that affect emotions, and made them play a simple investment game. Those with brain damage significantly outperformed those without, the researchers from Stanford Graduate School of Business, Carnegie Mellon University and the University of Iowa found. The key was the fear that stopped those with ânormalâ brains from taking even the most sensible of risks.
Antoine Bechara, an associate Professor of Neurology at Iowa, suggested that successful investors in the stock market might plausibly be called âfunctional psychopathsâ. These are individuals either much better at controlling their emotions or, perhaps, not experiencing them with the same intensity as others. Baba Shiv, of Stanford, added chillingly: âMany CEOs (chief executive officers) and many top lawyers might also share this trait. âBeing less emotional can help you in certain situations.â
The study is relevant, the authors say, to the âequity premium puzzleâ that has bemused financial experts. This is the tendency of large numbers of investors to prefer to invest in bonds rather than equities, even though the latter have historically always provided a much higher rate of return. When stock markets decline, investors shift to bonds, even though over the long term this is not the best thing to do.
Emotions lead people to avoid risks even when the potential benefits far outweigh the losses, a phenomenon known as myopic loss aversion that scholars have concluded can explain, for example, why people invest in bonds over historically higher-performing stocks.
The study does not mean that it is a good thing to have lesions in emotional regions of the brain. Oh, darn. There goes that plan... Such patients generally make worse decisions than those with intact brains. In this experiment, risk-taking was the most advantageous behaviour, so the participants who were less fearful made the better choices.
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