STREET DOGS

The latest scientific research on dopamine has implications for investors. First, it shows that our brains love long shots. The less likely or predictable a reward, the more active our dopamine neurons become and the longer they fire, flooding our brain with a soft euphoria. “That positive reinforcement,” says Wolfram Schultz, a neurophysiologist at the University of Cambridge, “creates a special kind of attention dedicated to rewards – that keeps you coming back for more.” It’s what makes you willing to take risks. Without it you would probably keep all your money under a mattress. The dopamine rush we get from long shots is why we play the lottery, invest in initial public offerings, keep too much money in too few stocks and invest with active portfolio managers instead of index funds. Even if you’ve never experienced a big score, you’re wired to want them. Dopamine makes winning big feel vastly better than just winning — and the prospect of its euphoric effect prevents us from focusing on how small the odds of winning big actually are.

The second dopamine discovery is that, as investors, we get stoned on our belief that we know what’s coming. We may get more of a dopamine high from predicting a coming gain than from the gain itself. Day-traders get a “buzz” from just sitting in front of their computers if previous trades were profitable. That buzz will probably make their next trade more aggressive.

The third dopamine finding: once you’ve learnt which cues seem to predict a coming gain, your neurons flood your brain with dopamine that dries up instantly when that gain fails to arrive. This wrenching swing from euphoria to depression may help explain why the market tends to overreact, to the extent that it does, to any short-term disappointment.

Adapted from an article by Jason Zweig

Michel Pireu (pireum@streetdogs.co.za)