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Could Your Brain Be Hindering Your Investments?

Seth Jentner08/14/2013

As you know, some people make trades in their investment accounts daily. But is this really a good idea?

This is an interesting question, particularly in light of all the news we face every day. Many investors “feel” the urge to “do something” in response to news events.

A new study concludes that people with an impaired ability to experience emotions could actually make better investment decisions. Participants in this study had normal IQs. The areas of their brain responsible for logic and cognitive reasoning were intact. But due to stroke or disease, they were inhibited in their ability to experience the basic feelings of fear and anxiety.

The study suggests that a lack of emotional responsiveness gave an advantage in making investment decisions. However, people with undamaged brains were typically more cautious and reactive in their investment decisions and, ultimately, wound up with less money.

In another study conducted by Barclays Bank, it was found that the wealthy make a common mistake of trading too much. Barclays surveyed 2,000 wealthy investors and found that 40% believe they must trade frequently to do well in the markets. But surprisingly, half of those who trade frequently said they believe they traded too much! They were troubled by their own behavior.

These studies support the forth cornerstone of the Jentner Wealth Management investment philosophy:  Emotions can be more powerful than logic. In spite of numerous studies that show how frequent trading typically harms long-term investment performance, many investors “feel” the urge to “do something” in response to daily news events.

I found an interesting quote attributed to Richard Thaler, professor at the University of Chicago’s Graduate School of Business.  He said: “I have not looked at my holdings and don’t intend to. I don’t want to be tempted to jump because I think I’d be more likely to jump in the wrong direction than the right one. My advice has always been to choose a sensible diversified portfolio and stop reading the financial pages. I recommend the sports section.”

For this reason, the prudent investor may want to delegate their investment-management decisions to a qualified investment advisor. This may help them avoid jumping in the wrong direction at the wrong time.

For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s newest white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.