Know the Signs of Risk-Taking Investing

September 16, 2008
Shirley M. Mueller, M.D.

Physician's Money Digest, May 31 2003, Volume 10, Issue 10

I was discussing money management witha very successful man, whose wealth isbeyond the dreams of most of us physicians.He said, "I hope some of my moneycan be used to do something stupid." I wasunclear as to what he could mean. Heexplained, "You know, something stupid,like a high flier, something risky." I wasastonished. He was talking about amethod of investing that regularly erodesnet worth. Yet, he clearly wanted to do it.

Upon reflection, the man's statementprobably wasn't unexpected. He's a personwho attained his present position, in part,by taking risks. He not only enjoys risks,but may even crave them. For him, using asmall portion of his portfolio for a riskyhigh flier might be justified if it made himfeel good. He did have an abundantamount of money. But what about the restof us? Why consider a risky investment?

One major reason is the chemistry ofour brain. Dopamine release in the brainleads to a feeling of satisfaction. Somepeople have, what geneticists KennethBlum and David Cummings call, "rewarddeficiency syndrome." People with thissyndrome are unable to get sufficient satisfactionfrom the usual rewards in life andneed to up the ante. One way to do this isto take a risk, which releases dopamineand therefore enhanced satisfaction.

The geneticists have identified a variationof a normal gene that preventsdopamine from binding to cells in thereward pathway. Therefore, the satisfactionusually felt with the release ofdopamine is diminished and must constantlybe reinforced. Although the studiesto date have been focused on addictivebehavior, there may be variations ofthe condition (eg, chronic risk-taking,which is a form of gambling).

RECOGNIZE RISK-TAKERS

Day traders from the bubble days arean example of risk-takers. These peoplequit their day job, paid money to use acomputer with specialized market access,and tried to earn money by tradingstocks multiple times during the day. Inreality, only 10% made money. Theexcitement sensation overwhelmed theday trader's logic. The dopamine rushovercame the reality that the vast majorityof day traders weren't making money.

How can you recognize impulsive tendenciesin yourself that lead to risky financialbehavior? The signs are similar tothose of compulsive gambling. You canfind a large list at www.trimeridian.com/warningsigns.html. A few of the mostimportant indicators include:

  • Using risk-taking financial behavior as an escape from problems such as anxietyor depression.
  • Using increasing amounts of money for risk-taking behavior to achieve thedesired excitement.
  • Borrowing money to continue risk-taking behavior.
  • Jeopardizing a relationship or job because of risk-taking behavior.

These characteristics suggest that theimpulse of risk-taking is chronic, and hasled to a loss of money and an erosion ofopportunities or relationships.

DEAL WITH THE BEHAVIOR

Seasoned professionals agree that thedifference between success and failure inequity trading is risk management. Moneymanagement is a defensive activity. If risk-takingis a part of it, it has to be wellthought out and deliberate, not impulsive.

If taking excessive risk is a pattern yourecognize in yourself, there is a way tocombat it. Turn your focus to the rewardfor not taking risk. Ask yourself how motivatedyou are to change the behavior. Ifyou recognize benefits in reducing thatbehavior, and are resolved to do so, thefirst step has been taken. Then, focus onwhat your net worth would be if youbypassed tempting arrangements thatoffer more optimism for return than realreturn. Other more specific therapeuticapproaches can be found at www.trimeridian.com/programs.html. Take sometime out when you recognize you're thinkingof behaving impulsively or hastily.Rethink the issue. At the end of the day,your investment return will reward you.

Shirley M. Mueller is boardedin neurology and psychiatry.She was a practicing neurologistuntil 1995. Since then,she has retrained and is activein the investment and financialplanning area. Dr. Mueller is a seniorwealth advisor at Star Wealth Managementin Indianapolis, Ind. She welcomes questionsor comments at mymoneymd@aol.com.