Blame Human Nature for Impulsive Trading

Physician's Money DigestNovember 2005
Volume 12
Issue 15

We all have heard overand over again that theway to make money inthe stock market is toimplement a buy-and-hold strategythrough practicing asset allocation andperiodically rebalancing our portfolio.Yet the media gives us the impressionthat the stock market is as constant asan untamed animal, which promptsmany investors to trade rather rashly.Such impulsive actions spurred by themany exciting opportunities presentedto us contradict the time-honored buy-and-hold strategy. Why is there a gapbetween what we see in the media andwhat we know to be true?

Part of the answer rests in humannature. Our brains are constantlysearching for interesting input. Thisscanning is performed largely by automaticmechanisms of which we are notaware. Various parts of our brain (ie,the superior colliculus, lateral pulvinar,and parietal cortex) await stimulation,and when something novel catchestheir attention, these cerebral areasincrease their activity.

Hard-wired Response

Phylogenetically, this trait was neededin our ancestors. Our ancient relativeshad to be able to recognize predatorsin their environment, or face beingharmed or killed. Still today we displaythat trait because our brains are constantlysearching for the unique andnew. Rather than recognizing predators,there are many sales tactics that competeto gain our attention today, andsome are keener than others. Televisionprograms, radio stations, and newspapersneed us to watch, listen, or readtheir programs. If the media does nothave an audience, they cannot continue.Therefore, it is in the best interest of theentire industry to feature subject matterthat captures our attention.

The investment industry is noexception—it knows how to grab us.A dialogue about glamour stocks withpiazzas, no matter how brief, is moreappealing than talking about a companythat simply does what it is supposedto do, even if in 1 year the sexystock has fizzled, and the boring corporationis still on target.

Aphrodisiacal Effects

On the one hand, if we fail to understandthe effect of the media, we willallow stock market hype to act as anaphrodisiac on our investing behavior.As a result, we trade more often, andthis behavior increases investmentcosts and decreases performance. Conversely,if we understand that ourbrains constantly seek interesting stimuli,we can learn to work with ourgenetic predispositions and filter kernelsfrom the bushels of meaninglessinvestment information supplied to useach day simply to gain our attention.

Consider steering clear of the stockmarket media glut altogether if youare experiencing difficulty in this area.Instead of falling prey to your instincts,diversify, practice asset allocation,rebalance, and hang on, sometimeswith white knuckles.

, dissects barriers to

effective monetary decisions so they

become manageable. Her unique training

and experience as a practicing physician

board certified in neurology and psychiatry,

combined with her 7-year investment advisor career, contribute

to her expertise. She welcomes questions and comments


Shirley M. Mueller, MD

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