Instrumented Interconnecteds Intelligent
September, 24th 2010

I wrote a couple of days ago about IBM’ researcher Mario Monti in a blog posting called Better Decision Making: How Analytics Can Counteract Emotion in Investing. Then along comes word of the impending publication of a new book by Meir Statman, a professor at Santa Clara University who has proved particularly adept over the years at stripping away the mumbo-jumbo from personal investing advice.

In Statman’s book, What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions, he analyzes the role of emotions in poor investing decisions. It turns out that anger, unlike greed and fear, can actually improve an investor’s performance under certain conditions. “Anger can induce risky behavior and undesirable aggression, but anger is not all bad,” Statman writes. “Anger can speed up decisions and prod us to take risk when appropriate.”

He points to the Balloon Analog Risk Task, a computer-based measurement of the willingness to take risks. A participant uses a computer mouse to click on a button that inflates a balloon on a computer screen. The more times they pump, the more money they get. But they lose it all if they explode the balloon. Cautious people invariably quit far short of the breaking point. People who are angry when they take the test tend to inflate the balloon further, accepting on more risk but accumulating more money.

Still, Statman isn’t claiming that members of fringe political parties will make the best investors. He points out that day traders, many of whom are motivated in part by anger at their former stock brokers, haven’t done very well over the long haul. Research shows, he writes, that “Twice as many day traders lost money as made money.”

The lesson here is that investors will do best when they understand their emotions and govern them; and when they rely on knowledge and deep analysis to guide their investment decisions.

Statman’s book won’t be published until Nov. 19. In the meantime, you can check out his blog.

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May 26, 2015
10:44 am

The more times they pump, the more money they get. But they lose it all if they explode the balloon.

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