There’s a growing body of research that suggests humans, especially men, are neurologically predisposed to making bad decisions.
We make investment decisions based on things like machismo, novelty and homesickness.
The Guardian’s Tim Adams sums up recent findings in a brilliant article on testosterone and high finance:
1. If groups of young men are shown pornographic pictures of women and then asked to choose between safe and risky investments, compared with men shown non-pornographic pictures they choose far riskier portfolios.
2. Our brains are designed to seek out novelty, but too much information can overwhelm them; we are generally better at assessing risk when listening to Bach than with the chatter of TV news.
3. Men’s brains tend to shut down after they have proposed a deal, waiting for the response. Scans show that women brains continue to be active, analysing whether they have done the right thing.
4. Humans are the only animals that can delay gratification, a function of the prefrontal cortex. However, the prefrontal cortex only matures after the age of 30, and later in men than women. Before that, we are more likely to seek immediate gratification.
5. Our brains reward social interaction with the release of a chemical called oxytocin. It makes us feel good when we follow the herd. Stock market bubbles are one likely result of this.
6. Our brains are wired for human oxytocin-mediated empathy (or HOME). We are biologically stimulated to love (or hate) what is most familiar to us. We are built to form attachments, to value what we own more than what we do not own. This fact skews the rationality of all our investment decisions.
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