Have you ever wondered why the anchors and the stock market experts on business channels make so many predictions day in and day out? And why they are so happy to make these predictions?
Or what gives you a natural high while predicting the future of the stock markets, or stocks you hold or are about to buy?
Neuroscientists lay the blame on ‘dopamine’ – a chemical in our brains that helps us figure out how to take actions that will result in rewards at the right time.
It’s the release of dopamine in our brains that gives us that high to make the next prediction, and the next one.
It gives us the pleasure of expecting our predictions to turn out true in the future. Like the pleasure you’d derive from predicting the Sensex over the next 12 months, and also expecting your call to turn out true!
Anyways, not just in investing, dopamine is associated with addiction of all types, like drinking, drug consumption, and, gambling. It is also connected with curiosity, adventure, entrepreneurship and accomplishments.
Image Source: National Institute on Drug Abuse (NIDA)
Dopamine is like a ‘feel good’ element that spreads inside your brain with a soft euphoria whenever you get whatever you want.
So, if your last stock market prediction came out true, there will be a greater spread of dopamine in your brain that will lead you to be even more excited in making your next prediction.
Anyways, there is one thing about dopamine that makes it such an interesting subject of study for neuroscientists.
You don’t get a dopamine kick when you get exactly what you expected. Even though rewards are meant to motivate you, getting exactly what you expected is neutrally unexciting.
What fires up a flood of dopamine in your brain is an unexpected gain.
So if you predicted a 20% jump in your stock’s price and the price jumps by 20%, that won’t give you much high. But if the price jumps by 21%, that will make you highly excited to make your next prediction in the hope that even that will give you a greater reward than what you expect.
This is the reason you see traders and speculators (sometimes even level-headed investors) going manic during bull markets, when stock prices are rising beyond what they had expected. And this is what causes their downfall.
If I can make an unlikely financial gain from flipping real estate stocks, or the risky biotech stocks – my dopamine neurons will bombard the rest of my brain with a jolt of motivation.
This will lead me to invest or speculate more in such risky stocks, expecting even (unexpectedly) greater rewards in the future.
But isn’t risk-taking scary?
Of course, it is. Taking chances with our hard-earned money is scary.
But it is the release of dopamine after an unexpected reward that makes us willing to take risks in the first place.
Without the rush of dopamine, our early ancestors would’ve starved to death trembling with fear inside their caves, and current day investors would’ve kept all their money under their mattresses.
Once you score well on a few investments in a row, you become the functional equivalent of an addict – except the substance you’re hooked on isn’t alcohol or cocaine, it’s money.
The funny thing about dopamine and its effect on our brains is that we get the ‘I got it!” effect even when a stock seems to conform to a pattern that has made money before.
This makes us feel sure that we know what’s coming next. This is regardless of whether there’s any objective reason behind such a belief.
This is what makes stock traders and speculators so drunk up on seeing moving stock prices.
Just when a stock is looking to conform to a pattern that was followed by a sharp rise in its price in the past, these people start to expect that a very similar movement will take place again. And this leads them to bet in that stock.
A leading neuroscientist P. Read Montague says…
“You’re probably 99.9% unaware of dopamine release, but you’re probably 99.9% driven by the information it conveys to other parts of your brain.”
Further, Jason Zweig, in his Your Money and Your Brain, writes…
“Of the brain’s roughly 100 billion neurons, well-under one-thousandth of one percent (or around 0.001%) produce dopamine. But this miniscule neural minority wields enormous power over your investing decisions.”
Anyways, how do you get over the ‘prediction addiction’ dictated by this powerful element of your brain, which you now know as dopamine?
How do you win this battle against your own brain?
Of course it’s tough to control the dopamine monster, but there’re definitely some ways you can reduce its control on your investing decisions.
We’ll study that tomorrow.
By the way, what’s your 12-month target for the Sensex?