In a special edition of Discover (November 2008) , I found an interview with Antonio D’Amasio that contained important insights for investors and traders
D’Amasio is the neurologist who established that robust decision-making is as much a function of our emotions as a function of our reasoning capacity. His thesis can be found in the quote from the interview: “It’s not that I am saying the emotions decide things for you. ..It’s that the emotions help you concentrate on the right decision. You (your cortex) still have to do some of the work, but the emotions give you a head start.”
D’Amasio contends that our reasoning depends on a supply of ’somatic markers’ to make a decision. ‘Somatic markers’ are past emotional experiences that serve as a guide. He goes on to postulate that his studies of brain-damaged patients has demonstrated that:
where emotional experiences are not present, then there are no somatic markers i.e. no foundations for the decision-making process. This process includes what shame, stress etc feels like.
One more study is relevant to investing/trading.
In 2005 D’Amasio conducted an ‘investment study’ with three groups of patients:
- a control group: this group did not contain lesions that involved emotional regulation
- patients with lesions: this did not contain lesions that involved emotional regulation (i.e. the lesions did not affect their emotional regulation)
- patients with lesions that involved emotional regulation.
The game was constructed in such a way that a player had a better chance of making a profit over a large sample size if he continued to invest the same size in each round.
D’Amasio found that groups (1) and (2) would reduce size if they lost the prior round. Given the structure of the game, this strategy would lose them money. The third group - the group that had abnormal emotional functions - did not exhibit this response i.e. they did not reduce their bet size and as a result made the most money.
Does that mean that the old-time traders had it right - that for the markets at least we need to trade emotionless?
Well, not quite.
Other studies show that when we ought to draw back because of a real and present danger, those in Group (3) would charge headlong and suffer adverse consequences in situations where Groups (1) and (2) would take take precautions and thus not suffer adverse consequences.
So then what do the studies tell us about success in the markets? A great deal and much of it of a practical nature. But that will have to wait until tomorrow including how D’Amasio’s ideas may provide a clue to the reasons for Madoff’s behaviour.
Refer this blog post to a friend or colleague…
