Sharon Begley's science column in today's Wall Street Journal is an insightful look into the psychological underpinnings of reckless teen behavior. (See below for a link to the article.) As she detailed a number of illicit things angry juveniles do, we couldn't help but think she was also describing the psychology of bad investing. Here are a few comments:
• "Teens tend to underestimate the bad consequences of risky behavior."
• "Mature adults manage to avoid risky behavior not because they're better at conscious deliberation, the scientists say, but because they intuitively grasp dangers. They go with their gut. ‘As a result of knowledge, experience and insight, they grasp the essence, the gist, of a situation,' says Prof. Reyna. ‘They don't stop and deliberate on the costs and benefits of risky behaviors.'"
This sounds a lot like investors acting irrationally in the midst of a bubble or mania, doesn't it? Ms. Begley goes on to explain the reasons for this behavior are likely due to the lack of full development in the frontal lobes of the brain (where most neuroscientists believe the seat of cognition and reasoning lay). In essence, teens' instincts and emotions can rule them easily because the portion of their minds built for reasoning isn't matured yet—and the consequences can be dire.
The same is true for investing. But it should be obvious that it's not just teens who are capable of letting emotions rule. Avoid the instinctual and emotional behavior your brain can trick you into—don't let the haughty teenage part of your mind drive your decisions. Reason, facts, and fundamentals are the tools of an adult investing mind. Give those frontal lobes a workout!
You Might Help a Teen Aviod Dumb Behavior By Nurturing Intuition (Registration Required)
By Sharon Begley, The Wall Street Journal