Emotion and Money

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Scientists studying investment behavior say emotions may be what's behind the average person's failure to master the market.

Traders are trained to keep a cool head where money is concerned. But the rest of us?

"It's the individual investors that are often led astray by emotions," said George Loewenstein, an economist at Carnegie Mellon University.

As reported in Discover Magazine, Loewenstein found that emotions and investing don't mix.

A lab demonstration showed how he used a coin-toss gamble to study the investing performance of people whose emotions were altered by stroke damage, compared to people with their full range of emotions intact.

He gave participants $20 and conducted 20 coin flips. Before each flip, they could either keep a dollar or invest it: heads, they lose the dollar. Tails, they win two $2.50, a situation where investing has a clear advantage.

"It's better than you're going to get if you go to Las Vegas," said Loewenstein. "It's better than you're going to get on Wall Street, but people are really deterred by the fear of losing the dollar."

Those whose emotions were intact invested only 58 percent of the time, while patients with damage to their brain's emotional centers invested in 84 percent of coin flips.

As a result, they made more money. Loewenstein says acting on emotion is what separates most of us from the pros, but he thinks we can train ourselves to separate fear from finances.

For more, visit www.sciencentral.com.