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Since the study of genetics became an important part of modern biology, we’ve learned that a surprising number of behaviours and personality traits have a biological, genetic basis. Things that we always thought were a sign of poor moral fortitude, even certain criminal behaviours, have now been convincingly shown to have a significant genetic component.
The latest human behaviour to come under biologists’ scrutiny is investing, and the related behaviour of gambling (both require a person to bet money on their expectation of a particular outcome and of the anticipated actions of other gamblers or investors).
In a study conducted under the auspices of the University of California, Berkeley, the National University of Singapore and the University of Illinois at Urbana-Champaign, researchers studied the brain activity of 217 undergraduates at the National University of Singapore as they engaged in a computer-mediated game of chance that involved betting against an anonymous opponent.
As it turns out, the researchers found that certain neurochemicals, in particular the neurotransmitter dopamine, have been found to play a key role in how the students make strategic decisions around money, betting, and interpreting others’ actions. What’s more, the researchers also scanned the participants’ genomes, taking particular note of twelve genes known to be involved in regulating brain activity, and exploring hundreds of thousands of variants of those genes. They found that there was a strong relationship between particular genes and genetic variants and participants’ behaviour during the game.
According to the researchers, this indicates that your personal genome may play a role in regulating how dopamine affects your behaviour while you’re engaged in investing activities. For example, if you’re an active trader, your brain chemistry may be influencing how you make decisions about when to trade and how much risk to take. Dopamine is involved in regulating people’s behvaiour in a lot of complex social interactions, but this study is the first to show that it plays a clear role in gambling and investing.
Now, one way to interpret research like this is to just assume that what it means is that genetics are destiny. If you are predisposed, genetically, to be a big risk taker and an aggressive gambler, then that’s what you will be, even if those behaviours wreak havoc on your long-term investment strategy.
But that isn’t necessarily true. Even if you are predisposed to aggression or risk taking, it’s only a predisposition – you may be more likely than someone else to display a particular behaviour, but you are not destined to do so. There are plenty of things you can do to prevent yourself from making bad decisions based on your impulses, indeed, half of the secret to being a good investor is to monitor your own emotions, and to not let them dictate the choices that you make.
Here are a few tips that can help you avoid making emotional investment decisions that could hurt your returns.
Have an explicit, written investment plan
Sit down and work out exactly what you want to do with your investment portfolio – when you want to rebalance it, how much risk you want to take on, what kind of asset allocation you want to make. Then, whenever you feel an urge to alter your plans, pause, and as yourself why you want to make the change? Is it possible that you are making an emotional decision, rather than a rational one? Talk over your plans with a financial adviser or a trusted friend, who can tell you whether your proposed change makes sense or seems like an impulse. Having a written plan to refer to will help you avoid making major changes midstream.
Consider rand-cost averaging
Basically, rand-cost averaging is an investment strategy that has you buying a particular rand value’s worth of a given asset on a regular schedule, regardless of price. The idea is that when prices are falling, you buy more of a particular asset while it’s cheap (that you have selected based on your expectations of future returns), and when prices are rising, you buy less at the higher price. Over time, the average price you pay for the asset will tend to the mean of the asset’s price range, and you will accumulate a position steadily, without allowing fear (when prices fall) or greed (when prices rise) to get the better of you.
When you’re investing offshore, it’s especially important to be aware of the potential impact of emotional decision-making on your investment returns. Currency prices tend to be very volatile, which can easily cause investors to panic, but if you have a plan and a steady accumulation strategy, you can build up a diversified global portfolio without losing your head.
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