avoidance systems and defines affective states. The
and pursuit. People who are electrically stimulated in
third and fourth sections survey empirical findings on
brain regions with high concentrations of dopamine
the role of affect in financial markets and on trading be-
terminals report intense feelings of well-being (Heath
havior. The fifth section discusses some of the personal
[1964]). In fact, the dopaminergic pathways of the re-
consequences of pathological disruptions in the func-
ward system are activated by illicit drug use, hence the 110
tionality of these systems. The sixth section discusses
term "dope" to refer to street drugs. Dopamine activity
the neurochemistry and genetics of risk assessment.
in the reward system appears to correlate with subjec-
The final section concludes, and proposes ways indi-
tive reports of positive affect (Knutson [2001b]).
viduals can make better financial choices by taking into
The personality trait of extraversion is character-
account the impact of affect on their decision making.
ized by both reward-seeking and sociability (gregari- 115ousness). Neuroscience researchers like Cohen et al.
[2005] have found that activation of the brain's re-
Reward and Loss Avoidance Systems in
ward system is positively correlated with extraversion
Decisions under Risk
scores. Cohen et al. [2005] also found that the pres-ence of the dopamine D2 receptor A1 allele correlates 120
Perceiving a potential reward in the environment
with extraversion and the strength of reward system
sets the brain's reward approach system into action.
activation when receiving financial rewards.
Overall, the reward system coordinates the search for,
The brain's loss avoidance system is less defined
evaluation of, and motivated pursuit of potential re-
than the reward system. It runs through several regions
wards. The neurons that carry information in the reward
of the brain's limbic system, in particular the amyg- 125
system transmit signals primarily via the neurotrans-
dala and the anterior insula. Its activity is mediated
mitter dopamine. The reward system lies along one
by serotonin and norepinephrine (among other neuro-
of the five major dopamine pathways in the brain, the
transmitters), and can be modulated with antidepres-
mesolimbic pathway, which extends from the ventral
sant medication such as selective serotonin reuptake
tegmental area (VTA) at the base of the brain, through
inhibitors (SSRIs). Acute activation of the loss avoid- 130
the nucleus accumbens (NAcc) in the limbic system, to
ance system can lead to the subjective experience and
the gray matter of the frontal lobes (MPFC) (Bozarth
physiological signs of anxiety (Bechara, Damasio, and
[1994]) (see Figure 1).
Damasio [2000]).
Dopamine has historically been called the "plea-
Chronic activation of the loss avoidance system is
sure" chemical of the brain. More recently, dopamine
indicated by the personality trait of neuroticism (Floury 135
has been found to play a part in functions such as atten-
et al. [2004]), which is characterized by risk aversion.
tion, mood, learning, motivation, and reward valuation
The prevalence of neuroticism has been weakly asso-ciated with the short form ("s"-allele) of the serotonin
transporter gene, which leads to a decrease in serotonin
The Major Structural Components of the Reward
sensitivity (Arnold, Zai, and Richter [2004]).
System. The dopamine neuron cell bodies located
Amygdala activation appears to decrease when po-
in the ventral tegmental area (VTA) have axonal
tential rewards are missed, showing an inverse corre-
extensions through the nucleus accumbens (NAcc)
lation with punishment. The brain's insula is involved
and into the frontal lobes, including the medial
in the anticipation of aversive affective and noxious
prefrontal cortex (MPFC).
physical stimuli (Simmons et al. [2004]) and in selec- 145tive disgust processing (Wright et al. [2004]). Pauluset al. [2003] show that insula activation is related torisk-averse decision making. They found that 1) insulaactivation was significantly stronger when subjects se-lected a "risky" response versus a "safe" response in 150an experimental task, 2) the degree of insula activa-tion was related to the probability of selecting a "safe"response following a punished response, and 3) thedegree of insula activation was related to subjects' de-gree of harm avoidance and neuroticism as measured 155by personality questionnaires.
Kuhnen and Knutson [2005] have demonstrated
the roles of the reward and loss avoidance systemsin portfolio choice and investment error. Their goalswere to determine whether anticipatory brain activity 160in the NAcc and anterior insula would predict risk-seeking versus risk-averse choices, and whether acti-
AFFECT AND FINANCIAL DECISION-MAKING
vating these regions would influence both suboptimal
thus collectively increase their willingness to accept
and optimal choices.
risk.Kamstra, Kramer, and Levi [2001] find that stock
Kuhnen and Knutson's [2005] study combined a
returns are significantly related to season. They ex-
dynamic investment task with functional magnetic res-
amine stock returns during the three months between 220
onance imaging (fMRI). Subjects' actual investment
the fall equinox and the winter solstice, and the three
choices during the task were compared to those of a
months between the winter solstice and the spring
rational risk-neutral agent who maximized expected
equinox. The authors found that variations in the length
profit. Suboptimal choices were defined as deviations
of day contribute to stock returns. In particular, the
from this model, and included both "risk-seeking mis-
market underperformed in the fall quarter and outper- 225
takes" (in which people take risks when they should
formed in the spring quarter. They hypothesize that
not), and "risk-aversion mistakes" (in which people do
affective shifts, like the seasonal mood variations of
not take risks when they should).
seasonal affective disorder, can alter risk preferences
Kuhnen and Knutson [2005] found that while NAcc
and subsequent investment behavior.
activation preceded both risky choices and risk-seeking
Krivelyova and Robotti [2003] found correlations 230
mistakes, anterior insula activation preceded both risk-
between strong geomagnetic storms and world stock
less choices and risk aversion mistakes. These findings
market underperformance over the following six days.
are consistent with the hypotheses that NAcc activation
The authors noted that the psychology literature
represents gain prediction (Knutson et al. [2001b]),
also demonstrates a correlation between geomagnetic
while anterior insula activation represents loss predic-
storms and signs of depression in the general popula- 235
tion (Paulus et al. [2003]). The results indicate that
tion over the two weeks following the storms. Depres-
anticipatory neural activation contributes to rational
sion is an affective disorder characterized, in part, by
choice and may also promote irrational choice. Thus,
risk aversion.
financial decision-making requires recruiting distinct
Seasonal and meteorological factors may contribute
anticipatory mechanisms for taking or avoiding risks,
to market price anomalies via collective changes in 240
while remembering that excessive activation of one
affect (and thus risk preferences). However, the nature
mechanism or the other may lead to mistakes.
of these effects is still debated. Goetzmann and Zhu
Overall, these findings suggest that risk-seeking
[2002] analyzed trading accounts of 79,995 investors
choices (such as gambling at a casino) and risk-averse
from 1991 to 1996, and found that individual investors
choices (such as buying insurance) may be driven by
do not trade differently on sunny days versus cloudy 245
two distinct neural mechanisms involving the NAcc
days. However, the authors did note that market maker
and the anterior insula. The findings are consistent
behavior was significantly impacted by the degree of
with the notion that activation in the NAcc and the
cloud cover. Wider bid/ask spreads on cloudy days
anterior insula relate to positive and negative antici-
were hypothesized to represent risk aversion among
patory affective states, respectively. Activating one of
market makers.
these regions can lead to a shift in risk preferences. This
If affect states do predict market price movements,
may explain why casinos surround their guests with re-
how can we measure investors' average affect in order
ward cues (i.e., inexpensive food, free liquor, surprise
to predict market prices? In the finance literature, senti-
gifts, potential jackpot prizes). Anticipating rewards
ment is the closest available measure. Both newsletter
activates the NAcc, which may lead to an increase in
writers (Clarke and Statman [1998]) and individual 255
investors (Fisher and Statman [2000]) show increasedoptimism about future stock market gains (bullishness)following high recent returns. Additionally, Fisher and
Affect in Market Pricing
Statman [2000] found that as the S&P 500 declinedover a twelve-month period, investor optimism about 260
Over the past five years, several finance studies have
the stock market's future also declined.
directly identified affective factors as likely causes of
Fisher and Statman [2000] noted that the percent-
market price anomalies. Cloud cover, for example,
age of investors who believed the market was over-
has been used as a proxy for negative affect states
valued was paradoxically correlated with expectations
(Schwartz [1983]). Hirshleifer and Shumway [2002]
of future returns from 1998 to 2001. When investors 265
found that cloud cover in the city of a country's major
perceived the market as undervalued, they expected to
stock exchange was negatively correlated with daily
earn lower returns. As sentiment became more opti-
stock index returns in eighteen of twenty-six national
mistic or pessimistic in a positive feedback relation-
exchanges from 1982–1997. In New York City, there
ship with past price changes, so did expectations of
was a 24.8% annual return for all sunny days, and
future gains or losses. Additionally, sentiment levels 270
an 8.7% average return for cloudy days. The authors
appear to be negatively correlated with (and somewhat
cite psychology literature indicating that sunshine in-
predictive of) future market price changes (Fisher and
creases market participants' positive affect, and may
Statman [2001]).
Whether sentiment is a proxy for the activation of
emotionally stable, introverted, and open to new ex-
the reward system (bullishness) or the loss avoidance
system (bearishness) remains unknown. Positive feel-
Steenbarger [2003] performed personality tests on 330
ings (like optimism) are a proxy for reward system
sixty-four traders at a seminar conducted by "Market
activation, and it is very likely that the brain's moti-
Wizard" Linda Bradford Raschke. He found that high
vational systems are engaged when forecasting future
conscientiousness scores (a measure of impulse con-
stock market gains or losses.
trol) were the most reliable predictor of trading success,but that high openness and high neuroticism were cor- 335related with trading problems. He summarizes these
Emotions and Personality in the Trading Pit
findings as "one important lesson: Success in tradingis related to the ability to stay consistent and plan-
Several researchers have investigated the psycho-
driven." Emotional stability and impulse control tend
logical origins of successful and unsuccessful trading.
to correlate with successful trading.
Quantifiable differences have been found between the
personality traits and emotional reactions of successfulversus less successful traders. Personality traits rep-
Financial Decisions and Mental Health
resent affective coping and impulse control strategiesthat differ from individual to individual. We previously
The neural origins of financial risk-taking can
discussed the personality trait neuroticism as a func-
be partially understood by examining the underlying
tion of the loss avoidance system. The personality trait
pathologies and treatments of individuals who exhibit
extraversion is correlated with optimism, an affect as-
disordered financial behavior. Some mental illnesses, 345
sociated with reward system activation. Preliminary
as defined by the Diagnostic and Statistical Manual
neuroscience evidence has suggested that extraverts
IV-TR (American Psychiatric Association [2000]), re-
have more sensitive reward systems during financial
sult in abnormal financial behavior. Brain lesions in the
gain processing (Cohen et al. [2005]).
orbitofrontal cortex, a processing center of the reward
Lo and Repin [2002] took psychophysiological
system, have been found to result in specific abnor- 350
measurements from ten traders during real-time intra-
malities in financial decision making (Damasio [1994],
day trading and found that traders experienced physi-
Shiv et al. [2005]). Taken together, these findings shed
ological reactions during periods of market volatility.
some light on the fundamental mechanisms of financial
They also showed that less experienced traders had
decision making.
significantly greater physiological reactions to mar-
Acute mania is a pathological mood state typically 355
ket volatility than their more experienced colleagues.
characterized by euphoric mood and excessive risk-
The authors concluded, "Contrary to the common be-
taking (including with money). Some manic patients
lief that emotions have no place in rational financial
who have access to brokerage accounts will rapidly
decision-making processes, physiological variables as-
trade stocks, often until the account is drained. One
sociated with the autonomic nervous system are highly
website notes that some manic patients "go on shop- 360
correlated with market events even for highly experi-
ping sprees, spend food money to buy lotto tickets, or
enced professional traders."
try to make a killing in the stock market" (Bernhardt
In a subsequent study, Lo, Repin, and Steenbarger
[2005] examined the trading patterns, personality char-
Mania is caused by overactive dopaminergic cir-
acteristics, and daily affective reactions of eighty
cuits in the brain, including the mesolimbic circuit of 365
traders over twenty-five trading days. Only thirty-three
the reward system. Treatments for mania include an-
of the traders completed the study, in part because of
tipsychotic medications that directly block or limit the
a 20% market decline during the study period. The au-
neural stimulation caused by dopamine release. But
thors concluded that personality traits themselves are
these treatments are often rejected by patients because
not important for trading. However, they did find a cor-
they also dampen the euphoric high that accompanies 370
relation between the strength of affective reactions and
an acute manic episode.
poor trading performance. They conclude, "Our results
For another example, consider that the lifetime
show that extreme emotional responses are apparently
prevalence of pathological gambling disorder in the
counterproductive from the perspective of trading per-
U.S. is less than 3.5% (American Psychiatric Associa-
tion [2000]). Recent neuroimaging studies demonstrate 375
The big five personality traits – extraversion, consci-
a hypoactivity of the reward circuitry in these individu-
entiousness, neuroticism, openness, and agreeableness
als. Pathological gamblers often gamble to "feel excite-
– are directly related to styles of affective processing
ment," which they achieve by activating their patholog-
and impulse control. Fenton-O'Creevy et al. [2004]
ically desensitized reward circuits.
conclude from a study of 118 professional traders at
Pathological gambling is often treated with naltrex- 380
investment banks that successful traders tend to be
one (Kim et al. [2001]), a medicine that blocks opiate
AFFECT AND FINANCIAL DECISION-MAKING
receptors. In the reward system, mu opiate receptors
have shown success in treating hoarding (Saxena and
stimulate dopamine release (Di Chiara and Imperato
Maidment [2004]).
[1988]). Blocking opiate receptors with naltrexone de-
creases dopamine release in the nucleus accumbens,which results in decreased subjective feelings of plea-
The Neurochemistry of Risk Assessment
sure (Jayaram-Lindstrom et al. [2004]). Gamblers tak-ing naltrexone are not compelled to seek reward sys-
An article written by a psychiatrist in February
tem stimulation through further gambling, possibly be-
2000 was headlined "Is the Market on Prozac?" (Nesse
cause they feel reduced pleasure from gambling.
[2000]). The article noted that prescriptions for psy-
Some subtypes of depression, such as "melan-
choactive drugs increased from 131 million in 1988 to 445
cholic" depression, correlate with decreased dopamine
233 million in 1998. The author went on to speculate,
activity in the reward pathway. Melancholic depression
"I would not be surprised to learn that one in four large
also correlates with anhedonia (lack of pleasure), ex-
investors has used some kind of mood-altering drug."
cessive sleepiness, and chronic risk aversion, including
He also remarked that some of his patients on SSRI
in the financial markets.
medications "report that they become far less cautious 450
One patient in treatment with this author for depres-
than they were before, worrying too little about real
sion kept all her assets in cash. Because of her fear of
dangers." He wondered whether the clear disregard
financial risk, she was reluctant to invest in U.S. gov-
for risk among many investors at that time was partly
ernment bonds because she believed the government
attributable to the use of common antidepressant med-
might default on payments. These thought distortions
were directly related to her depressive illness and its
In fact, many executives are rumored to refer to
neurochemical basis. Successful treatment with antide-
Prozac as the "teflon-medicine," because it allows them
pressant medications was followed by small, tentative
to look past perceived threats, decide quickly without
purchases of bonds and mutual funds.
ruminating, and remain more optimistic during stress.
The role of anxiety in biasing financial decisions is
In his bestselling book, Listening to Prozac, psychia- 460
less clear-cut than for mania, pathological gambling,
trist Peter Kramer [1993] frets about the potential use
and depression. Pathological anxiety is characterized
of SSRI antidepressants as "steroids for the business
by exaggerated risk perception and hypervigilance. At
higher levels, anxiety may lead to panic and the psy-
Knutson et al. [1998] gave normal subjects ther-
chophysiological "fight or flight" response (e.g., "panic
apeutic doses of the antidepressant paroxetine (an 465
selling"). Whether the "fight" or the "flight" response
SSRI). Knutson's subjects experienced a reduction in
is triggered depends on past experiences, personality
threat perception and an increase in affiliative behav-
traits, anxiety intensity, and learned coping strategies.
iors. In another study, subjects given the SSRI med-
Isolated mild anxiety leads to an overall reduction in
ication citalopram showed decreased amygdala (fear-
related) activations on fMRI (Del-Ben et al. [2005]). 470
Anxiety can lead to either impulsive overtrading, or
The characteristics of decreased threat perception and
paralysis and avoidance of the markets. If the reward
increased social affiliation mirror the decreased risk
system is overactivated along with the loss avoidance
perception and herding of excessively bullish investors.
system, obsessive overtrading may result. If the re-
It is as if bubble investors are experiencing a partial de-
ward system is underactivated, paralysis and passive
activation of their brains' loss avoidance systems.
anxiety may occur. Mild anxiety and neuroticism cor-
In addition, amphetamines are known to increase
relate with a paucity of serotonin function throughout
the brain's extracellular concentration of dopamine.
the brain (Floury et al. [2004]). These disorders are
Neuroimaging data collected by Knutson et al. [2004]
often successfully reversed with serotonin-enhancing
suggest that amphetamines modulate dopamine sig-
medications like fluoxetine (Prozac).
nals in the NAcc area of the reward system. Anec- 480
Two mental disorders on the obsessive-compulsive
dotal reports indicate that time-release amphetamine-
spectrum merit discussion as well. First, compulsive
derived medications have been used by poker play-
shopping disorder is currently assumed to reside on
ers to win millions of dollars in tournaments. "With
the obsessive-compulsive/anxiety spectrum of disor-
Adderall [an amphetamine derivative] in my system, I
ders, but its legitimacy as an independent mental ill-
am like an information sponge, able to process data 485
ness is still being debated. Moderately successful treat-
from several players at once while considering my
ment has been achieved with the SSRI antidepressant
next action" (Phillips [2005]). The author speculates
(citalopram) (Bullock and Koran [2003]). Second, the
that the increased focus and wakefulness promoted by
disorder of hoarding, whereby sufferers accumulate ex-
amphetamines aids poker playing.
cessive quantities of one type of good or asset, is also
Some medications directly alter risk/return percep- 490
considered a subtype of obsessive-compulsive disor-
tions in behavioral experiments. Rogers et al. [2004]
der. Only behavioral and psychotherapy approaches
report that a common high blood pressure medication
in the beta-blocker family decreased experimental sub-
(Goleman [1998]). For example, according to Schwa-
jects' discrimination of potential losses during a risky
ger [2003], Steve Cohen, the principal of SAC Capital,
task. "Propranolol [a beta-blocker] produced a selec-
is "unquestionably one of the world's greatest traders."
tive change in volunteers' decision-making; namely, it
SAC Capital has a former Olympic psychiatrist, Ari
significantly reduced the discrimination between large
Kiev, M.D., on staff to assist traders in improving 550
and small possible losses when the probability of win-
performance. The use of a psychiatrist by one of the
ning was relatively low and the probability of losing
world's greatest traders certainly supports the notion
was high" (Rogers et al. [2004]). Propranolol is also
that psychological management can benefit financial
one of the most common treatments for "stage fright,"
risk-takers. It may even suggest that people need psy-
and is occasionally used to treat other types of anxiety
chological support to prevent themselves from suc- 555
and aggressive impulsivity.
cumbing to the most common cognitive, behavioral,
Perhaps not surprisingly, other drugs have also been
and affective biases.
shown to affect financial decisions. Lane et al. [2005a]
While observing Steve Cohen trade, Schwager
designed an experiment in which subjects were given
[2003] is "struck by his casualness." Schwager notes,
a choice between a certain low-value positive expected
"He also seemed to maintain a constant sense of humor 560
value option ($0.01) or a zero expected value option
while trading." Cohen's sense of humor and casualness
with high return variability (the risky option). THC-
demonstrate that he isn't taking his trading gains and
intoxicated subjects preferred the risky option signifi-
losses "to heart." So how can the average financial de-
cantly more than control subjects who had been given
cision maker maintain such an emotional balance and
a placebo. Additionally, if they lost money after select-
healthy state of mind?
ing the risky option, THC-intoxicated subjects were
One method of cultivating dispassion about finan-
significantly more likely to persist with it, while con-
cial performance is to maintain non-judgmental beliefs
trol subjects were more likely to move to the positive
and flexible expectations. In particular, practitioners
expected value option.
must realize that not every decision requires abso-
Lane et al. [2004] found a similar preference and
lute perfection or they will invariably be disappointed. 570
persistence with the risky option in alcohol-intoxicated
George Soros [1995] provides an excellent example.
subjects when compared to controls. Deakin et al.
Referring to his well-publicized philosophy, "belief in
[2004] showed that a dose of the benzodiazepine val-
fallibility," he says, "To others, being wrong is a source
ium increased the number of points wagered in a risk-
of shame. To me, recognizing my mistakes is a source
taking task in only those trials with the lowest odds of
of pride. Once we realize that imperfect understand- 575
winning but the highest potential payoff. Lane et al.
ing is the human condition, there's no shame in being
[2005b] found that administration of the benzodi-
wrong, only in failing to correct our mistakes."
azepine alprazolam produced increased selection of a
Soros is thus protected from a crisis of confidence.
risky option under laboratory conditions. The strength
For most people, the possibility of being wrong is
of subjects' risk-seeking personality traits may be pre-
threatening and can cause anxiety. As Cymbalista 580
dictive of how drugs affect their risk-taking behavior
[2003] notes, "The difference between Soros and most
(Lane et al. [2005b]).
other traders is that he accepts fallibility, so he starts
These studies illustrate that common chemical
out by assuming his hypothesis is wrong, rather than
compounds can alter an individual's propensity for
right like almost everyone else." By maintaining a be-
risk. In particular, frequently prescribed antidepres-
lief in fallibility, Soros remains open-minded about his 585
sants and anxiolytics (SSRI medications) appear to
positions, and can minimize denial, disappointment,
decrease threat perception and increase social affili-
and anger if he learns his decisions were wrong.
ation. Time-release amphetamines increase alertnessand smooth the reward system's reactivity to potential
Investor, Heal Thyself
financial gains. A common hypotensive medication (abeta-blocker) decreased aversion to potential financial
Financial practitioners can improve their financial
losses. Findings regarding alcohol, marijuana, and ben-
decision making by learning to interpret and man- 590
zodiazepines suggest these drugs increase risky finan-
age affect states. With adequate self-awareness, affect
states can be viewed as internal signals. As seen fromthe examples we cite here, investors are most likely tomake subpar financial decisions if they are emotion-ally reactive or have poor impulse control. In either 595
How to Make Better Financial Choices
case, a dysfunction of the reward or loss avoidance sys-tems is likely to result. The affect states that can arise
are conditioned by our past experiences, the vividness
The use of psychological techniques to improve per-
of the potential consequences, innate genetic endow-
formance in the business world is increasing rapidly
ments, and personality (among many other factors). As 600
AFFECT AND FINANCIAL DECISION-MAKING
demonstrated in Kuhnen and Knutson [2005], strong
Additionally, note that successful financial practi-
affects threaten to override rational decision making
tioners systematize as much of their decision-making
and should be appropriately managed for optimal per-
as possible. Professionals are prepared for contingen- 660
cies, and they approach mistakes with curiosity, rather
In clinical psychology, there are a plethora of strate-
than dread, fear, or denial. As Lo and Repin [2002] find,
gies for regulating affect states. Use of these strategies
experienced professionals are less reactive to market
may benefit financial practitioners who find themselves
volatility than novices, which may be due to a classical
overwhelmed by affect (fear, euphoria, greed, panic,
conditioning process or their internal beliefs.
etc. . ) during their investment decision-making.
The brain's two motivational systems evaluate po-
The first step in managing affects is to become aware
tential gains and losses independently. We are likely to
of them. Biais et al. [2000] found that "highly self-
experience relatively strong affects when one system is
monitoring" traders perform better than their peers in
dominant and are prone to making irrational financial
an experimental market. While it is important to notice
decisions. Our only clue to a personal condition of im- 670
affect states, it is crucial to avoid placing any value
balanced motivational systems lies in our affect states.
judgment on them. Judgments such as "I shouldn't
If we learn to become self-aware, we can perceive when
be feeling this" or "I'm really good at this" interfere
one system is out of balance. Self-awareness, cultivat-
with the exercise and give rise to further affective reac-
ing a "belief in fallibility," exercising techniques of
tions (annoyance, disgust, anger, frustration, and self-
affect management, and visualizing and practicing dif- 675
congratulation, to name a few).
ficult decision situations can all assist in minimizing
Some common causes of affective reactions among
the irrational and costly impact of financial emotions.
financial decision makers include the size of the po-
We can take action and learn to be more profitable.
tential reward or loss (Knutson et al. [2001b]), thevividness of potential consequences (Loewenstein et al.
[2001]), and any counterfactual comparisons it rep-
resents (Mellers, Schwartz, and Ritov [1999]). Learnwhat financial situations cause affect to arise. Too of-
Based on the research we summarize here, it is ap- 680
ten, affect is left unnoticed and unattended. Place the
parent that recent financial gains and losses change
feelings in a context, and then practice noticing what
investor behavior. Financial market participants need
automatic behaviors you associate with them.
to monitor their own internal reactions to see how their
Meditation, peaceful reflection, and contemplation
decisions are biased by their recent experiences, and
are other disciplines that can be used to improve
they must be careful not to let such biases affect deci- 685
self-awareness. Financial practitioners should practice
sion discipline.
noticing the thoughts, feelings, and attitudes that un-
In particular, investors who have experienced a re-
derlie their decision-making. They can search for pat-
cent loss may note feelings of nervousness and/or other
terns, relationships, and emotionality, impulsivity, or
signs of irrational risk avoidance behavior like hesita-
irritability in these thoughts and feelings. In particular,
tion in entering new positions, excessive deliberation 690
when observing greed and fear, ask yourself: "What
about further potential losses, and seeing more finan-
causes this? Where did it come from? What is it re-
cial threats than usual. They must take special care not
lated to?" By placing the affective information in a
to let that anxiety affect future discipline in trading
personal context, you can become familiar with your
"triggers" and use awareness of your emotional state
Conversely, investors who have recently earned 695
to generate a personal warning signal. By understand-
large gains may be feeling celebratory, extremely intel-
ing and contextualizing your emotions, you can more
ligent, or somewhat invincible. They must also make
easily detect potentially weak decision situations when
sure not to focus solely on potential returns and ig-
nore the risk control and monitoring aspects required
Self-discipline, a facet of the personality trait con-
in making financial decisions.
scientiousness, relates to impulse management. It is es-
Not everyone can maintain a disciplined investment
sential to interrupting the automatic flow among emo-
strategy during the simultaneous gains or losses that ac-
tions, thoughts, and behaviors. Self-disciplined people
company stock market fluctuations. Our research sug-
are better able to control and channel their impulses
gests that investors' undisciplined decisions may be
toward goals. They can identify and delay acting upon
biased in a way that furthers the development of bull 705
their affects. To illustrate, we note that a survey of 600
and bear markets. When the stock market is rising and
foreign exchange traders in Europe and the U.K. by
most people are experiencing paper gains, many feel
Oberlechner [2004] asked traders to rank the most im-
hypomanic, they ignore risks, and they overempha-
portant characteristics for professional success. From a
size potential returns. Consequently, the market risk
list of twenty-three, "disciplined cooperation" ranked
premium tends to decline and stocks rise further, gen- 710
the highest.
erating more upward movements in the bull market.
When the stock market is falling and most peo-
in Male Volunteers." Psychopharmacology (Berlin), April, 173,
ple are incurring paper losses, many become anxious,
1–2, (2004) pp. 88–97.
place more emphasis on the risky attributes of stocks,
DeBondt, W., "Betting on Trends? Intuitive Forecasts of Finan-
cial Risk and Return." International Journal of Forecasting,
increase the risk premium they require to invest in
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