One of the “maxims” followed by the legendary Warren Buffett is to “be fearful when others are greedy and greedy when others are fearful.” But according to a new study by behavioural economists at Caltech and Virginia Tech, few people are actually able to act on this simple advice, which is really one of the best pieces of investment advice anyone can give.
The researchers analysed the brain activity and behaviour of people investing in markets, using a functional magnetic resonance imaging (fMRI) scanner to track and analyse the brain’s responses.
They found that as a bubble was forming, only the wisest investors received a warning signal in their brain that made them uncomfortable and urged them to sell. Only a few investors.
The most common brain pattern the researchers found was one in which, once the bubble had formed, the less wise investors began to behave more greedily, buying aggressively during the peaks.
These investors had much higher activity in the nucleus accumbens (NAcc), which is associated with processing rewards.
The highest earners significantly slowed down their investing activity, sensing a price peak (a bubble), while the poor investors kept buying and bought even more once the price was at its very highest.
The high earners are interesting for this kind of behaviour, because they are emotionally “equipped” to do the hardest thing, which is to sell in a rising market: their brain sends them an early warning signal, even though prices were still going up at that point.
However, even though you might think a person’s brain should already be fully formed, the truth is that anyone can train their brain to the same level as these great investors.
Further reading
- 9 things you can do every day to become smarter
- 7 things the world’s most successful people have in common
Featured image: EconomicsUZH, CC BY-SA 4.0, via Wikimedia Commons.
