Two weeks ago I shared some thoughts from the very interesting book, Inside the Investor’s Brain, by Dr. Richard Peterson. Here are some more of his insights. Some of the initial parts (e.g. feelings) are fairly self-evident but are necessary foundations for later comments and conclusions. [reminder: page numbers are in parens]

Feelings
Feelings are the result of the comparison of one’s expectations and the actual experience. So when one expects a positive event (gains in one’s investments) and this happens, there is a positive response (elation). When you expect a positive event and the event doesn’t occur, a negative feeling response occurs (e.g. disappointment). If you expect a negative event (losses in your investments), but a positive event occurs instead, you have a positive response (e.g. relief). If you expect a negative event, and it occurs, a negative response occurs (e.g. anxiety).
The intensity of the feelings experienced is the result of three factors:
a) the size of the discrepancy between expectations and reality;
b) one’s experience with similar situations; and
c) any significant associations or memories. (39)

So, obviously, the larger the gain in relation to your expectations, the “higher” you will feel. Or the greater the loss in relation to your desires, the deeper the anguish will be.

Comparisons

I find the process of comparing ourselves to others to be one of the biggest contributors to our state of emotional being. And, as I have emphasized previously, we typically compare ourselves to others whom we pereceive to be “better off” than we are (and often our perceptions are incorrect). Thus, we can become angry, disappointed, or envious. Conversely, if we compare ourselves to less well off than we are, we can be quite thankful for our lives (and sometimes feel guilty, too.)

Dr. Peterson states:
“Emotions often arise when one compares his or her life circumstances to those of others.” (40) “This comparison phenomenon occurs throughout the business world, where measures of self-esteem and accomplishment are often made tangible. Silicon Valley billionaires may feel jealous of the size of each others’ yachts, leading to a boom in the construction of ultra-luxury vessels as each tries to outdo the others. A non-billionaire sailor may feel happy simply to be in the same marina as such beautiful boats.” (41)
Peterson goes on to propose that “when one measures success by comparing oneself to another, . . . then winning the comparison makes one feel happy, but also deprives one of the motivation to continue working hard. .. Alternatively, when success is measured according to an internal benchmark, … then it remains an enduring motivation and leads to long-term excellence.: (41)

Defense Mechanisms

Sometimes we employ the use of psychological mechanisms to defend ourselves from feeling negative feelings (which we typically don’t like to experience) such as guilt or anxiety. One defense mechanism is rationalization where an individual attempts to provide a rationale (a logical reason) for their choice or behavior which created a negative result.
Peterson cites one type of rationalization investors often use called motivated reasoning. “Motivated reasoning is thinking biased to produce preferred conclusions and support strongly held opinions.” (45) [ASIDE: There seems to be a lot of this type of thinking going on in the political realm, on both sides of the spectrum.]
An important implication is that “people who engage in motivated reasoning perform more poorly on decision-making tasks than those who are less defensive about negative information. . . George Soros indicated that one of the keys to his acumen is the ability to non-judgmentally think about why his investment reasoning process may be wrong (his theory of fallibility).” (46)

Investing and Feelings

“ ‘If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.’” [George Soros] (91)

The Jackpot Trap. Studies of individuals in casinos, reveal the following thinking patterns of individuals gambling. People tend to focus more on the size of the potential reward (the jackpot), rather than the probability of winning.
There are a number of cognitive misjudgments that occur during games of chance (and which can impact financial investment decisions, as well.) Dr. Peterson cites research that found the following:
“When an outcome is possible but not probable, people tend to overestimate its chance of occurring. This is called the possibility effect. (Frequently seen during huge lottery jackpot payoffs.)
When an outcome is likely, people to tend to underestimate its odds. This bias has been named the certainty effect.
Events of probability less than 40 percent are susceptible to the possibility effect. Outcomes with greater than 40 percent probability are in the realm of certainty effect.” (177)
“For the most part, there is dissociation between intellectual judgments of risk and emotional feelings about risk. Emotions in uncertain or risky situations are more sensitive to the possibility rather than the probability of strong consequences, contributing to the overweighting of very small probabilities. In general, naïve investors think that very low probability but emotionally loaded events (such as potential market crashes) are much more likely than they actually are. High-likelihood, emotionally weighted outcomes, such as bull markets, are assumed to be less likely than they actually are.” [emphasis added] (178)

The Anatomy of a Stock Hype

Some investment opportunities directly appeal to investors’ emotional reactions. One such deal is the “stock hype”, where a promoter attempts to hook investors’ interest and commitment by the style in which the information about the investment is communicated. Unfortunately, I could track point-by-point with him on times when I have succumbed to the pressure of this approach.  Dr. Peterson presents the following characteristics of a stock hype:

1. Novelty. An emphasis on new or overlooked areas of the market, in order to stimulate curiosity.
2. Anticipation of a large gain. Suggestions that investors could expect a “huge payoff”.
3. Information overload. Sales pitches loaded with lots of statistics such as projected revenues, earnings, projected market size. The large amount of information tends to shut down people’s ability to critically analyze the data.
4. Bargain buying. An appeal to the investors’ search for a bargain by using phrases such as “under book value” and “dirt cheap”, implying that one can’t lose by investing.
5. Author as expert. The communicator of the deal presents themselves as an expert in the area of investment, attempting to foster a trust of his recommendation. Using obscure, detailed data in one ploy used.
6. Time pressure. The deal is presented in a manner that makes the potential investor to feel as if they may “miss out” if they don’t act quickly. Individuals need to “act soon” or the offer is going to close soon. (94-95)

There is a lot of other both interesting and practically helpful information in this book. One final point from some research Dr. Peterson summarizes: we tend to make better decisions (both in life, generally, and financially) when we are rested, are eating healthily (limit fat, caffeine and alcohol), get moderate exercise, and are connected relationally to others (306-307). So go live a healthy life and have the wonderful secondary result of making better decisions, as well!

It seems like colleges start earlier and earlier each year — but in the Midwest, at least, a number of colleges and universities started this past week or will this coming week (I know many schools back East and on the West Coast start after Labor Day). And with the beginning of the fall semester comes the transition for thousands of students from high school to college. Currently, I am working with a number of families and I have several friends who have students in this life stage.

Given that I went to college for ten years (four years bachelors, two years masters, and four years of doctoral coursework) and that I have taught undergraduate and graduate level courses, I think I am pretty qualified to talk about those behaviors that lead to success in the classroom. So let’s look at habits and choices which lead to academic success in college.

1. Go to class (and show up at least five minutes early). This is a no-brainer, but many students who are transitioning from high school are looking forward to the “freedom” of college — that they don’t “have to” go to class and no one is checking up on them. Successful students go to class. And showing up early does a number of things — it allows some for something to go wrong and still get to class on time, it shows the teacher class is important to you and you want to hear everything they have to say, it provides the opportunity to interact with other students and build some friendships, and it prevents you from coming in late to class, interrupting the instructor and irritating them (not good if you are on the bubble at the end of the semester between a C/B or B/A).

2. Stay awake in class and pay attention. Going to class and sleeping is little better (and for irritating the instructor, its worse) than not going to class. So this means you either need to get enough sleep (a major challenge for many college students) or loading yourself with enough caffeine to stay awake. Take a hint from an instructor — what the professor says in class is what is important to them about the topic and is much more likely to be on the exam. Plus, if you use the words and language the instructor does, you are more likely to get points on an exam.

3. Keep current in your reading. Besides not going to class regularly (especially those 8 a.m. “gen ed” classes), getting behind in your reading assignments is probably the next big error students make. A professor’s lectures are usually focused on the reading for the day — so to get the maximum benefit of the lecture, it is helpful to have some idea what she or he is talking about. In high school you may have been able to coast and just get the material from the lectures; in college, trying to learn without doing the reading is asking for trouble [trust me, you can believe me now or you can believe me after you get your first D or F in your life on an exam.]

4. Review your class notes at least once a week. (For those students who are really serious about learning, review and correct/clarify your notes after each class.) Exams will cover and emphasize material covered in class. Keeping familiar with the information and reviewing it periodically will make it significantly easier to remember for tests (as opposed to cramming 20 pages of notes the night before the exam). This habit is probably the one that will be new to most students, and also which will be most helpful. Many tests in college are not just “regurgitate the material”; they ask you to think about and synthesize the concepts. So to be able to do this, you have to know the basic information “cold”. For example, instructors are no longer going to ask you to “cite the four major political events leading up to the Civil War” but they may ask you to “compare the major political events which led to the Civil War with parallel political issues in our culture today.” If you have trouble remembering the facts, you will struggle with coming up with an answer that makes sense.

5. Take care of yourself — physically, socially and emotionally. Sleep deprivation + eating mainly junk food (with no fruits or vegetables) + no exercise = foggy thinking, poor memory and a high likelihood of getting sick or depressed. Studying all the time (or playing computer games by yourself for hours) and never hanging out with friends leads to not having friends, being viewed as weird, and loneliness — increasing the potential (significantly) for you dropping out of school. You don’t have a mom around anymore (hopefully!) — telling you to go to bed, fixing vegetables at every meal, and making you turn off the computer and go outside. If you don’t take care of you, no one will.

6. Study in ways that maximize your time and effort. Research demonstrates that most people’s core attention span and ability to focus is between 10 minutes and 20-25 minutes after they started studying. The first 10 minutes is sort of “warm up” where you are getting into the material. The next 10-15 minutes are high intensity concentration. Then your ability to concentrate and learn wanes. Usually, after 30 minutes on a subject (e.g. reading history), your learning impact is low and you are wasting time. To maximize your study time, it is best to break your study sessions into 30 minute segments. Study subject A (history) for the first 30 minutes. Then switch not only subjects but the type of task (e.g. do math problems) for the next 30 minutes. Take a 5 minute (not 15, 30 or 60 minute) break — get up, walk around, get a drink, go to the bathroom. Then do two more subjects, for 30 minutes each. THEN take a longer break — go get some exercise, eat a meal, hang out with friends. This approach to studying will help you accomplish a lot more than studying the same subject for 60, 90 or 120 minutes at a time.

So, there you have it. If you want to do well academically in college, go to class, pay attention, keep up in your reading, review your notes, take care of yourself physically, and study in short segments. As a professional learner, if you do practice these six habits, I guarantee you will maximize your opportunity for success (I would feel dishonest in guaranteeing pure “success”).

p.s. I do have other tips for taking tests which I can share later in the semester.

I’m on vacation this week — and when I’m on vacation (after the first few days of brainless activity), I dive in to books I have had in my reading pile for a while.  One of the books I brought, Inside the Investor’s Brain: The Power of Mind over Money by Richard Peterson, (published just this year) is quite interesting.  And I’d like to share some of the thoughts from the book with you all.

First off, Dr. Peterson is an associate editor at the Journal of Behavioral Finance, is a psychiatrist, a former stock trader and did postgraduate research at Stanford University in neuroeconomics (i.e. studying the neurology associated with financial decison-making).  So he is no lightweight.

Secondly, the primary focus of the book is to summarize the research which has been conducted over several decades regarding the psychological processes that underlie and impact investment decision-making, and to tie these factors to the physiological components that accompany them neurologically.  That is, Dr. Peterson looks at various decision-making strategies, the biases that interfere with good judgment, the emotional aspects (e.g. fear, overconfidence) that are intertwined, and what is going on chemically within the brain with these.

Rather than summarize the main points here, I want to just give some semi-random snippets of quotes that I personally have found interesting (page numbers follow the quote in parentheses).

“In investment management, mathematical genius may perform well in the short term, but it is no substitute for emotional intelligence.”  (2)

“The pursuit of profit for its own sake can quickly go awry. . . Pursuing profit as one’s primary goal can be a sign of emotional ill health. . . when money becomes the goal, rather than a by-product of enjoyable work, then emotional stability is apt to suffer.” (290)

“‘Our probability assessments shift based on how others present information to us.’” [Michael Maubossin]  Emotionally, investors have stronger reactions if possible outcomes are more vivid or imaginable. . .Stocks with exciting stories cause people to forecast high stock returns.” (179, 181)

“Because the future is intrinsically uncertain and market dynamics change, the past is a poor guide to the future.” (187)  “‘The fundamental law of investing is the uncertainty of the future.’ [Peter Bernstein] (179)  “‘The future is never clear, . . . Uncertainty is the friend of the buyer of long-term values.’” [Warren Buffet] (180) “‘Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.’” [George Soros] (182)

“But, in general, it is a congruence of characteristics, not any one individual trait, that leads to true excellence.  To achieve greatness in investing, education is the first step. . . . The next step is a self-evaluation. Identify your strengths and weaknesses and inventory your resources.  What is your psychological Achilles’ heel, and how will you protect it? . . . Small positive changes in psychological well-being, mental training and physical health improve the probability of successful decision making.  A slightly increased probability of success, over years of decision making leads to better long-term outcomes.” (289-290)

“‘Self-discipline is the single most important success factor.  Without it, nothing else matters.’ [Howard Fleishman, PhD, performance psychologist]. . . one’s degree of self-discipline correlates with wealth level.  In general, pursuing immediate gratification erodes prosperity. . .Investing ‘rules’ are useless for people who don’t first have discipline.” (295-296)  “‘No one can do your push-ups for you. [Jim Rohn]’” (290) 

“‘[Profitability] comes when the investor realizes that investment success does not come from external control, but from internal control.’” [Van K. Tharp] (301)

Dr. Peterson has a number of chapters on the emotional components of decision-making (intuition, fear & anxiety, excitement and its relationship to greed, overconfidence, the love of risk, and the impact of stress on decision-making).  Additionally, he summarizes a number of perceptual biases that affect making good decisions. (I hope to share those later).

To close, I’ll share from the preface to the book: “to really excel in investing, you’ve got to learn the skills to manage yourself.” (xv)