Expert comment from leading figures within the business community, on a variety of topical issues across a range of sectors. INVESTOR’S DIARY INVESTMENT DECISIONS DETERMINED BY EMOTION CAN BACKFIRE SPECTACULARLY Not until I joined a swimming club more than three years ago did I even begin to understand what endorphins are, how they’re produced and what they do. I’ve always been very sporty, but a knee operation in late 2015 put paid to both regular running and a weekly round of golf. Swimming was the obvious alternative; aside from having minimal impact on the body’s joints, swimming builds endurance and lowers both blood pressure and cholesterol levels, all vitally important when you’ve turned 50. I didn’t know any of this when I began swimming regularly in 2016; after all, like most people, diving into a pool and successfully completing half a dozen lengths was something you did while on holiday, usually as a precursor to a drink. Delighted with my first attempt when completing just a few dozen lengths represented the extent of my water-based endurance, I spoke with a friendly lady of certain age afterwards and was brought down to earth after learning that she had covered a distance three times further than me. There was only one way forward; build endurance by swimming more frequently. Fortunately, exercise results in the body releasing chemicals called endorphins, which interact with receptors in the brain and effectively stifle the perception of pain. Endorphins also trigger a positive feeling in the body, commonly known as a ‘runner’s high’, usually accompanied by a euphoric, energising sense of achievement. It is a fantastic feeling and if, for some reason, I miss my early morning swim, I feel sluggish and lethargic all day. The gratification we get from achievement, physical or otherwise, undoubtedly helps motivate us, whether that involves getting up at some ridiculous hour of the morning for a dip, or persuading us to tackle further challenges, so does something similar happen when we invest? The short answer is ’yes’. Scientists have identified the brain’s frontal cortex as the area responsible for complex functions, recognising it as the ‘thinking’ part of the brain, although it’s not, on its own, responsible for making investment decisions. You see, the men and women in white coats discovered that the possibility of financial reward boosts activity in the nucleus accumbus, also known as the brain’s ‘pleasure centre’. Few people would be surprised to discover that the prospect of recognising an attractive investment return causes the brain’s thinking and pleasure areas to be stimulated simultaneously. However, numerous 8 | Looking on the bright side of life has paid enormous dividends studies have proved that investment decisions determined even in part by emotion can backfire spectacularly. A research paper published in 2004 by Dr Richard Peterson and Dr Brian Knutson found that when the brain’s thinking and pleasure areas are activated simultaneously, the investment outcome is rarely successful. Dr Paterson concluded that most brains are more responsive to the possible size of future rewards than to the probability of achieving them. In other words, the research reinforced earlier evidence, which suggested that humans are instinctively drawn towards ‘investments’ that come with the possibility of providing outsize returns. This probably explains why, while collecting our morning newspaper, we’re often tempted to buy a Lottery ticket too. The potential jackpot return on investment is colossal. Yet to counter this, one has to recognise that looking on the bright side of life has paid enormous dividends – as longer-term equity investors would confirm. And someone has to win the Lottery. Perhaps, as investors, we should acknowledge the often conflicting role our brains will play when we invest and avoid an over-supply of emotion into the process. There’s nothing better than backing a winner, be it a share or a horse, as it boosts our neurological senses, in much the same way that an early morning run or swim can make us feel so much better about ourselves. It surely follows that if the more we exercise, the more we improve at our chosen activity, the same has to be true of investing – except it’s our hard-earned at stake, not our sense of pride which can be dented when you’re overtaken by an athletic-looking 65-year-old.