Wednesday, December 12, 2007

Emotions and Wall Street

From the article, How to Stop Your Emotions from Wrecking Your Returns in the Wall street Journal this week (Getting Going -

Make no mistake: Emotions can hurt your investment results. For instance, a
study published in Psychological Science in June 2005 found that people with impaired emotional responses made more-sensible financial decisions.

These folks, who had lesions on their brains that limited their emotional reactions, were more willing to take gambles where the potential payoff easily outweighed the potential loss. "When people with normal emotional reactions lost, they got discouraged and stopped gambling," notes one of the study's authors, George Loewenstein, an economics professor at Carnegie Mellon

Emotions can also help, supplying the motivation to focus on our finances, plan for retirement, save diligently and avoid excessive risk. "Without emotion, we wouldn't be able to make the sort of trade-offs essential to our financial survival," argues Andrew Lo, director of the Massachusetts Institute of Technology's Laboratory for Financial Engineering.

As you might gather, handling our emotions is a juggling act. Intense
emotions can be helpful, making us more engaged in what we are doing. But to be successful, we also need to figure out what's going on with our feelings and then limit the impact, suggests a study in August's Academy of Management Journal.

"People who can pinpoint their emotions are less likely to be affected by them," explains Myeong-Gu Seo, co-author of the study and a management professor at the University of Maryland. This self-knowledge is part of a broader notion sometimes dubbed "emotional intelligence."

"Women have greater emotional intelligence than men," notes John Ameriks, an investment analyst at Vanguard Group.

A few notes here. First of all, according to Reuven Bar-on's exceelent research, women do not have "greater emotional intelligence than men." Men and women actually test the same overal. They vary significantly on how they test on the individual competencies however. If you'd like more information on this, email me at sdunn@susandunn.

And if you'd like to INCREASE YOUR EMOTIONAL INTELLIGENCE, email me at for some coaching. It's what I do.

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