If a drug existed that promised to help you achieve higher investment returns, would you take it? This question was recently raised in an online behavioural finance forum.
For simplicity, I limit my response to the single behavioural trait that is the most robust, widespread and probably responsible for the biggest disasters in investing history: loss aversion. This trait manifests itself in a disproportional reluctance to realise losses, meaning that investors tend to let poor investments run for too long. Profits are correspondingly realised too soon, for fear they turn into losses. Imagine a pill that would allow gains and losses to be perceived with equal weight. It would eliminate this bias and allow good and bad investments to be dealt with correctly.
The first thing that would happen is that losses would be realised more often. These losses would be smaller than under the drug-free condition, but there would be more of them, so we would constantly be reminded of the poverty of our past choices. There would also be a fewer number of profits, because the doped investor would be more willing to let the profits run. As we can only really savour our profits once they have been realised, we would have fewer opportunities to pat ourselves on the back. The result would be better performance, but one’s well-being would take a dreadful knock. And it wouldn’t end there; the effects of the pill would continue once the investing day was over. The super-investors would sit and wait in a line of slow-moving traffic on the commute home because there would be no malign pleasure from gaining a few metres on the motorists in the adjacent lane; they would draw no pleasure from discovering a sale bargain after having spent hours trawling the department stores; they could not even lean back and savour their achievements from time to time, as their motivation is undiminished by having attained their objectives.
So, whilst performance could be enhanced, both in and out of the office, it may well come at the expense of one’s welI-being. As human evolutionary selection has obviously preferred loss-averse individuals, this is possibly an element that ought not to be totally neglected. An investment pill sounds appealing, but be careful of those side-effects.