“A pathological gambler dies and thinks he is in heaven because he wins every time he plays. Very quickly after constantly winning his wagers, he requests to be sent to hell, only to find out that he is already there.”
Neuroeconomists, that breed of behavioral researchers seeking to link actual brain function to real human behavior, are fascinated by people who exhibit what they refer to as excessive risk taking and whom the rest of us refer to as “scary”. Whether this behavior is pathological gambling, compulsive shopping or simply eerily unworried stockmarket trading, there seems to be an underlying theme: risk takers crave the buzz of novelty and are turned on by the uncertainty it generates, not by the outcomes.
Neurotransmitted Uncertainty Lovers
This type of craving behavior has been linked to the hormone dopamine, and raises the suspicion that certain people are genetically inclined to be more turned on by uncertainty than others. In a world where the opportunity to explore the outer regions armed only with an out of date Michelin Guide and a sofa-sized bar of chocolate is now sadly limited we shouldn’t be surprised if the dopamine addicts gravitate to the legal home of uncertainty and insanity, the stockmarket.
Previously we’ve seen suggestions of a link between genes, hormones and investing, (see: Are You A Born Investor?) as people with a particular variation of the gene for managing serotonin seem to be better investors than others. Serotonin is a neurotransmitter, one of the chemicals that passes information around our nervous systems, and it’s specifically associated with negative emotions. Some people are genetically disposed to avoid situations like stockmarkets because they’re overly worried by possible losses and not particularly excited by potential gains.
Dopamine is another neurotransmitter, but one that controls the risk taking side of our natures: it controls the reward center of the nervous system, specifically being implicated in the craving for rewards – whether these be big profits or a nicotine fix or something stronger. It’s not involved in the feeling you get when you actually get your fix, but the anticipation of it.
Economists have long been puzzled by altruistic behavior, as we’re supposed to be motivated primarily by self-interest, which rather rules out the possibility that we might be generous to other people out of the goodness of our hearts. Yet studies of representation behavior by Hibbing and colleagues in Generosity is it’s own reward: the neural basis of representation – the situation where our interests are represented by someone else, a Congressman, a CEO, a platoon leader or whomever – shows that the dopamine reward system is triggered in the representative by causing a financial gain for the third-party. A financial advisor should get a dopamine fix by making money for their clients.
This finding is an outcome of neuroeconomic studies, where people are wired up to brain scanners and then made to perform various tasks in order to see what areas of the brain are stimulated by their behavior. Analysis of how the brain acts when confronted with a monetary reward have pointed the finger of suspicion at an area known as the nucleus accumbens (NAcc) which gets activated when we make financial gains. The NAcc is rich in dopamine and dopamine is also known to be linked to the habitual use of drugs like cocaine. However, the NAcc is completely unmoved when we actually make a financial killing, it’s primary interest seems to be in the expectation of gain. As Knutson describes it, in Neurally reconstructing expected utility:
“The NAcc is the gas pedal that fuels appetitive behavior”
Some people seem to be particularly sensitive to the effects of the dopamine system, for instance, studies of people with Parkinson's disease who develop pathological gambling problems have found a link with a dopamine. In financial terms these people are driven by the need for risk taking and will take ever greater gambles in order to fuel their addiction: it’s the uncertainty that gives them their high.
This leads to an interesting hypothesis – that when we see overtrading and excessive risk taking in markets we’re not seeing some kind of irrational bias at work, but the affect of dopamine craving traders desperate for some action. McClure and colleagues have shown that the gratification of instant rewards – such as those received by someone out shopping – are also linked to dopamine pathways through the nervous system.
Sapra and Zak, quoted at the head of this article, suspect that mass market irrationality may be triggered by dopamine:
“A significant proportion of trading in financial markets is not related to changes in fundamentals, but rather due to other factors. The neuroscience evidence suggests that much of our activity and choices are driven by affect, largely dictated by the dopaminergic pathways in the NAcc. As a result, trading decisions will not be immune to the same neurologic impetus that causes the urge to gamble, or even ingest cocaine. Hence, one may postulate that some of the excess trading (and hence volatility) observed in financial markets may be due to trading related to affect rather than fundamental changes in companies’ valuations.“
Wall Street Dope
Unsurprisingly this has led people to wonder whether genetic makeup can predict success in the stockmarket. A study by Steve Sapra, Laura Beavin and Paul Zak has looked at whether variants of the dopamine gene can predict investing success. They looked at a small group of professional Wall Street traders, noting how important this group has become in modern markets:
“By one estimate, professional traders were responsible for only 10% of New York Stock Exchange (NYSE) trading volume in the 1960’s, while individual investors were the primary source of trades. Professional trades are estimated to account for 90% of NYSE activity today, with traders from the 100 largest institutions responsible for 75% of volume. At the same time, stock market prices are known to exhibit ‘‘excess volatility’’, that is, to move more than predicted by the economic fundamentals of companies they represent. The reasons for excessive market volatility are unresolved, but the high volume of institutional trades suggests it is at least partially due to the behavior of professional stock traders”.
Their results suggest that successful traders commonly have a set of dopamine genes associated with moderate risk taking. The longer the traders had worked on Wall Street the more likely they were to have this genetic make up and the less likely they were to trade in volatile and unpredictable markets. Personality tests of this group of people suggested:
“That successful traders in our sample weigh risk and reward, rather than taking excessive risks. This was born out in the personalities of our sample of traders. We found that they were good at integrating disparate pieces of information, eschewed trading in volatile markets, and did not view the world as threatening their survival. These findings align with previous evidence suggesting that more experienced traders may respond in a less emotional way than those with less experience.”
Go To Hell, Gloriously
As the researchers point out, the evidence isn’t conclusive because of the difficulty of getting access to traders. In addition, because success is defined by longevity this might be missing the most successful traders of all, who get rich quick and retire early. Still, it’s suggestive if nothing else.
Interestingly it is possible to train the dopamine system – or to take drugs to dull the high risk taking triggers. That the most successful traders appear to be calm, rational and calculating and not gung-ho risk-taking dopamine junkies shouldn’t be a surprise: when the bullets are flying it’s the gunslinger that takes cover who lives to fight another day. The gamblers go to Hell, in a blaze of glory.