Analysing investor reactions

24th April 2012

The approach you take makes a big difference to your wealth, and as the financial crisis rumbles on it is wise to hone your natural instinct towards long-term gain.

Research on how the brain operates suggests that the left and right sides of our brain perform different and specific functions and determine much of our personality traits and problem-solving styles – also when it comes to investing.

In general, the left hemisphere of our brain is primarily responsible for fact gathering, logical thinking and analysis. Meanwhile, the right side on the other hand is more visual and creative and determines how we act on our feelings and emotions.

Most of us have a dominant side that we rely on without realising it – which are you? And how does this affect your investment success?

Right brain investors respond quickly to investment suggestions soon after envisioning an increase in wealth – even if the numbers don't add up. They focus is on the possibility of winning rather than the probability of losing, seeing the prospect of a mouth-watering profit.

However, we all learn differently. Some people rely more on reading text and tables – left brain thinkers, whereas right-brainers others rely more on pictures – perhaps charts and videos.

Seeking Alpha tries to add some value to this distinction with the example of picking decent dividend paying stocks, with the examples of picture graphs to back this up for right-siders while tabled numeric data will be of greater use to those patient left-siders. Different strokes for different folks.

Of course, it's important to feed your brain the form of information it handles best. "Giving both forms of data is valuable, but unknowingly starving your brain of its favoured information format diminishes your decision capability," says the blog. "Investing for dividends, and investing in general, is heavy on pattern recognition and comparison of data from security-to-security."

Nobel laureate psychologist Daniel Kahneman describes right brain investing as System 1 reactionary decisions in his recent book, Thinking, Fast and Slow. However, he says that relying on intuition for investment decisions is a mistake. "We are prone to overestimate how much we understand about the world and underestimate the role of chance in events."

After all, History shows us that the real winners are few and far between, and it's not possible to know who the winners will be in advance.

Our right brain is incapable of considering risk and return simultaneously – it tends to see a stock in the newspaper and buy it while focusing on the potential profit. However, the left brain provides the analytical thought that the right brain lacks. Kahneman calls this System 2, which is in charge of recognising the facts and changing System 1 decisions – it's the analytical work that uncovers issues with investments that right brain people miss.

Left brain investors understand that the probability of loss is more important than the possibility of return.

However, disrupting the way we consider anything, including investing, can lead to dramatic change. So if you're naturally a right-brainer, try cultivating your left-side for a more balanced, profit-worthy approach. Or alternatively, the other way around to be bold in your investment decisions.

The consequences of the behavioural gap between the right and left side of the brain can amount to a hefty chunk of profit or loss over a lifetime. Creating a balance between the two seems the wisest stance – as logic and reason alone are not enough.

It is the combination of intuition, emotions and reason that yield the best decisions.

 

More from Mindful Money:

Eurozone: French austerity will bite in 2012

Will IMF firewall tranquilize euro crisis?

Paradigm Lost: Rethinking our global economic system

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