Sept 20, 2005
Psychopaths make the best investors
'Functional psychopaths' make the best investment decisions because
they cannot experience emotions such as fear, a study by
researchers at the Stanford Graduate School of Business (GSB)
showed.
Fear stops people from taking even logical risks, meaning those who
have suffered damage to areas of the brain affecting emotions, and
can suppress feelings, make better decisions, the report
showed.
The ability to control emotion helps performance in business and
the financial markets, researchers found.
'Many chief executive officers and many top lawyers might also
share this trait,' Professor of neurology Antoine Bechara, at the
University of Iowa, said in a statement on the Stanford GSB
website.
The study was carried out by Stanford, Carnegie Mellon University
and the University of Iowa.
The participants in the study were given US$20 (S$34) to play a
gambling game. At the beginning of every round, they had to decide
whether to risk a US$1 dollar stake on a toss of the coin, for a
US$2.50 return if they won.
While any player could decline to take part in a round, the
financially 'logical' approach to the game was to participate at
each stage because the 'potential return' outweighed the risk of
loss.
Brain-damaged players took this approach. They finished on average
US$3 richer than the others and invested in 84 per cent of the
rounds, compared with 58 per cent played by the rest, who let
'fear' govern their decisions, the study showed.
The results help to explain the 'equity premium puzzle', or why
more people invest in bonds than stocks, when equities historically
offer a higher average return, the report said.
'Investors are not behaving in their own best financial interest,'
co-author Baba Shiv of the Stanford GSB said.
'All research suggests that, even after taking into account
fluctuations in the market, overall people are better off investing
in stocks in the long term.'
Many successful investors may be so-called 'functional psychopaths'
because they lack or can suppress emotions, according to the
study.
Still, Mr Shiv said emotions are not all bad.
Those who cannot experience feelings tend to make 'disadvantageous'
social decisions, losing their jobs and their friends, the report
said.
-- BLOOMBERG NEWS
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