The benefits of brain damage: Crack addicts outperform others
Experiments show that individuals with a specific type of brain damage, which prevents them from feeling fear, outperform normal players when it comes to making some investment decisions. Crack and methamphetamine addicts as well as alcoholics similarly outperform.
According to James Montier, a global equity strategist at Dresdner Kleinwort Wasserstein who has an interest in behavioural finance, the impaired ability of these groups to feel fear can help them to make better investment decisions because it makes them more tolerant of short-term losses. This makes them bigger risk takers in situations where risk taking is rewarded.
“Assuming that risk is rewarded in financial markets, then the best investors are likely to be those who can keep their emotions in check,” says Montier.
It could also explain why the archetypal hot-shot trader behaves so differently from most in polite society and why the 1980s was such a great period in the markets.
Montier also finds useful lessons for investors from animal behaviour. Pigeons and rats, for example, are better at predicting sequences than human beings because they don’t attempt to find patterns where none exist. For example, when presented with a random sequence of red and green lights, in which one colour flashes 70% of the time, animals will always choose the dominant colour. Humans, by contrast, attempt to match the frequency of the lights, a strategy that proves less successful.
Experiments also show that the brain has a natural tendency to look for patterns even if none exist.