Hardwired: The Physiology Behind Financial Decisions

December 9, 2019

May 01, 2014 | My Money MD | Shirley M. Mueller, MD

George Soros, one of the greatest stock market traders of all time, lets his body guide him in his financial decisions. When his back hurts, he knows he’s in trouble with a market position and lightens his position. If his mouth waters, he feels good about his bet and hangs on.

It’s as though his nervous system conveys information to him that helps him trade. He listens, takes it into consideration and makes his judgment. The financier’s sensitivity to his internal biological system paid off handsomely. His success begs the question—should we be listening, too?

Though some might scoff at this notion, the new science of Neuroeconomics suggests Soros is on to something. This emerging field studies the physiology behind financial decisions, focusing on brain-body reactions and interactions that occur during monetary choices. Its findings suggest that humans have underlying hardwiring that tends to both enhance and sabotage investment efforts. Insight into this area is vitally important for economic success, because identifying our innate strengths, as well as weaknesses, means we can capitalize on the former and strengthen the latter. Armed with this knowledge, investors can be more like George Soros.

This is a recent concept. As little as a few years ago, most believed the market was efficient, all known information was taken into account, and people acted rationally on their own behalf. Emotion was not part of the known investing equation. Then, Andrew Lo, of the Massachusetts Institute of Technology, and Craig MacKinlay, of Wharton School of Business, came along. They re-examined this hypothesis and found that stocks have non-random movements suggesting that financial markets are not as straightforward as previously thought. Inefficiencies occurred. If they are understood, they have the potential to be exploited for profit.

Behavioral economics stepped in to contribute. Its practitioners searched to explain the psychological underpinnings of nonrandom markets by combining studies in human behavior and economics. Daniel Kahnemann and Vernon L. Smith won the Noble prize in Economics for work this area in 2002.

Finally, in the last 12 years, researchers are explaining the neurological processes behind behavioral economics. Neuroeconomics was born, started by a group of scientists focused on biologic research that explains how people make economic decisions. Where behavioral economics has a psychological basis, Neuroeconomics is biologically grounded. Information from this cutting edge field provides insights as to why we do what we do in the financial markets.

Some of our inherent biological tendencies lead to actions that enhance our odds of making money. Others channel us in the reverse direction. Our job is to be able to recognize which characteristics guide us toward wealth and which direct us in the other direction. Then, we can accentuate our natural attributes that help us and curve those that are getting in our way.

This new information plays right into theories that academicians have tossed around for years—that we have 2 ways of thinking. One is intuitive or instinctive. The other is analytic.

Instinctive reasoning is off the cuff, an almost unconscious reaction. It is directed by internal feelings coalesced through previous experiences, a sum of emotional knowledge. As such, it is fast to come to mind and extremely handy to access though inadequate information may play into its assessments, and certainly there can be lack of logic.

Analytic thinking, on the other hand, is slow and deliberate, a conscious response. It works with external data such as a page of numbers or a table in Forbes. Processing it can be laborious and even mind numbing. If errors are made, contributing issues include our own lack of capacity or extraneous factors like time pressures.

In the majority of us, the most important factor that influences our financial decisions is intuition, not analytic thinking.

How Unfair Transactions Affect You

December 9, 2019

Feb 06, 2014 | My Money MD | Shirley M. Mueller, MD

A few months back I wrote about Jim, a service provider who observed that his stockbroker appeared to be separating him from his money.

He noticed that cash seemed to be disappearing from his account. This was because of loads (up-front charges) and continuing 12b-1 fees (advertisement expenses charged to Jim that only benefit his brokerage firm) plus high management costs. All are legal.

This had been happening to Jim for several years, he finally was ready to delve into the reasons, though he had been meaning to do it for some time. Deep undercurrents were apparently at work in Jim’s head that only recently bubbled to the surface. There are some neuroscientific reasons why Jim finally took action.

Current neuropsychological studies demonstrate that unfair offers lead to rejection. For example, in the ultimatum game, if one player is given $10 and knows he can share it with a second player any way he wants, but can keep money only if the second player accepts his offer, certain outcomes are predictable. If the first player offers the second less than 25% of his money, the second player will reject his offer 50% of the time. Then, neither player gets anything. They both lose. On the other hand, if player one offers the second player 30% or more of his cash, most of the time the second player will accept and they both win (gain more than they had to start with).

This sense of fair play is even reflected in the animal kingdom. When two monkeys are in cages side by side and each is given a cucumber slice in return for a pebble they have offered to the researcher, then all is well. But, if one monkey is given a grape in place of the cucumber for the same pebble, the other monkey becomes agitated and no longer wants to play. He evidently perceives a grape as a better reward and sees the game as no longer fair.

This rebuff of one player toward the other (in the case of humans, one to another, and in the case of the monkeys, animal to human) is thought to be a form of punishment for an unfair action. According to the work of Fehr and Fischbacher, this rejection can promote more reasonable and accommodating behavior in the future. Therefore, these actions can be explained through evolutionary forces.

Why Men and Women Differ in Financial Decision-Making

December 9, 2019

Jan 11, 2011 | My Money MD | Shirley M. Mueller, MD

Men and women approach making financial decisions differently. That much is widely documented. For example, one study showed that if a large number of 401(k) investment fund options are offered, fewer women participate than men. (I wrote about this phenomenon in a previous post.) On the other hand, if the retirement plan’s selection of funds is small, more women tend to participate than men. This tantalizing diversity begs the question, “What is going on here? Why are the sexes different when they analyze investment options?”

The reasons behind gender divergence are just beginning to be revealed. Senior author Daniel Tranel and co-authors report that there is a hemispheric sex-related asymmetry in financial decision-making. Their article is about to be published in the journal Neuropsychologia.

Though the experiment is complex, it is worth examining. The researcher’s investigation was unique in that it involved patients with brain impairments rather than healthy study participants. The patients had amygdala and ventromedial posterior cortex (VMPC) lesions. Damage to the amygdala has been found to decrease autonomic reactions to stressful and emotional stimulus. The authors state that the injury impairs “the emotional response to learned complex, cognitive information.” It is the learning that involuntarily elicits an emotional response.

The VMPC, on the other hand, links memory and emotional systems. If it is damaged, the patient will fail certain financial tests, in part because he or she can’t recreate earlier bodily sensations that told the individual a mistake had been made. This awareness is tested by the skin conductance response, a way to measure a reaction to stress. Recognized failure of an appropriate financial choice is one way to induce a reaction, because it initiates an unconscious stress response in a normal person. This response does not occur in a VMPC-damaged patient.

Read more at: http://www.hcplive.com/physicians-money-digest/columns/my-money-md/01-2011/-Why-Men-and-Women-Differ-in-Financial-Decision-Making#sthash.qmaMykCs.dpuf

Using Emotions to Your Financial Advantage

December 9, 2019

Nov 09, 2010 | My Money MD| Shirley M. Mueller, MD

According to modern portfolio theory, investors try to maximize the expected return of their portfolios for a given level of risk. Evidence speaks otherwise. Many individuals don’t make economic decisions in their own best interest, because their emotions get in the way.

This scenario can cut both ways, however. Sometimes feelings protect the decision maker. Recognizing and using this concept to your advantage is just as important as being familiar with the potential for financial devastation that emotions can bring. For example, when a buyer believes that a price for an object is too high, his brain acts on his behalf and squelches his desire to purchase the object. It protects his comfort level, because the shopper would feel distressed if he felt he paid more than he should.

Likewise, if another shopper believes she may be a victim of deception, such as a “bait-and-switch” scam, her brain will turn away from an offer. For example, Eli Lilly, a prominent art collector in the first half of the 20th century, pulled out of a potential art deal unexpectedly and quickly.

In 1948, Lilly was offered eight Chinese hand-painted scrolls from C.T. Loo, also an important person of the time and a New York-based dealer in Chinese art. Two of the scrolls interested Lilly, who resided in Indianapolis. He expressed his interest in a letter to Loo. But when Loo sent the merchandise to Lilly on approval, the cost of one of the scrolls had increased in price by $2,000. Lilly promptly backed out of the sale.

According to studies by Julie Grezes, Ph.D. and her colleagues at the Laboratory of Physiology and Perception in Paris, and others by the Wellcome Department of Imaging Neuroscience at University College in London and the Department of Experimental Psychology at the University of Oxford in Oxford, U.K., Lilly’s fear center, or amygdale, was almost certainly activated when the quoted price for the scrolls was suddenly increased. The amygdale is considered part of the primitive brain, such as the pleasure center or nucleus accumbens, and the price-concern region known as the insula. It is stirred when we feel someone is acting deceptively toward us, as well as when we are fearful. Grezes, who studied this phenomenon, said that his results suggested that, “When one is personally involved, deceit is taken as a potential threat.”

Read more at: http://www.hcplive.com/physicians-money-digest/columns/my-money-md/11-2010/Using-Emotions-to-Your-Financial-Advantage#sthash.daorrW0R.dpuf

Collecting and Gender

December 9, 2019

Why Women Invest Differently than Men

“Many people perceive a style difference as the other person’s personal failing.”
—Deborah Tannen

Our financial choices, like many other decisions, are rooted in our neurobiology. And the neurobiology of a woman’s brains is somewhat different than a man’s due to phylogenetic history. This means that by looking back to our distant ancestors we can better understand why women and men tend to make the investment choices they do.

Our prehistoric grandparents wanted to survive just like we do today. In order to achieve this, they had to use every skill she/he could muster to stay alive in a threatening and often hostile environment. Along the way, each developed life protective skills that were gender specific and are still carried in our genetic makeup today.

Our prehistoric grandmother had to protect herself so she wouldn’t be killed. Since she was the physically weaker sex, this involved caution. Otherwise, a strong male from another group might carry her off, or an animal might enjoy her for lunch. Genetic selection for caution meant she was more likely to live and procreate. Her stronger male counterpart, on the other hand, had to develop the confidence and aggressiveness to kill animals and other humans or he wouldn’t survive and his genetic pool would die.

Also, just like women today, our great, great, etc. grandmother wanted to be as comfortable as possible. This involved cooperation and communication with other females to use common utensils and tools for making a home. Talk/listen was the process she used. Without this skill, she would more or less be on her own, and again more likely end up as prey for a predator. Males, on the other hand, developed their action-based skills, since this was needed for killing animals for food and other humans to protect their group. Rather than discuss whether to kill a foe, it was killed upon sight. Action had to be taken. If not, our cave-grandfather was the victim, not the victor.

Additionally, our great, great, etc. grandmother had to look ahead to her future. Which male would she align herself with who could give her and her potential children protection? Which group members were trustworthy allies? Thinking ahead and seeing her future in perspective meant she saw the overall goals for her survival, the long-term picture. He, on the other hand, had to be more focused on short-term goals in order to supply the group with food and protect them. Also, because he was powerful, he could conquer his female of choice and was less likely to calculate ways to attract her.

Gender, Decisions and Outcomes: Improving Return

December 9, 2019

Apr 14, 2009 | My Money MD | By Shirley M. Mueller

Women and men make investing decisions the same, but also different. It is the dissimilarities that lead to unlike outcomes. For example, men trade stock more than women and thereby made less money because of trading costs. The authors, Barber and Odean, postulated that this was due to overconfidence on the part of the male participants (compared to female). Men thought they could pick more winners than losers, but when the cost of trading was figured in they didn’t. Instead, they lost money.

Women are not so daring. They tend to be less confident and risk adverse rather than seeking. This is confirmed by several studies that show they invest their retirement assets more conservatively than men. When the market drops unexpectedly as it recently did, that can only be good. Of course, the reverse is also true.

A key question is why the sexes make different choices. If we knew that, perhaps we could find a way to use that knowledge to improve decision making and thereby attenuate or prevent financial disasters going forward.

Daniel Tranel and Antoine Bechara published a paper last month in the journal, Neurocase that addresses this issue. It is entitled “Sex-related functional asymmetry of the amygdala: preliminary evidence using a case-matched lesion approach” (http://www.informaworld.com/smpp/content~db=all?content=10.1080/13554790902775492) Tranel is in the Division of Behavioral Neurology and Cognitive Neuroscience at the University Of Iowa College Of Medicine in Iowa City, Iowa. Bechara is in the Brain and Creativity Institute & Department of Psychology at the University of South California, Los Angeles. They studied decision-making as well as social conduct, emotional processing and personality in male and females that had amygdala damage. They found support for the concept that there is a sex-related functional asymmetry of the amygdala. Left sided damage led to female, but not male dysfunction. The reverse was also true.

This is interesting because of the important role of the amygdala. It triggers non-conscious emotion that is needed for arousing a specific portion of the prefrontal cortex to take action in making judgments of right or wrong. The prefrontal cortex is the executive decision making part of the brain. It is the ventro-medial prefrontal cortex (VMPC) portion that designates moral judgment important. In an earlier paper, the authors found that the VMPC was more important on different sides of the brains in each sex. Interestingly, the side correlated with the findings in the amygdala study. In women, the left amygdala and VMPC were more important and in men it was just the opposite. The authors postulate that this could be because it was phylogenetically advantageous for men to have emotional process tied to the visual-spatial system (right sided) and for women to have it coupled to the verbal (left sided). This is because hundreds of thousands of years ago, as the brain was evolving, men needed hunting skills that depended primarily on nonverbal processes. Women, on the other hand, required speech to negotiate with others (crucial to their survival since they were the weaker sex) and teach their offspring.

The Psychology of Collecting

December 9, 2019

The Psychology of Collecting

Apr 28, 2016 | My Money MD | Shirley Mueller, MD

*Collectors collect almost anything including vintage cars.*

Though all collectors seek pleasure when they collect, there are differences in the motivators for each collector. This is because there are psychological reinforcers that feed into their pleasure center (nucleus accumbens) and spark their desire for collectibles. In fact, the possibilities of what these reinforcers are is so vast that only the most common can be covered here.

One contributing factor is the pride that is felt in acquiring exquisite objects. This can be further heightened by the pleasure of gathering them together as a group for the first time. During the search, excitement can be sharpened by finding a rare piece, which sets that collector apart from all others in his peer group. This may provide recognition and admiration by associates.

Other collectors, aside from the rareness of the piece, want to acquire it at a modest price. That is their joy and makes them feel self-important in being so astute. It is the object that is acquired for comparatively little money that titillates them and pumps them up to qualify for “bragging rights.”

Different from bragging rights is the thrill of the chase. Here, the goal is finding the most desirable object, not the favorable price of the piece. In “The Cone Sisters of Baltimore: Collecting at Full Tilt” (Hirschland and Ramage, 2008), the authors talk about the siblings striving to outwit not only each other, but also dealers in their effort to find the best Rembrandt or Raphael.

Other collectors feel a sense of history when they assemble objects. By owning antiques, they feel closer to cherished bygone days or perhaps even dead ancestors or important people or circumstances of long ago.

The reverse of feeling a sense of history is looking into the future. This collector may hope to build a larger legacy for herself by passing on special objects to future generations.

Yet others collect because it is an intellectual process and provides intellectual satisfaction. The gathering of objects in a specific area requires discipline, knowledge and an eye for the unusual or particularly beautiful. This may have been the impetus for Stephen W. Bushnell, MD, who was physician to the British queen’s legation in Peking (now Beijing) at the end of the 19th century. He was a medical doctor in an outpost remote from other colleagues. Collecting Chinese porcelain, readily available in Peking, but a novelty in his home country of Britain, offered him intellectual stimulation. He put this to good use. Bushnell produced a number of books about his hobby, really an avocation. In many ways, it must have been his passion. His books were not only popular in his day, but are still read. These pursuits turned out to be beneficial to Bushnell’s nation in terms of introducing serious Chinese scholarship through the eyes of a contemporary Englishman. They were also, no doubt, advantageous to Bushnell who was able to benefit initially from intellectual stimulation and later the social recognition that was generated when his works were published.

It has also been said that some collectors gather objects to enhance their social lives. My guess is that their love of objects came first. Then, somewhere along the way, they realized that there are organizations for collectors like themselves. Friendships forged through these vehicles no doubt expand their social lives. Additionally, the “wow” factor of a friend or neighbor who visits a collector’s home and admires the cherished pieces is worth a great deal to almost anyone.

Others enjoy the arranging and rearranging of a collection. Though this may serve as a means of control, it could simply be the demonstration of organizational skills applied to collecting as taste and knowledge accumulates.

Art: The Chinese Are Buying?

April 22, 2016

Sep 17, 2015 | My Money MD | Shirley Mueller, MD

*From MANDARIN & MENAGERIE: THE SOWELL COLLECTION Part I (left) and Part II (right) From Christie’s.com*

“Timing is everything when selling art.” This is what Geraldine Lenain said to me when I visited her in Shanghai, China while speaking at a conference there. Lenain was then international head of Chinese Ceramics & Works of Art for Christie’s Auction House in Shanghai and now is with their Paris office.

For me, at no time could her words be more potent. The recent sale of The Sowell Collection II of Chinese export art at Christie’s in New York City on Wednesday could be described as painful. Only 44% of the auction’s offerings sold. This was roughly half of what the Sowell Collection I sold for back in January at the same auction house in the identical city. Then, 74% of the Chinese export porcelains offered sold. The items in the two sales were from the same collector and not substantially different. What did change, I believe, was the willingness of the Chinese to buy back their heritage. I wrote about this phenomenon back in March, in a column entitled, “The Chinese are Buying and Americans Receive the Benefit.”

Today, there appears to be a shift and indicators point to the Chinese economics as the cause. The Chinese economy has virtually gone from boom to bust. This situation, of course, could influence any Chinese buyer and make her shy of spending her money on possessions she may want but really doesn’t need. That era may be over, at least temporally, for most Chinese. Though there are still bidders from China (I heard the auctioneer refer to them on the phone while listening in on this week’s sale), there likely are fewer that want to spend big sums of money.

Source: http://www.hcplive.com/physicians-money-di...

Why We Collect

April 22, 2016

Mar 17, 2016 | My Money MD | Shirley Mueller, MD

There are many reasons collectors, whether wealthy or not, collect. But there is one common underlying motivation for all—pleasure.

*A sculpture by Giacometti though not the one Cohen purchased.*

Last year, Steven Cohen, the legendary hedge fund manager, purchased a Giacometti sculpture for $101 million. Whether he did this for love or money is not clear. On one hand, Cohen may have adored the piece. On the other, he might have thought he was getting a bargain as he was the only bidder and thereby he anticipated he could re-sell it later for a profit.

Either way, his purchase makes a point. Super-wealthy people, like others, buy art. Some use it to adorn their homes and make them and their families happy; others have an eye to a future re-sale.

Whatever the case, immediate happiness prevails. This is because the anticipation of buying special pieces fuels the primitive pleasure center in the brain called the nucleus accumbens. Whether it is a Giacometti sculpture, a Ming (1368–1644) Chinese porcelain, an old master painting, a rare stamp, or an unusual fluorescent rock, the nucleus accumbens is sparked on fire when anticipating its purchase.

And, that is why collectors collect. Unless, of course, there are inhibiting factors that throw a wet blanket on the fire. For example, if the price is too high, the primitive insula is activated and feeds back to the nucleus accumbens, squelching its vigor. The sale may be disrupted. This same process can also happen with the primitive fear center, the amygdala. If it is stimulated should the buyer feel she is being deceived, its activity counteracts that of the nucleus accumbens. Again, a purchase may not be made.

Source: http://www.hcplive.com/physicians-money-di...

Art and the Altered State: Science Correlates with the Sublime →

December 8, 2015

Author: Shirley M. Mueller M.D

I stood in front of a work of art that was both unexpected and exceedingly beautiful. It sent me into a trance. Time ceased. My body was fixed. But, my brain was active. It spoke to me and said, “I feel happy.”

Anonymous Art Lover

Tom Kuebler, a physician friend of mine, had a particular feeling when he saw art with which he instantly fell in love. He described it as ecstasy. Kuebler is not alone. Though others may call it an altered state or even a trance, the sensation seems to be the same, intense positive emotion. In fact, the reaction has a name, Stendhal syndrome. According to Wikipedia, it is a “psychosomatic disorder that causes rapid heartbeat, dizziness, fainting, confusion and even hallucinations when an individual is exposed to art, usually when the art is particularly beautiful or a large amount of art is in a single place.”

The term, “Psychosomatic,” suggests that the basis of the response is entirely emotional. But, recent research indicates this may not be the case. Semir Zeki from University College, London recently demonstrated that the perception of beauty itself can cause simultaneous blood flow changes in a crucial brain area consistent with pleasure and happiness.

This is Dr. Zeki’s story. He studied the brain’s response to a range of paintings, some beautiful and others less so, by using functional resonance imaging (fMRI). This technique measures changes in blood flow associated with increased metabolism that directly correlate with enhanced underlying brain activity. When art judged as beautiful is perceived, a particular part of the brain known as the medial orbitofrontal cortex (mOFC), a recognised pleasure and reward centre, increases in activity. Zeki described his findings along with his co-author, Tomohiro Ishizu in a recent paper entitled, “Toward A Brain-Based Theory of Beauty".

This is how the study was performed. The twenty one volunteers (average age 27.5 years; all right handed; 9 male and 12 female) measured their perception of the beauty of paintings on a scale of 1-10. Their rankings were divided into three groups from the least favourable to the most.

One-three: unpleasant
Four-six: indifferent
Seven-nine: beautiful

Then, the volunteers viewed the paintings a second time as fMRI was performed. Thus, a correlation was assessed between the participant’s earlier judgment of beautiful, indifferent or unpleasant art and their brain activity. The intensity of the brain changes for the visual stimuli (A) demonstrated a linear relationship with the volunteer’s rating of beauty. The more beautiful the painting to the volunteer, the greater the intensity of the increase in blood flow to the pleasure centre.

Figure 2: Brain activations related to the experience of beauty from Zeki’s and Ishizu’s paper, “Toward A Brain-Based Theory of Beauty.”

So, in Zeki’s and Ishizu’s study, when certain pieces of art were judged to be especially beautiful to a particular person, their pleasure/reward centre was stimulated to the degree they judged the art as beautiful. This may have a real life application. I can extrapolate that this positive feeling could be so intense to some that they would call it sublime. It could well be part of a broader physiological correlate of what is called Stendhal’s syndrome. Thereby, the altered state associated with this condition may not be psychosomatic at all, but instead physiologic in origin. Although further work needs to be done, the research of Zeki and Ishizu brings us tantalisingly closer to a physiological understanding of at least one reaction to art previously described as psychosomatic.

NOTES:

Cover Image: Jean Benner L'Extase
Oil on canvas
Strasbourg Museum of Modern Art
Image Source

The Cyclical Rotation Effect: A Factor in the Art Market and the Stock Market

December 7, 2015

Oct 15, 2015 | My Money MD | Shirley Mueller, MD

*The first lot in the Marques dos Santos Leilões sale of Chinese export porcelain on Sept. 25 sold for nearly $20,000 including commissions.*

My phone representative said, “He never takes down his hand.” This was my counter-bidder for Chinese export porcelain at the Marques dos Santos Leilões sale of Chinese export art Sept. 25 in Oporto, Portugal. Chinese export porcelain is porcelain made in China and exported to the West.

What was surprising was not that I was outbid, but the nationality of my opponent. He was not Chinese (this ethnic group been rabid in the auction market of late for all things Chinese). Rather, he was from India.

This competitor for the auctioned Chinese export porcelain lifted his arm and did not drop it when he wanted to make a purchase. Bidders in the room found this intimidating no doubt, but it was also intimidating to me as a phone bidder. I knew that if I desired a lot and this man did too, he wouldn’t stop until he won it. Of course, that could mean he paid too high a price, but perhaps no matter to a wealthy person whose anticipation of owning Chinese export made his pleasure center burn brightly.

Secondary bidders in the sale were evidently Brazilian and English with Chinese buyers scarcely to be found according to my phone representative. So, it is with art. When a country’s economy nosedives as it has in China, generally fewer art enthusiasts buy art.

http://www.hcplive.com/physicians-money-digest/columns/my-money-md/10-2015/the-cyclical-rotation-effect-a-factor-in-the-art-market-and-the-stock-market#sthash.NFN0t4Xh.dpuf

Collecting Gone Amuck

November 12, 2015

When my uncle died he had multiple new items (for example, billfolds) still in unopened boxes stored in his house that was already short for space. They had no apparent purpose because he could never use these items due to his advanced age. Similarly, a rich neighbor also gathered package upon package of new shirts and simply kept them, never to be worn.

These scenarios seem counterintuitive. Why would someone do these things?

A paper by Steven W. Anderson and his colleagues entitled “A neural basis for collecting behavior in humans” throws light on collecting gone amuck similar to that described above. Though the group studied patients with brain lesions, the findings can be extrapolated into a provisional hypothesis for collecting behavior in normal humans. This paper is extremely important because it is the first of its kind.

Anderson, et al studied 87 subjects with brain lesions. Thirteen exhibited abnormal collecting behavior that was severe and associated with troublesome accumulative of useless objects. In the study, the collecting set of subjects exhibited this behavior only after the onset of their lesions, not before. A close relative, usually a spouse, was the source of this information. In order to qualify as a collecting subject, the individual had to accumulate objects of little value to excess in such a way that the collecting interfered with daily function. For example:

A 70-year-old, right-handed, retired bank clerk with 13 years of education underwent resection of an orbitofrontal meningioma. Her husband noted that all of her life she had been reluctant to throw away items with potential value, but that this characteristic was not so prominent as to cause any problems. However, following surgery, she began to collect large quantities of a wide array of items, to the extent that serious space problems arose in their home. She began ordering large quantities of unneeded items, particularly clothes, from mail-order catalogues, most of which her husband would intercept and return.
Patient 8 from “A neural basis for collecting behavior in humans” by Steven W. Anderson, Hanna Damasio, and Antonio R. Damasio.

When the collecting set was compared to the non-collecting set, they did not differ in age or standardized neuropsychological tests designed to determine intellectual abilities. Additionally, the two groups were alike when examined for executive function skills and anterograde memory. The difference between the two sets of subjects was that the collecting group all had damage to a specific part of the frontal lobe called the mesial frontal region. The non-collecting group did not. The mesial frontal area is located in the executive frontal lobe of the brain medially.

Art and Lots of Money: What to know

November 12, 2015

This past week NYC hosted the Antiques Fair at the 67th street armory and the Ceramics Fair at the National Academy of Design. There were also simultaneous high end sales at Christies and Sotheby’s to coincide. The events brought out not only art collectors, but also art advisors buying for their clients, some of which were high net worth individuals (HNWI). Art advisors buy art for HNWIs to smooth out the overall return of their investment portfolios within the ups and downs of specific categories in the art/luxury markets.

However, whether adding art as another asset class is beneficial to return is still a matter of speculation. The British Rail Fund (BRF) used art in its portfolio for 25 years and made an annualized return of 11.3%, which is perfectly respectable, but was not as high as the rest of the BRF’s portfolio.

Today, the BRF does not invest in art as an asset class. Its concerns could have included the cost of storage and insurance for the art or luxury item. In addition, this category has no dividends or income like stocks and bonds. Moreover, they cannot be disposed of rapidly. They are only worth what someone will pay for them and the market can be very thinly traded. Therefore, valuing art/luxury items can be speculation more than a solid determination.

A recent research paper by RFA Campbell, however, challenges this concept. It suggests that art is worth considering as an asset class in a HNWI’s investment portfolio. She looked at art as yet another alternative asset class and treated it like real estate, commodity futures, private equity and hedge funds. Each of these can be used to broaden diversification within an investment portfolio. She focused on bear markets because it is there that the benefit of diversification is most needed. The author used data from both the Art Market Research and Mei Moses All Art Index that compare repeat sales prices of particular items at auction.

Auction Overbidding: The Drive Behind it

November 12, 2015

At a recent ceramics auctions in NYC, I bid successfully at both Christies and Sotheby’s. It was nice to get pieces that I both wanted and added to my collection. It was less pleasant to pay what I considered high prices. Nevertheless, most of the time, if I purchased these same articles at a dealer, they would cost anywhere from two to five times more than what I paid at the public sale. So, I was happy. The question is, was pleasure my overwhelming feeling the moment I purchased the items?

Elizabeth A. Phelps and her colleagues would argue that it wasn’t. The scientist from the New York University in NYC and associates would instead suggest that I bid not to win, but because I was afraid of losing. Contradictory as it seems, this is what their research data shows.

Scientific experimental auction work done as far back as 1982 suggests that bidders tend to overbid. One explanation is that bidders bid to win. They submit higher and higher offers because they have a rival for the prize. In Phelps’ and colleagues experiment, however, that didn’t happen.

The testing went like this. The seventeen volunteers participated in both an auction and a lottery. The auction was against another person and the lottery was played opposing a computer. Functional Magnetic resonance imaging (fMRI) was used to examine patterns of activation in the brain during the different trials. The goal of the fMRI study was, “to examine the effects of type of social competition (auction versus lottery) and type of incentive (money versus points) on blood oxygen dependent responses to winning or losing.” The BOLD (blood oxygen level dependent) response is related to increased blood flow secondary to neuronal activation.

Why Your Brain Prefers a Bargain

November 12, 2015

My Money MD | Shirley M. Mueller, MD

People love bargain-hunting so much there is even a website devoted to stories about it. Investors, of course, like a good buy too. Now, we know why this is a universal quality.

Brian Knutson, Scott Rick and others studied the phenomenon in “Neural Predictors of Purchases,” published in the journal, Neuron. In a nutshell, it showed that the subjects did not respond as much to absolute price as to the price relative to what they thought was suitable. In other words, preconceived notions of cost influenced their purchases. Though the authors studied the purchase of various products, if one considers stock as merchandise, the same results would appear to apply.

The subjects were examined using functional magnetic resonance imaging (FMRI) while taking a SHOP task. (SHOP stands for “Save Holdings or Purchase.”) The test is comprised of trials where participants could purchase products. They were identical in the time sequence. Those taking part saw a labeled item, then its price, and lastly chose whether to buy or not. The scientists predicted that: 1.) During the initial presentation the item would activate neural circuits associated with anticipated gain; and 2.) During the price appearance excessive costs would activate circuits associated with potential loss, as well as deactivate brain regions previously associated with balancing potential gains against losses.

The authors were correct in their prediction: During the product presentation, the nucleus accumbens (NAcc), or pleasure center of the brain, was activated indicating anticipation of a gain. But, if the price was excessive per the judgment of the subject, the product was unlikely to be chosen. Then the medial prefrontal cortex (MPFC) that is associated with decision-making was deactivated, while the insula -- known to be related to losses -- was stimulated. This suggests that the insula suppressed the MPFC.

In the words of the authors, “The findings are consistent with the hypothesis that the brain frames preference as a potential benefit and price as a potential cost, and lends credence to the notion that consumer purchasing reflects an anticipatory combination of preference and price considerations.” Scott Rick, the paper’s co-author, summarized its importance in an email, “The paper helps us better understand how emotions influence spending behavior. Specifically, the paper provided the first physical evidence suggesting that people rely on distress to deter their spending. The notion of a ‘pain of paying’ had previously been used to explain some non-rational behavioral phenomena, but there had never been any clear process evidence supporting the notion.”

A New Concept: Art for the Average Investor

November 12, 2015

My Money MD | Shirley M. Mueller, MD

A few weeks ago, I gave a lecture in Paris entitled “Art: For Love or Money?” It was in association with Deloitte S.A. Luxembourg’s third annual “Art and Finance” conference regarding the art market and finance. The two intersect because studies by Rachel Campbell, assistant professor of finance at Maastricht University in the Netherlands and others show that holding 5% of a portfolio in an art fund results in a positive for return over time, at least for high-net-worth individuals (people with net worth of $30 million or more).

At the conference, Thierry Hoeltgen, the lead partner of Deloitte Luxembourg, made a surprise announcement (at least it was a surprise to me). Deloitte wants to bring the art-fund concept to the average investor. The scheme is evidently preliminary, as no details were given. Nevertheless, what we know about art funds for the wealthy is likely applicable. Art adds diversification to an investment portfolio in that it has low correlation with stocks – when stocks go up or down, art does not necessarily follow.

Art as an alternative investment has been promoted by Jianping Mei, a professor of finance at the Cheung Kong Graduate School of Business in Beijing, China, and by Michael Moses, previously an associate professor of management and operations at NYU Stern School of Business. The two launched a company called Beautiful Asset Advisors LLC, which created the Mei Moses Art Indexes based on the researchers’ data. The index tracks returns on some 15,000 objects that have been repeatedly sold in major auctions over the past 75 years, according to the Wall Street Journal.

This graph indicates that currently the All Art Index is back to 2005 levels, while the S&P Total Return is hovering near levels it hit in the early part of this decade.

The 2008-09 downturn in the art market occurred after logging strong returns since the late 1990s, though not always in tandem with the S&P 500. This is, of course, why Campbell and others find low art and stock market correlation.

The Chinese are Buying!

November 12, 2015

Mar 22, 2012 | My Money MD | Shirley M. Mueller, MD

Editor: Shirley learned the hard way that sellers should beware too! Read about the troubles she and others have run into.

Anyone with Chinese art around the house, whether purchased before 2000 or inherited from the family, might want to take a closer look to determine its current vale. The Chinese art market is hot right now as nationals are buying back their heritage that was exported abroad.

In 1984 I purchased a lacquer box at a “going out of business sale” at a reputable NYC Madison Avenue shop. At the time I bought it both because it seemed like a good deal and I liked it.
“Send it in,” the Asian art specialist at Christie’s said to me. “The Chinese are buying.”

He was referring to the recent upswing in sales to Chinese collectors at Christie’s and other auction houses. I had a Chinese cinnabar lacquer box that consequently might sell well.

The large carved red lacquer globular box and cover that I sent to Auction. Ming Dynasty, late 16th/17th century. Courtesy Christies. — *The large carved red lacquer globular box and cover that I sent to Auction. Ming Dynasty, late 16th/17th century. Courtesy Christies*.

Indeed, the Chinese are buying. According to the Mei Moses Index, a respected art buying guide, the purchase of traditional Chinese art burst forth like an Asian firecracker during 2000 to 2011. It achieved a compound annual return of 15.82% compared to 0.47% for Standard and Poor’s 500 Index (the leading indicator of the U.S. equity market).

The Mei Moses World Collecting Comparative Performance Table 2000-2011 (September) above shows the returns of the S&P and the Traditional Chinese market on the right in bold. The traditional Chinese market is composed of art that the Chinese produced for themselves rather than export to the West. Still, some of it was exported abroad. All categories lagged behind the Traditional Chinese, in part because the recession in Europe and the U.S. diminished buyers in the impressionist, old masters and post war categories in which these countries commonly purchased.

The Chinese are Buying (They’re Just Not Paying!)

November 12, 2015

May 31, 2012 | My Money MD| Shirley M. Mueller, MD

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Americans who do business in China know that they will be operating under unfamiliar rules. Now United States owners of Chinese antiquities are finding the same thing when they sell to mainland Chinese.

This hit me personally. I sold a 16th/17th century cinnabar box at Christies, NYC at its March 22, 2012 sale. It fetched a respectable price. Though this was cause for celebration, more than two months later I haven’t been paid. The reason according to the auction house is that the buyer didn’t reimburse them.

*The large carved red lacquer globular box and cover that I sold at Christies during their March 22, 2012 sale is above. The buyer has not paid. Photo: Courtesy Christies.*

When I pressed as to whether the purchaser was Chinese, the Christie’s person wouldn’t say for reasons of confidentially; however, it’s probably a good bet. The market for antique cinnabar boxes tends to be wealthy mainland Chinese, and, unfortunately, this group is notorious for not paying for the items they buy at auction.

According to Melissa M. Chan who writes for the China Digital Times, almost half of Chinese auction bids are unpaid. Other articles, such as the one in Newsweek Magazine, reported the same scenario. Though both publications focused on Hong Kong and Asian auction houses, there is no reason the same thing can’t happen in the United States and elsewhere when mainland Chinese bid.

It's Not Easy Diversifying a Portfolio with Antiques

November 12, 2015

Jun 20, 2013 | My Money MD | Shirley M. Mueller, MD

Being a Chinese antique is not all it’s cracked up to be.

There can be unexpected vicissitudes along the way, including total rejection. This is what happened to my seemingly very worthwhile 16th/17th century Chinese cinnabar lacquer container. I was assured somebody would desire it, which was true. Except he or she didn’t want to pay for it.

A large carved red lacquer globular box and cover. Ming Dynasty (Late 16th/early 17th century). It sold for 43% less in 2013 than the year before. In 2012, the Chinese buyer who bought it at auction did not pay for it.

I was left holding the bag. This is the story. I first sold the object at Christie’s New York at its March 22, 2012, sale for a very respectable price. However, my elation turned to confusion, and even sadness, when the Chinese buyer did not pay the auction house. This means Christie’s didn’t reimburse me. Instead, they held the box to resell it at their 2013 Spring Asian sale.

Of course, buyers do not know why the box is back on the market so quickly — they feel it is tainted. Its value was diminished. Though the box sold (again) in 2013, its sale price was 43% less than in 2012. Of course, I still had to pay the 12.37% seller’s fee and the $750 for “marketing,” which was really photography.

Antiques, Auction Houses and Your Portfolio

November 12, 2015

Sep 26, 2013 | My Money MD | Shirley M. Mueller, MD

“It takes just as much effort to sell an object for $10,000 as for $100,000” — Anonymous

An example of an art piece that meets the new criteria for the increased buyer’s premium. Before the enhanced pricing, the buyer’s premium was 20% — now it is 25%. From Christies.com: A FABERGE-STYLE SILVER GILT AND ENAMEL KOVSH, AND A PILL BOX,20TH… — *An example of an art piece that meets the new criteria for the increased buyer’s premium. Before the enhanced pricing, the buyer’s premium was 20% — now it is 25%. From* *Christies.com: A FABERGE-STYLE SILVER GILT AND ENAMEL KOVSH, AND A PILL BOX,20TH CENTURY, sold for $52,500 at Sale 2721 Interiors 23-24 July 2013 New York, Rockefeller Plaza*

Antiques and art are recommended for a limited part of an investment portfolio, at least for high-net-worth individuals. Recently, Christie’s and Sotheby’s whittled away at any benefit this might have for buyers of more modest artwork by increasing the threshold for their buyer’s premium in their lower two tiers (Effective 11 March 2013 for Christie’s).

Before Now

Tier 1 (25%) <$50,000 <$75,000

Tier 2 (20%) $50,000-$1,000,000 $75,000-1,500,000

Tier 3 (12%) >$1,500,000 >$1,500,000

Percentage of U.S. buyer’s premium depending on item value for Christie’s. Note the figures for the lower two tiers increased. Sotheby’s increased similarity.

Whether this was to squeeze an additional premium from clients or to discourage lower and medium-end sellers and buyers from consigning to them is the $64,000 question. Javier Lumbreras from Artemundi Global Fund tackled this puzzle with data in his article entitled, “What is the True Reason Behind Christie’s and Sotheby’s Increase in Buyer’s Premiums?” It was published in ArtBanc Intelligence, in June 2013 (issue 4).

Lumbreras performed a statistical analysis on more than 9,000 lots sold at Christie's and Sotheby’s during 2012. To do this, he grouped the lots sold using the before period and then the after increase in pricing structure at both Christie’s and Sotheby’s. He used the lots in each tier and their share in value to calculate the percent of premiums the auction houses gained from the sales.

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