Using Emotions to Your Financial Advantage

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

The Psychology of Collecting

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.

Why We Collect

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.

Read more at: http://www.hcplive.com/physicians-money-digest/columns/my-money-md/03-2016/why-we-collect#sthash.fudVi5tx.dpuf

Auction Overbidding: The Drive Behind it

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.

Read more at: http://www.hcplive.com/physicians-money-digest/columns/my-money-md/02-2010/fear_of_losing_auction_overbidding#sthash.9UfRygaK.dpuf

Why Your Brain Prefers a Bargain

 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.”

Read more at: http://www.hcplive.com/physicians-money-digest/columns/my-money-md/09-2010/Why-Your-Brain-Prefers-a-Bargain#sthash.2Oaecqkf.dpuf