FEELINGS

The subject of Behavioural Finance is becoming extremely well known in finance and investing circles; however, there remains a common misconception as to the role feelings play in our investment decision making process. Superficially it appears that our feelings cause us to make irrational decisions in situations of uncertainty and therefore the best cure for our attack on our feelings bias’s is to cut them out completely. Until recent advancements in neuroscience this mistaken assumption would have been acceptable thinking; going forward far more comprehensive models will be required to outsmart our own smarts.

Allow me to take you on a journey of philosophical thinking before providing you with some scientific proof. Importantly these ideas and a lot of the words have been taken from an excellent book by neuroscientist Jonah Lehrer called, The Decisive Moment.

The question of how we make decisions has been puzzling philosophers throughout the ages. Plato was one of the 1^st to tackle the subject and used the now famous analogy of a charioteer being pulled by 2 horses. The charioteer being the rational brain and one horse representing good and the other bad combining to represent our feelings. Plato wrote of the bad horse, ‘He is of an ignoble breed. He has a short bull-neck, a pug nose, black skin, and bloodshot white eyes; companion to wild boasts and indecency, he is shaggy around the ears – deaf as a post – and just barely yields to horsewhip and goad combined’.  What Plato was putting across is that the human job as charioteer is to keep going forward by keeping both horses under control and in so doing he pioneered the thought of the mind being separated into 2 spheres; reason and emotion as became accepted by western culture.

René Descartes a leader of the Enlightenment era took a similar view and separated man into a soul representing the reasoning part of man, and a body full of ‘mechanical passions’. His objective was to advance man as an entity that could triumph reason over emotion, with the Cartersian faith forming the basis of modern philosophy. Francis Bacon and Auguste Comte took this rational approach to society further as did Thomas Jefferson with his hope for America been governed by reason alone. Immanuel Kant took it a step further with the imperative that morality was rationality. Freud to embraced Plato’s style of thinking by describing the mind as divided into a series of conflicting parts (id, ego) with the survival of modern society incumbent on man sacrificing the id (pleasure principle) for the sake of greater good.

Then with the increasingly scientific approach of mapping the cortex of the brain modern science became uncomfortable with a lot of the theory surrounding human thought. It lead to the belief that the mind behaved like a computer and therefore scientists such as Marvin Minsky (the pioneer of artificial intelligence) thought the programming of computers could replicate the human mind as one driven by rational thought. Cognitive psychologists followed this line of rational thinking taking it through to the field of our interest Behavioural Finance.

To summarize; the line of thinking Plato and his followers supported was a utopia whereby man could use his reasoning sphere of the mind to completely shut out the emotional side, which after all was the cause of all mistakes throughout the ages. As Lehrer in his book puts it, ‘the truth is far more interesting’. Science proves to us that in fact both sides are mutually dependent upon each other and without emotions reason wouldn’t exist at all. Talk about turning accepted philosophy on its head. In the story that follows Lehrer presents a case study where we learn how important emotions are in our decision making process.

In 1982, a patient named Elliot walked into the office of neurologist Antonio Damasio. A few months earlier, a small tumor had been cut out of Elliot’s cortex, near the frontal lobe of his brain. Before surgery Elliot had been a model father and husband and held an important management job. But the operation changed everything. Although Elliot’s IQ stayed the same he now exhibited one psychological flaw: he was incapable of making a decision. This made normal life impossible, routine tasks that would take minutes now took hours, with endless deliberation over irrelevant details. Damasio realized while in conversation with Elliot and later confirmed it with scientific brain testing that Elliot no longer had feelings.

At that time neuroscience believed human emotions were irrational and therefore not having feelings should make for better decisions. ‘The charioteer should have complete control’. What we now know is that a brain that cannot feel cannot make up its mind.

To bring some closure to this journey it is worth understanding how the emotional brain system works according to neuroscience. ‘The orbitofrontal cortex (OFC) is responsible for integrating visceral emotions into the decision-making process. It connects the feelings generated by the primitive brain – areas like the brain stem and the amygdala, which is in the limbic system – to the stream of conscious thought’. To say this in English the brain only feels comfortable making decisions when it experiences positive stimuli along with its rational calculations. The field of neuroscience is scientifically able to demonstrate how certain stimuli trigger emotions and their involvement in brain computation making the field of Behavioural Finance and Neuroscience mutually dependent on one another.


I would therefore like to suggest that in order to advance our ability to make decisions under uncertainty a two pronged approach is necessary, i.e. the study of our behavioural biases along with the influence neuroscience has to offer. To negate feelings just because we are scared of the biases they may represent is a one dimensional approach to the teachings of Behavioural Finance and is perhaps a misdirected objective - much like the philosophy taught by Plato and his followers.