Songwriter Don Schlitz spent two years trying to get someone to record his song, “The Gambler.” Eventually several artists recorded it, but those went nowhere. Until Kenny Rogers recorded it in late 1978 and made it a monster hit.
Not every great idea is instantly successful. Not every stock purchase doubles immediately.
There is an environment that matters. The Gambler in the song knew the answer. It applies to more than poker.
“If you’re gonna play the game, boy, ya gotta learn to play it right.
You got to know when to hold ’em, know when to fold ’em,
Know when to walk away and know when to run.
You never count your money when you’re sittin’ at the table.
There’ll be time enough for countin’ when the dealin’s done.
Now Ev’ry gambler knows that the secret to survivin’
Is knowin’ what to throw away and knowing what to keep.
‘Cause ev’ry hand’s a winner and ev’ry hand’s a loser,
And the best that you can hope for is to die in your sleep. “
How to allocate capital. How to quit. How to keep track and when to begin noticing.
Every decision is potentially a winner and the same can become a loser if poorly executed or poorly timed. Most of us are better administratively than we are as executives. To do lists and such, keep us organized, but our brain runs free on a possibility list. That leads to emotional decisions.
The Wharton School of Business at the University of Pennsylvania recently published an article. Why Do We Make Bad Stock Decisions? You should read it.
The gist is we sell winners too soon and keep losers too long.
Are there brain factors that make this behaviour inevitable? It relies on research by behavioural economist Colin Camerer at calTech. His research is in decision neuroscience and neurofinance.
I must confess, neurofinance is new to me.
First he claims that the outcomes of his study are not conclusive. More like a sketch than photograph. They are nonetheless intriguing.
His experiment dealt with just three possible “stock” choices, whose prices were then manipulated. Participants could alter their choices and had opportunities to buy, sell or hold. But just one stock at a time. No diversification opportunity here.
Collective activity matters. What one of us does may be different from what “all of us” do. How do we measure immediate and long term rewards and costs, and how do we do it while interacting with others? Especially how do we anticipate their actions. What do we do then?
One such decision, the regret / repurchase decision is badly handled. When we sell too soon we have a negative reaction if the stock goes up. Do we rebuy? No! Because it makes our first action look stupid. Ego ahead of information.
He has seen the results with fMRI studies. It seems the discomfort (fear) response is in the insula cortex and the euphoria (greed) response is in the nucleus accumbens. They have not yet tried to stimulate the regions and discover the outcomes of that. Building bubbles and panics on purpose.
We are governed by emotional responses to external stimuli and they are not always in our interest. Some of us may pay more attention to the brain signal, or may do so sooner and thus gain an advantage in performance. Maybe our brain does know when to hold ’em and know when to fold ’em.
Maybe we don’t listen.
I arrange life insurance for people who understand the value of a life insured estate.
In previous careers, I have been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
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