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