In the late 40s in America a nut called Walter Freeman carried out some 3,500 transorbital lobotomies, having developed a way to carry out this procedure quickly and without the need for an operating theatre. He travelled 23 states in all in a van he called his “lobotomobile,” seeking to convince doctors that his treatment was a legitimate form of psycho-surgery.
His gruesome ideas might yet have their day.
According to James Montier at SocGen, those investors who do best in bear markets are those who don’t feel fear – or, more specifically, those who have suffered a particular type of brain damage, lesions on the orbitofrontal cortex. a.k.a. a lobotomy.
Montier has dug out the work of Shiv, Loewenstein, Bechara, Damasio and Damasio and their 2005 paper ‘Investment behavior and the negative side of emotion’, published in Psychological Science. They carried out an experiment showing pretty conclusively that those with this specific brain damage – however caused – could invest without emotion. Those who could feel the pain of loss, on the other hand, were the heaviest losers.
The parallels with bear markets are (I hope) obvious. The evidence above suggests that it is outright fear that drives people to ignore bargains when they are available in the market, if they have previously suffered a loss. The longer they find themselves in this position the worse their decision-making appears to become.
We hasten to add that Montier is not going to present himself as a latter day Freeman. In his latest ‘Mind Matters’ note to SocGen clients he simply advocates religion:
Investors should consider trying to adopt the Buddhist approach to time. That is to say, the past is gone and can’t be changed, the future is unknown, and so we must focus on the present. The decision to invest or not should be a function of the current situation (from my perspective the degree of value on offer) not governed by our prior experiences (or indeed our future hopes). However, this blank slate is mentally very hard to achieve. Our brains seem to be wired to focus on the short term and to fear loss in an extreme fashion. These mental hurdles are barriers to sensible investment decision-making in a bear market.
Related links:
Teenage Lobotomy – The Ramones
_____