Sept 20, 2005
Psychopaths make the best investors
'Functional psychopaths' make the best investment decisions because they cannot experience emotions such as fear, a study by researchers at the Stanford Graduate School of Business (GSB) showed.
Fear stops people from taking even logical risks, meaning those who have suffered damage to areas of the brain affecting emotions, and can suppress feelings, make better decisions, the report showed.
The ability to control emotion helps performance in business and the financial markets, researchers found.
'Many chief executive officers and many top lawyers might also share this trait,' Professor of neurology Antoine Bechara, at the University of Iowa, said in a statement on the Stanford GSB website.
The study was carried out by Stanford, Carnegie Mellon University and the University of Iowa.
The participants in the study were given US$20 (S$34) to play a gambling game. At the beginning of every round, they had to decide whether to risk a US$1 dollar stake on a toss of the coin, for a US$2.50 return if they won.
While any player could decline to take part in a round, the financially 'logical' approach to the game was to participate at each stage because the 'potential return' outweighed the risk of loss.
Brain-damaged players took this approach. They finished on average US$3 richer than the others and invested in 84 per cent of the rounds, compared with 58 per cent played by the rest, who let 'fear' govern their decisions, the study showed.
The results help to explain the 'equity premium puzzle', or why more people invest in bonds than stocks, when equities historically offer a higher average return, the report said.
'Investors are not behaving in their own best financial interest,' co-author Baba Shiv of the Stanford GSB said.
'All research suggests that, even after taking into account fluctuations in the market, overall people are better off investing in stocks in the long term.'
Many successful investors may be so-called 'functional psychopaths' because they lack or can suppress emotions, according to the study.
Still, Mr Shiv said emotions are not all bad.
Those who cannot experience feelings tend to make 'disadvantageous' social decisions, losing their jobs and their friends, the report said.
-- BLOOMBERG NEWS
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