Concerned about your plummeting 401(k)? Sick to your stomach over a risky investment? The best thing for your nerves—and your financial future—may be to think like a Wall Street trader, suggests new research.
March 17, 2009


By Amanda MacMillan
TUESDAY, March 17, 2009 ( — Concerned about your plummeting 401(k)? Sick to your stomach over a risky investment? The best thing for your nerves—and your financial future—may be to think like a Wall Street trader, suggests new research.

Yes, the financial industry’s seemingly cavalier attitude about other people’s money is probably one of the reasons you’re stressed in the first place. But researchers say those hurt by the current financial crisis may be able to improve their outlook by adopting a similar way of thinking.

In a study published this week in the Proceedings of the National Academy of Sciences, 59 participants were given a sum of money and asked to choose between taking a gamble where they could win or lose (for example, a 50/50 chance of getting $10 or losing $10) or breaking even on a sure thing. Most of the time, the volunteers chose the sure thing, says study co-author Elizabeth Phelps, PhD.

That’s because most people aren't crazy about taking risks with their money, says Phelps, a professor of psychology and director of the Phelps Lab at the New York University Center for Neuroscience. For many people, the fear of a potential loss outweighs the feel-good emotion of a potential gain. These types of people tend to have an emotional and physical reaction when they do lose money—making them less likely to take risks at all.

Traders, on the other hand, are generally less risk averse because they deal with losses every day; they work with large portfolios of stocks tend to look at the long-term, bigger picture, rather than focusing too much on individual, day-to-day ups and downs.

Next page: Think like a trader? No sweat.

In the new study, study participants were then asked to think about these bets in terms of a bigger picture—as if they were individual stocks in a larger portfolio. When they did so, their betting behavior became more aggressive.

What's more, the losses seemed to bother them less; they didn't sweat or have an increased heart rate when they lost some cash.

“By using a glass-half-full perspective rather than a glass-half-empty, these people became more willing to take chances,” says Phelps. “If they know they’re not going to be that upset when they lose, they’re less likely to avoid a situation where that might happen.”

Previous research has shown that this type of “cognitive reinterpretation” can blunt some of the fast-acting, automatic emotional responses to bad things that happen to us, says University of Oregon psychology professor Ulrich Mayr, PhD, who was not involved in the study.

“All in all, that can be a very healthy way of dealing with negative emotions,” he adds. “The study extends this to the way we deal with financial losses, and, maybe more importantly, shows that people who are good in this type of reinterpretation actually start behaving as if they cared less about losses in their investment choices.”

When people are faced with these types of decisions, says Phelps, it’s important to remember that emotion does seem to play a strong role.

“Changing your perspective might allow you to change your decision about something,” she explains. “If you’re considering of making an investment or taking a vacation but you’re a little nervous about it, thinking about the excitement versus the risk can help make up your mind.”

Next page: Don't ignore losses, though

Of course, this won’t protect you from the possibility of losing money on an investment. And Mayr says it’s important that people not rely too much on wishful thinking: “If traders come to habitually ignore losses through cognitive reinterpretation, they may miss the signals that indicate trouble ahead as a bull market starts to shift to a bear market.”

Historically, however, people who are aggressive and take risks with their investments do tend to be more successful in the long run. At the very least, says Phelps, this strategy may help people debating a decision—financial or otherwise—get off the fence and take the plunge.

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