Researchers have shown that the areas of the brain that light up on brain scans of investors are often the same ones that light up in high stakes gamblers. There is a huge rush when an investment really takes off, and you make a lot of money in a very short period. This can lead to the investor turning into a gambler, seeking that “rush” rather than long-term, safe returns.
Cognitive psychologists regard sensation seeking as a stable personality trait that varies across individuals. Sensation seekers are those people that search for new, intense, and varied experiences that can be associated with real or imagined physical, social, and financial risks. The trait generates behaviors in many areas that are less frequently observed among those endowed with lower degrees of the sensation-seeking trait: these include risky driving, risky sexual behavior, frequent career changes, gambling, and even crime. Sensation seeking behavior crosses many domains; hence, a roulette player may also drive too fast and trade too frequently. Trading, then, can fit the definition of a sensation seeking for some people.
Involvement in financial markets is perceived by many to be economically risky. Buying and holding stocks, however, lacks the novelty and variety that the sensation seeker craves. Gambling is also risky, but repetitious betting adds novelty and change. A single bet may not be as rewarding to the sensation seeker as successive smaller bets. It is the newness of the recently traded stock in a trader’s portfolio or the shifting in the trader’s position in a security that provides consumptive utility to the sensation seeker. An implication of this is that a diversified portfolio can be as stimulating to the sensation seeker as a nondiversified one. However, a static portfolio is not as gratifying as a dynamic one.
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Last Updated: 6/25/2018
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