Investing from the Heart
"Successful investors in the stock market might plausibly be called "functional psychopaths." These individuals are either much better at controlling their emotions, or perhaps don't experience emotions with the same intensity as others do." --Antoine Bechara, Associate Professor of Neurology, University of Iowa
Bechara was part of a research team that analyzed investment decisions made by persons who were unable to feel emotions due to brain lesions. These persons earned $25.70 on their investment stake of $20, while "normal" study participants earned only $22.80. The "investments" were made a dollar at a time; "normal" participants were more likely to become nervous about continuing to invest, although the study was designed in such a way that investing very obviously was the logical thing to do.
Irrationality accounts for many situations in which investors chase improbable performance from stocks with which they've formed an emotional bond, fail to balance and diversify portfolios, or invest in ways unlikely to attain their goals. They should give heed to the Robert De Niro character: "Don't allow yourself to get attached to anything you cannot walk away from in thirty seconds flat if you feel the heat around the corner." Also, this is a good point to bring up the stock market axiom; "Hunch trading is one of the worst ways to trade, but it is one of the best ways to lose money."
Emotional investing can be defused in some simple ways. When a stock is added to the portfolio, write down the reasons why and when it should be sold; make that the blueprint for future action. Have a competent friend or outsider who won't be reticent about pointing out an illogical contemplated investment move. Conduct an annual sunset portfolio review; if keeping any component sounds more like an alibi than a solid reason--well, you know what to do! And see how many of the Fifty Ways You Know You Are an Emotional Investor apply to you.
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