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Robin Powell: Hello there. A key attribute
The issue is partly emotional. Investors are prone to several
But it’s also physiological. A study has found that stressful situations, and raised hormone levels, in particular, can make people take more risks.
Researchers invited 142 volunteers, all of
Ed Roberts: It increased risk-taking in riskier stocks, but it also was associated with the participants being more optimistic about the way these stocks would increase in price, so they just thought these stocks would go up more than when they were on the placebo. So it means that they were taking more risks because they were more optimistic about the future. Which is quite interesting because testosterone might be changing your perceptions of the future, so although the information is the same, you think "No, I think things will be better in the future.", therefore it’s logical to take more risks.
Robin Powell: This research has important implications for investors. If you use active fund managers, remember that they work in highly
Also, you yourself should avoid making big decisions regarding your portfolio when you’re feeling under pressure.
Ed Roberts: The critical thing is to be aware that these factors do have an effect, so stress has an effect on your decision making, and testosterone would, so in terms of being overconfident, these are factors that do change your behaviour and they don’t, on the basis of our experiment, bring you any more returns.
So that’s sort of the critical thing, if you want to make the best financial decisions, you want to be in the right frame of mind to make those, and being stressed or highly overconfident, irrationally exuberant, those aren’t the best conditions for that.
Robin Powell: Remember, too, that having a rational and unemotional adviser can also help. Investment decisions are very important. A good adviser will always ensure that the client is in the right frame of mind to be making them. Thanks for watching.