A Pill for Investment Success


If a drug existed that promised to help you achieve higher investment returns, would you take it? A behavioural finance forum raised this question, and it wasn’t hypothetical. After all, doping has occurred in other areas of extreme human endeavour, like sports. So, why not in investing? Indeed, recent media coverage of ‘smart drugs’, supposedly capable of boosting human intelligence, and of psychedelics as a means to enhance productivity, suggests that it might be possible. Just like in the movie, Limitless, a chemically enhanced individual could stomp around the capital markets earning outsized returns.


If athletes could use devices, they wouldn’t take drugs

Even if these drugs were effective, it seems to me that we would need more than this to achieve greater investment returns. This is because these substances only seek to enhance our concentration, memory and computational power. Yet, we cannot ignore that investors already have access to this kind of brain power – computers – and this has been no guarantee of greater performance. And Bradley Cooper would not have done anywhere near so well had he refused to cut a loss just because he didn’t want to lose face in front of his boss, Robert de Niro.


To produce better investors, therefore, a pill would need to target not just the way we perceive and process information, but also our preferences. The pill would certainly have to be capable of undoing the preference that is the most robust, widespread, and probably the most damaging for investment outcomes: #LossAversion. This trait manifests itself in a disproportional reluctance to realise losses, meaning that investors tend to let poor investments run for too long. Profits, on the other hand, are realised too soon, for fear they turn into losses.

Being wrong is no fun

Imagine a drug that would allow gains and losses to be perceived with weights equal to their monetary value. It would eliminate this bias and allow good and bad investments to be dealt with correctly. The first thing that would happen is that losses would be realised more often. These losses would be smaller than under the drug-free condition, but there would be more of them. So, we would have to concede that we were wrong more frequently. There would also be a smaller number of profits realised, because the doped investor would be more willing to let the profits run. Being right would be more rewarding, but we would experience it less frequently. The result would be better performance, but one’s well-being would take a dreadful knock.

The effects of the pill wouldn’t end once the investing day was over either. Super-investors would sit and wait in a line of slow-moving traffic on the commute home because there would be no satisfaction to be had from switching lanes to gain a few metres on adjacent motorists; they would draw no pleasure from discovering a sale bargain after having spent hours trawling the department stores; they could not even lean back and savour their achievements from time to time, as their motivation is undiminished by having reached their objectives.

So, whilst performance could be drug-enhanced, both in and out of the office, it may well come at the expense of one’s welI-being. As human evolutionary selection has clearly preferred loss-averse individuals, this is perhaps a trait that one should treat with more respect. An investment pill sounds appealing but be careful of those side-effects.

 

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