The Psychology of Investing Quotes

“The DRD4 gene has variations called alleles that differ in the number of times a segment of the gene repeats itself. The most common versions are either the 4-repeat allele, which is carried by approximately three-quarters of the population, or the 7-repeat (or more) allele. The presence of the higher-repeating alleles (7 or more) has been shown to be related to reduced sensitivity to dopamine. A reduced sensitivity to dopamine requires relatively more stimulation to provoke the same internal reward. People with at least one allele of 7-repeats or longer are more likely to engage in novelty-seeking or compulsive gambling.”
― John R Nofsinger, The Psychology of Investing

“A common adage on Wall Street is that the markets are motivated by two emotions: fear and greed. Indeed, this book suggests that investors are affected by these emotions. However, acting on these emotions is rarely the wise move. The decision that benefits investors over the long term is usually made in the absence of strong emotions.”
― John R Nofsinger, The Psychology of Investing

“Mental shortcuts, also called heuristic simplifications, help us analyze situations and make decisions quickly in our daily life. However, this process often leads us astray when analyzing decisions with risk and uncertainty. Because investing decisions involve substantial risk and uncertainty, our decisions are biased in predictable ways. The representativeness bias causes us to extrapolate the past and assume that good companies are good investments. The familiarity bias causes us to believe that firms we are familiar with are better investments than unfamiliar firms. Thus, we own more local firms and our employer’s stock and few international stocks. Thus, these biases lead to low diversification and higher risks.”
― John R Nofsinger, The Psychology of Investing

“Saving money from a monthly salary requires much more self-control.8 This might be why the savings rate of countries like Japan is higher than that of the United States. A higher percentage of income in Japan is from the year-end bonus. However, a simple environmental control of automatic payroll deduction or an automatic investment plan can make saving easier.”
― John R. Nofsinger, The Psychology of Investing

“Investors often regret the actions they take, but seldom regret the ones they do not.”
― John R. Nofsinger, The Psychology of Investing

“Their evidence supports life-cycle predictions that older investors hold less risky portfolios. They also show evidence that experience leads older investors to exhibit stronger preference for diversification, trade less frequently, exhibit greater propensity for year-end tax-loss selling, and exhibit fewer behavioral biases. Consistent with cognitive aging effects, they found that older investors exhibit worse stock selection ability and poor diversification skill. As investors both age and gain experience, their investment skill increases. Then, as cognitive aging begins, that skill starts to diminish, even while gaining more experience. The investment skill deteriorates sharply starting at the age of 70. The impact of the declining cognitive ability results in an estimated 3 percent lower risk-adjusted annual returns and that underperformance increases to over 5 percent among older investors with large portfolios. Thus, there are real economic consequences to cognitive aging.”
― John R Nofsinger, The Psychology of Investing

“the 7-repeat allele are less likely to make the safe, patient financial choice. The neurobiological difference between the groups is that 7-repeat people need more stimulation to feel the same pleasure of dopamine. Small changes in stimulation do not generate enough joy to notice. Small stimuli have little or no effect on 7-repeat people and they seek strong stimuli to feel the dopamine reward. This appears to have an impact on their financial decision making.”
― John R Nofsinger, The Psychology of Investing

“The interesting finds are that the 7-repeat people: hold fewer funds in savings; are less likely to pay off credit card balances each month; withdraw more cash than needed at the ATM; are less likely to use a debit card instead of a credit card; and are less likely to purchase overdraft protection.”
― John R Nofsinger, The Psychology of Investing

“One of these genes, known as DRD4, produces receptors in the limbic system, the prefrontal cortex, and the striatum areas of the brain. These regions of the brain are responsible for motivation, cognition, and emotion. Thus, variations in this DRD4 gene can impact how people are rewarded (with joy) for various thoughts and activities. If these thoughts and activities are about risk and uncertainty, it could impact a person’s level of risk aversion.”
― John R Nofsinger, The Psychology of Investing

“Compared to females from a same-sex twin, the study concludes that female twins from an opposite-sex pair: allocates more of her financial assets to equity; invests in a higher-risk portfolio, as measured by return volatility; and allots a higher proportion to individual stocks relative to mutual funds.”
― John R Nofsinger, The Psychology of Investing

“The theory postulates that for opposite-sex fraternal twins, the higher level of prenatal testosterone in the amniotic fluid from the male fetus increases the pre-birth testosterone exposure of the female fetus. This results in a masculinization of the female twin. In general, women tend to be more risk averse than men. If this transfer theory and prenatal testosterone exposure theory are correct, then the female twin of a female-male pair should take more financial risk than other women, all else equal.”
― John R Nofsinger, The Psychology of Investing

“The study findings show that genetics has a similar role in acquiring financial wealth, explaining about one-third of the decisions, as found in the twin studies. The role of genetics is very high (over 50 percent) in educational level attained, but plays no role in the equity portion of the portfolio. The genetic role for stock market participation is nearly 14 percent. Overall, the study illustrates that a person’s genes has an impact on their financial decisions.”
― John R Nofsinger, The Psychology of Investing

“In summary, our genes seem to explain a large portion of the investment decisions we make and the biases we exhibit. The environment in which we are raised explains a very small portion of these decisions. In that regard, nature drives our decisions more than nurture. However, the experiences we have throughout adulthood explain the highest portion of our decisions. Thus, in the end, nurture wins out.”
― John R Nofsinger, The Psychology of Investing

“Too much optimism leads investors to underestimate risk and overestimate expected performance. Optimistic investors tend to seek good-story stocks and be less critical. Pessimistic investors tend to be more analytical. Extended,”
― John R Nofsinger, The Psychology of Investing

“Scholar Diego García examines the tone of the words in two financial news columns of the New York Times over a century.22 He shows that when the fraction of the words in the articles is more negative, the stock market declines the following day. That is, negative sentiment leads to lower stock prices. The market reaches the bottom when sentiment is very pessimistic, thus leading to long-term higher returns.”
― John R Nofsinger, The Psychology of Investing

“These results suggest that optimistic investors bid up speculative stocks to overvalued levels. When the optimism becomes high, so does the stock price. Eventually, the optimism reaches its peak. From these high levels, the stocks subsequently earn a lower return. Pessimistic investors avoid speculative stocks, which fall to a low level. As the sentiment gets more negative, stocks decline.”
― John R Nofsinger, The Psychology of Investing

“When individual investors are optimistic, the demand for these funds increases and the discount declines. Pessimistic investors sell the funds, and the discount increases.”
― John R Nofsinger, The Psychology of Investing

“The prospects of large, well-established firms have less uncertainty, so their stocks prices are generally more reflective of actual prospects than of optimistic prospects. For example, the business potential of General Electric, Procter & Gamble, and Intel are well known and leave little room for a high degree of optimism and pessimism. For firms with a high degree of uncertainty, optimists tend to set the stock price until that uncertainty is resolved. This resolution usually includes a downward revision of optimism and a decline in the stock price.”
― John R Nofsinger, The Psychology of Investing

“Optimism skews a person’s beliefs and judgments. Optimistic people believe they are less likely than average to experience disease and divorce or to be a victim of crime. This belief can cause the optimist to take unnecessary risks.”
― John R Nofsinger, The Psychology of Investing

“High suicide rates in one month are associated with poor stock returns during the same month and during the subsequent month. Again, negative emotions are associated with poor stock market returns.”
― John R Nofsinger, The Psychology of Investing

“the day after the season finale, the stock market declines.14 People are sad about the end of their show—it is the end of a relationship people experience with the characters of the show. If enough people experience these negative emotions, the misattribution bias can impact the stock market.”
― John R Nofsinger, The Psychology of Investing

“The outcome of soccer matches in the European or World Cups produce substantial mood swings in a large proportion of a country’s population. Psychologists have found an increase in heart attacks, crimes, and suicides accompanying sporting losses.”
― John R Nofsinger, The Psychology of Investing

“The returns in 48 stock markets around the world were investigated during the lunar cycle.12 Stock returns were 3–5 percent lower per year during the seven days around the full moon than around a new moon.”
― John R Nofsinger, The Psychology of Investing

“Psychologists have reported correlations between the full moon and depressed mood. If the lunar cycle impacts investors, then they may value stocks less during a full moon relative to a new moon, thus causing a lower return around the full-moon period.”
― John R Nofsinger, The Psychology of Investing

“That is, good weather promotes risk taking. The sunshine puts people in a good mood and does not inhibit their ability to quantitatively assess choices. So, they continue to have the mental capacity to be critical, but the good mood seems to bias them toward making decisions through optimism and lower risk aversion.”
― John R Nofsinger, The Psychology of Investing

“when the weather is sunny, institutions have a greater propensity to buy stock.”
― John R Nofsinger, The Psychology of Investing

“Antonio Damasio reported on patients who suffered damage to the ventromedial frontal cortices of the brain. This damage leaves intelligence, memory, and capacity for logic intact but impairs the ability to feel. Through various experiments, it was surmised that the lack of emotion in the decision-making process destroyed the ability to make rational decisions.3 Indeed, these people became socially dysfunctional. Damasio concluded that emotion is an integral component of making reasonable decisions.”
― John R Nofsinger, The Psychology of Investing

“Employees who work for a company whose stock price increase ranked among the top 20 percent of all firms in the past five years allocated 31 percent of their contributions to the company stock. This compares to an allocation of only 13 percent to company stock in firms whose performance was in the worst 20 percent. The actual 401(k) asset allocation behavior of employees suggests that they use the past price trend (the representativeness bias) as a determinant for investing in the company stock (the familiarity bias).”
― John R Nofsinger, The Psychology of Investing

“The brain often uses the familiarity shortcut to evaluate investments. This can cause people to invest too much money in the stocks that are most familiar to them, like their employer’s stock. Ultimately, this leads to a lack of diversification. In summary, investors allocate too much of their wealth to their employer, local companies, and domestic stocks.”
― John R Nofsinger, The Psychology of Investing

“When you are familiar with something, you have a distorted perception of it. Fans of a sports team think their team has a higher chance of winning than nonfans of the team. Likewise, investors look favorably on investments they are familiar with, believing they will deliver higher returns and have less risk than unfamiliar investments. For example, Americans believe the U.S. stock market will perform better than the German stock market; meanwhile, Germans believe their stock market will perform better.26 Similarly, employees believe the stock of their employer is a safer investment than a diversified stock portfolio.27”
― John R Nofsinger, The Psychology of Investing