Washington State Magazine

Spring 2002


Spring 2002

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In This Issue...

Features

Nurses to the homeless :: Gypsy's camp is evidence of the harsh living conditions faced by a growing number of homeless in Spokane. It also doubles as a classroom, and a lesson in reality, for student nurses. By Andrea Vogt.

A campus full of wonders :: All over campus, curiosities emerged from closets to form one of the most popular and unusual shows ever to fill the art museum. By Tim Steury.

What don't we know? :: James Krueger wants to know why the average person will spend 219,000 hours asleep. By James Krueger and Tim Steury.

Memories are made of this :: Neuroscientists Jay Wright and Joe Harding can approximate Alzheimer's symptoms in a rat by injecting a certain protein into its hippocampus. What's more, they can reverse those symptoms. By Tim Steury.

Catherine Mathews Friel is thankful for...Life in a small college town :: Catherine Friel has lived in Pullman nearly 100 years, and she has some stories to tell. By Pat Caraher.

Opening Day...a great way to reunite Cougars :: Cougars batten their hatches and hoist their mainsails. By Pat Caraher.

Fiction

The Peking Cowboy :: He wanted to tell the story in the third person, but it came out in the first; he wanted to tell it in the past, but it came out happening in the now; even if he wanted to, he could not change a word of it, its sequence and language clarifying its own shape and direction in his voice. A short story by Alex Kuo.

Panoramas

Departments

Tracking

Cover: Student Jennifer Schwarzer and Intercollegiate College of Nursing instructor Carol Allen. Read the story here. Photograph by Ira Gardner.

Panoramas

The other side of the coin

by | © Washington State University

Making financial decisions is difficult to begin with—even more so when we let our emotions get in the way.

“Greed is good,” says Gordon Gekko in the movie Wall Street.

Although I would not go quite that far, greed is a natural human emotion. A Wall Street adage states that two factors move the market: fear and greed. This perception is fueled partly by the media and partly by reporters who wish to be dramatic but may not fully understand what truly drives the market. While ideas of fear and greed have dramatic potential, the characterization is far too simplistic. The human mind is too sophisticated, and human emotions too complex for fear and greed to adequately describe the psychology that affects investors.

Historically, students of finance have ignored the role of emotion in the investment world. Instead, they have focused on developing tools for investors to measure and control risk and optimize return. This endeavor has been fruitful, yielding ideas about diversifying investments and finding undervalued stocks. Although investors should use these tools for investment decision-making, they typically do not, because psychology and emotion affect their decisions more than financial theory does.

For example, our desire to feel good about ourselves causes us to sell stocks that have risen in price. Selling a winner makes us feel like we made a good decision buying that stock and makes us feel like winners too. However, we also want to avoid feeling the pain of regret. So we hold onto losing stocks too long. The consequences of these emotions are that we sell high-performing stocks and keep low-performing stocks. This behavior not only diminishes our future returns, it also causes us to pay higher taxes. That is no way to increase our wealth!

Overcoming our emotions in an attempt to make good investment decisions is not easy. We have trouble enough controlling ourselves in all aspects of our life, let alone our financial life. However, we seem to get more help shoring up our willpower in non-financial matters. For example, many books and articles show us how to overcome the roadblocks we put up for ourselves: problems with our relationships, sticking to our diet, continuing our exercise program, or living by our faith. By contrast, we get very little help managing our debt, our budget, or our investing.

Which is unfortunate, because making financial decisions is difficult to begin with. We must make decisions based on information that may be inadequate or inaccurate. And we must be able to effectively understand and analyze that information. The task becomes more difficult when we let our emotions get in the way of good decision-making.

Consider these common investment laments:

“If the stock’s price would just go back up to what I paid, I would sell it.”

“Why do I seem to buy high and sell low, instead of the other way around?”

“I knew I shouldn’t have bought that stock, but I did it anyway.”

“I know I should be contributing to my retirement plan, but I never seem to get started.”

If you have made comments like these, then you have let your investment decisions be affected by your emotions.

We are constantly bombarded by the media with opinions and ideas that others want us to have. Are these opinions and ideas, put forth by banks, brokerage firms, insurance firms, and the rest of the finance industry, really the best for us and our money?

In future articles, I hope to explore with you the other side of the coin of investing—to help you think about money and the world of finance in a different way.

John R. Nofsinger is professor of finance at Washington State University and author of the book Investment Madness. He can be reached at John_Nofsinger@wsu.edu.

Categories: Business | Tags: Money, Investments

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