Investing and Dopamine?

I know this may not sound like a related topic but i really think it is way more correlated than what you may think.

Let’s start by acknowledging the time we live in, technological progress has been amazing in the last couple of years.

For example, 20 years ago we didn’t have:

Social media (YouTube, Facebook, Instagram)
Smartphones
Ride-sharing services (Uber & Lyft)
Streaming (Netflix. Disney+, Prime video)

This have been convenient and provided entertainment, though at what cost?

Dopamine

Well I’m not here to give you the full scientific definition of what and how dopamine works. There are now a lot of great places to learn about that. Basically, is a chemical in our brain that influences our motivation and even happy states.

I do want to give you a little insight in how these new technologies that i previously mentioned can be very detrimental for our life.

Can you see how social media (just obsessively scrolling to distract yourself), UberEats (easy access to huge amounts of junk food), Netflix (access to infinite movies and Tv shows) can be of any detriment to you?

This is not a post about improving your daily habits, though if you know you are lacking in any of the above you should definitely do something about it ASAP.

Anyways this has more to do with how these technologies have impacted this chemical called “dopamine” and how this brings so many problems that most of the people are not even aware of.

Don’t believe me? Just go at your nearest Starbucks or local coffee shop. Then sit and enjoy your coffee and look around. It’s very rare to spot someone who isn’t on their phone. Worse than that is they normally are just scrolling mindlessly.

It seems everyone has a phone addiction.

All of this is really unprecedented, before we had nothing close to this number of technologies that allows instant gratification.

This can contribute to problems such as:

Disrupting attention spans and motivation system
Dopamine Dysregulatio
Creating addictive behaviors

Investing… ?

But how does all of this affect our investing capabilities?

Does it really affects it at all? Well i tend to think it does.

Let me explain to you why.

Living with all of these technologies that allow us for so much instant gratification it is no wonder we are living such a fast paced life.

Shortening our attention spans and messing with our ability to be patient and understand not everything will be immediate.

Both traits that i believe are key to investing and life.

You may think i am just messing around and that all of this is just mere speculation.

First of all the dopamine dysregulation seen from “phone addiction” i don`t need to prove that. Just go out as i said and you will see it for yourself.

The second point which is that this is also affecting our way of investing, therefore making worst investors. This is where i had to do some research in order to give more validity to what i just thought to be “obvious”.

Investing -Psychology -Dopamine

If you think in casinos probably you think about money, gambling, lights, music.

Not so much in human psychology, economics, probability, and behavioral psychology.

I’m fascinated by how they are able to trick our minds and disguise such every little detail in apparently “simple” non harmful ways.

One of them for example is how in the slot machines you never get to know when you will win something, it is very random in nature, so it keeps you wanting to go “one more”.

This is called intermittent reward, and it is the same process that applies to social media with “likes” “comments” etc. Keeps you engaged-addicted craving for WHEN is the reward finally coming.

Now also the lights and sounds are another component that play a role!

Sounds mimicking coins or high pitch sounds keep engagement and the feeling of winning, even though you could be losing! They also use color psychology to foster engagement, so you continue playing!

Now you may ask what the heck does this casino analogy has anything to do with investing? Everything.

Trading Platforms

Just look at some of the most recent “trading platforms” like Robinhood which is popular for retail traders.

Is filled with colors, noises, fully distracting but engaging. It even has the audacity to make you “gamble” in which direction you think a stock will move by buying “CALLS” or “PUTS” which are financial derivative instruments which require an in-depth knowledge.

Have in mind that I’m not saying Robinhood is bad for this or is the only platform that works like that, in fact most trading platforms feature sounds, colors, quotes of the stock prices in real time.

Making it very very likely that people will treat investing as gambling.

This was of course more evident and prevalent while millions of people had to stay at home while the pandemic was in full swing in the year 2020. People were rushing for immediate results and expecting gains of 1000% buying options that expire the same day just like a lottery ticket.

Remember the full GameStop short squeeze debacle!?

“Investor” Behavior

This of course has an impact on everyone because we are humans and humans are guided by emotion and whole complex chemical cocktail of neurotransmitters that reside inside of us.

What does that mean? It means even great traders and investors can be affected by all of this.

I recall a great trader who never placed orders when markets were open, because he knew emotions could get in control and his process. So what he did was placing the buy or sell orders while the markets were closed, that way hi didn’t let any emotion of fear, greed or whatsoever interfere with his process.

There was other example of one of my favorite investors Nick Sleep from the Nomad investment partnership. He and his friend and also fund manager Qais Zakaria didn’t have a desk with chair, they instead had a standing desk so they couldn’t be more than a couple of minutes in front of the charts, investment news and full display of infinite information on a Bloomberg terminal.

That allowed them to remain passive and just “Buy & Hold” which is in itself an active decision of doing “nothing” and get a 900%+ return over 10-year period. Not bad. huh?

But Retail?

Here is where the real problem is.

As i pointed out even the great investors need their own techniques or routines that allow them to be disciplined to follow their strategy and not succumb to their own emotions.

If that holds true for the best, what can the average investor or newcomers expect to achieve? Not much unfortunately.

Why? Because of all the pointed above!

Here is when i took the task to investigate further on investor behavior and compare a time where all this technological and immediate reward systems weren’t in place vs today.

What were the results?

Average period of holding a stock since 1930 to 2020`s has shrinked from an average of 10 years to an average of 5 months

The simple but not so easy reality is that buying and holding great assets continues to be one of the greatest strategies and one that could benefit the most amount of investors.

The problem? We are living in a society that is increasingly leaning towards wanting everything immediately and not being able to wait.

Like Warren Buffett once said:

No matter how great the talents or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.