Friday, January 02, 2009

Why We Take Risks — It's the Dopamine - TIME

We know that most investors are risk averse, but in spite of that, many of us take risks that rationally may not make sense. In class we have generally explained this via a catch-all "Its fun" and people maximize utility not a risk adjusted return.

From science we now have a better grasp on the "it's fun".

From Time: Why We Take Risks — It's the Dopamine - TIME:
"A new study by researchers at Vanderbilt University in Nashville and Albert Einstein College of Medicine in New York City suggests a biological explanation for why certain people tend to live life on the edge — it involves the neurotransmitter dopamine, the brain's feel-good chemical. (See the Year in Health, from A to Z.)

Dopamine is responsible for making us feel satisfied after a filling meal, happy when our favorite football team wins ....It's also responsible for the high we feel when we do something daring,...skydiving out of a plane. In the risk taker's brain, researchers report in the Journal of Neuroscience, there appear to be fewer dopamine-inhibiting receptors — meaning that daredevils' brains are more saturated with the chemical, predisposing them to keep taking risks and chasing the next high.....

The findings support Zald's theory that people who take risks get an unusually big hit of dopamine each time they have a novel experience, because their brains are not able to inhibit the neurotransmitter adequately. That blast makes them feel good, so they keep returning for the rush from similarly risky or new behaviors, just like the addict seeking the next high...."It's a piece of the puzzle to understanding why we like novelty, and why we get addicted to substances ... Dopamine is an important piece of reward."
So, there are risk lovers out there.


Steve in Greensboro said...

Between Christmas and New Year's, Jim Cramer was advising his viewers (maybe his more gullible viewers) to speculate to avoid boredom. I'm thinking of about a dozen less expensive, more rewarding ways to avoid boredom, including patronizing Elliott Spitzer's girlfriends. But Mr. Cramer does support your thesis.

locksmith mesa said...

no risks, no fun la..

Finance Learner said...

Ganerally the higher the risks, the returns on investemt will be higher as well.