Sadder but wiser - Jacob Burak explores how our mood influences the investments we make
The most famous poem written by British poet and philosopher Samuel Taylor Coleridge (1772-1834) is The Rime of the Ancient Mariner, about a sailor returned from a long journey to the South Pole who recounts his story to a passerby. In this lengthy poem, Coleridge employs special literary techniques, including personification and repetition in a way that at times invokes a feeling of impending danger, the supernatural, or deep tranquility, depending on the prevailing mood of the different sections of the poem. The mood of the ship’s crewmen also changes with the events that take place, from anger to joy, according to the fickle, volatile sea. But even more than the literary techniques employed, this poem occupies a unique place in English poetry thanks to the many expressions that Colerigde coined that have since entered the language, the most notable of which is “sadder but wiser.”
Whether it is sadness that leads to wisdom or it is the wise who understand something that saddens them, the expression takes on special significance for anyone wishing to trace the link between our mood and the wisdom of the way we invest our money.
A study published recently in Australia supports what researchers have already known for more than two decades: that depressed investors perform better. Joseph Forgas of the University of New South Wales conducted a series of studies in which he took pains to induce different moods in the participants and then checked their performance in a series of tasks. The ill-tempered participants were more attentive to detail, less gullible, less likely to make errors of judgment and, when requested to do so, were able to put together more convincing arguments than their colleagues who were in better spirits.
The study, recently published in Australasian Science, also opens a window to interesting research methods that researchers in the behavioural sciences sometimes adopt when participants in an experiment are not in the appropriate mood. In order to ensure the necessary level of melancholy or elation, the researchers used the Velten Mood Induction procedure, which is based on the reading of fifty-eight sentences beginning with the neutral (“Today is neither better nor worse than any other day”) and ending with sentences that are more and more positive (when the aim is to invoke a good mood) or more and more negative, when the opposite effect is desired. Sentence #27 on the negative list is “I’ve doubted that I’m a worthwhile person” and the last sentence on this list is “I want to go to sleep and never wake up.” Sentence #28 on the positive list is “My memory is in rare form today” and the last sentence on this list is “God, I feel great!”
Those people who doubt the efficacy of these sentences in developing the appropriate moods should recall the way they feel after a film or play that proceeds gradually toward a comic or tragic ending. Even though we are aware that this is a fictional story we become involved emotionally. It is important to remember that participants in the experiment were called on to perform a task a very short time after taking part in this procedure, and their reactions to the sentences they read are still fresh in their minds.
So what, then, is there about depression that makes those who suffer from it better investors? The answer is far from simple, and is linked first and foremost to what depression lacks: optimism and overconfidence, two of the most destructive biases among investors. While similar, there is an important difference between them. Whereas overconfidence can be curtailed, especially with experience, optimism cannot. It is the fuel that fires up entrepreneurs to estimate the results of their activities with rose-colored glasses and at the same time causes them to fail to foresee the inherent dangers. That notwithstanding, it is important to understand that without optimism the economy would grind to a halt and gardening, reading and the development of human relationships would become central to our lives.
On the other hand, overconfidence is a character trait that can cause us, for example, to miscalculating our ability to make payments when they are due. In effect, most of us are late in making at least one payment due to a variety of temporary difficulties and daily problems; as a result, we are obliged to pay particularly high interest rates to the credit companies, who understand this tendency only too well. Overconfidence is what causes investors to identify trends before they have actually formed, and then they take action according to this faulty identification. Furthermore, people who are more confident than what is justified tend to ignore the effect of randomness (“luck”) on events and to underrate the other players in the market.
The term “depressive realism” was coined by researchers back at the end of the 1980s as a way of describing the surprising phenomenon that claims that people with depression have a more accurate perception of reality, especially in terms of their own place in the world and their ability to influence events. How true it is that the sadder you are, the wiser you are.
About author Jacob Burak:
Jacob Burak (b. 1948) founded Evergreen Ventures in 1987 and became one of the founding fathers of the Israeli venture capital community. Five years ago he took a step back from the business world and now devotes his time to social activism and writing.
He has written two books: Do Chimpanzees Dream of Retirement?, which deals with the encounter between business, psychology and evolution; and Noise, which maps the “noises” in our lives – external but mainly internal. Jacob also lectures on these topics.