By Plamen Monovski
In 1996, the world chess champion Garry Kasparov sat down to play a match against Deep Blue, IBM’s supercomputer. In the 1997 rematch, Deep Blue won. The machine, which could think 200 million moves ahead, had learned to mimic the thought process of its genius opponent. In chess, where chance plays no role, machine trumped man.
Not so in games of chance where instinct takes primacy over the ability to crunch huge amounts of data. The most sophisticated software is a poor match for the world’s best poker players. Poker players employ intuition, not brute force calculations, and thus resemble some legendary investors. George Soros says that some of his best insights come from premonitions, not spreadsheets. He talks about a mysterious back pain that spurs him to act with conviction.
Gut feeling is often seen as detrimental to investment success. The recent advances in biology, however, challenge this view: the frontal cortex in the brain, the pinnacle of evolution – is responsible for the emotions, not the ratio. We know now that a molecule known for dispensing happiness is also responsible for decision-making: the molecule of dopamine.
Dopamine neurons operate like the electrons of the Deep Blue chess computer –via trial and error learning. They generate patterns from past experience and expect validation from future occurrences. The chaos of reality is thus arranged in digestible correlations, which help the brain predict what happens next. The confirmation of the expectation is rewarded with a release of the dopamine drug, which results in a pleasurable rush. We all love being right.
When reality differs from the prediction, dopamine cells rebel. The amygdalae take over and emit an urgent alert that there has been a surprise. When the brain is mistaken, it emits cortisol, the hormone for urgency and displeasure. This kick-starts again the pleasure cycle of dopamine as the brain yearns to be right again.
The dopamine neurons are like athletes – they need to be constantly trained and retrained to succeed. Mistakes are not be discouraged but nourished. They are not signs of stupidity, but an essential part of the learning process. The most successful investors have all nursed periods of bad performance. Allegedly, the success of Bridgewater associates is also due to constant learning from mistakes, a thirty-year mass dopamine ooze.
There is a downside to this learning cycle: The immediate chemical reward for being right hardwires the brain for short-term gratification. Finance professionals seem to be aflush with dopamine. No wonder the modern society is fast paced, success and novelty driven. The information overload engendered by our constantly changing dopaminergic society and the desire to be constantly “plugged in” creates new problems for the brain. The information overload fools the pre-frontal cortex into illusionary correlations. This begets over-confidence and mistakes on a massive scale. The Global Financial Crisis of 2009 was indeed the consequence of a prior giant global dopamine rush.
So how to avoid the dopamine crash? Do your own research. Don’t get caught up in the hype. Think about emotions, this can calm them. Accept ambiguity and the constant change in the financial markets. Be your own devil’s advocate. Be skeptical of grand theories that explain everything. And be in a good mood: happy people solve 20% more puzzles that miserable ones.
Like life, poker is ambiguous but intelligible. Like poker, successful investing requires not so much mathematical prowess but comfort with uncertainty and the ability to decide with conviction. Despite the boffins’ best efforts, the world’s most respected investors still leave the machines way behind when the competition is about making money.
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About the author
Plamen Monovski is one of the most seasoned investors in emerging markets with more than two decades of experience. He was previously the Head of Emerging Markets in Blackrock which under his aegis grew to over $10 bn in assets and the CIO of Renaissance Asset Managers. Plamen now works on a select portfolio of projects and is in much demand as a speaker and commentator. We are delighted to be able to bring one of the most iconoclastic thinkers of the investing world to the ALFIES family.