Summary of video on “Physiology of Finance”

Here is the link of the article: https://www.youtube.com/watch?v=1YaWjEwHXtM&feature=youtu.be

Behavioural Finance deals with the human aspect of investing. The investor having the knowledge of behavioural finance is better off while dealing with finances. Behavioural Finance talks about the various shortcuts which investors take while investing which may not be in their best interest.

Behavioural Finance involves the study of how investors go through the cycles of greed and fear. When a particular sector is booming people become greedy and invest without seeing the risk factor. Also, when people fear because of reasons like an economic down turn they sell off all their investments.

Physiology of Finance

This involves linking finance with the biological aspects of humans. John Coates used certain methods to study the physiology of finance. Another method used was to conduct experiment on various species of animals. Levels of biological markers of the people associated with the financial markets were assessed. It involved collecting their blood samples, blood pressure levels, pulse rate at different times of a day.

There is a comparison of behavioural finance with physiology wherein the terms like fear and greed have been replaced by mania and depression in physiology.

The difference between the terms lies in their nature. Greed and fear are just a state of mind whereas mania and depression are clinical conditions.

Hormones send messages from body to brain. Like I am hungry or it is hot outside. Steroids are another class of hormones. They are powerful messengers.

Euphoria (greed equivalent) – Dopamine is chemical related to pleasure feeling in body. Over consumption of dopamine can lead to losing of interest in other things. Different activities can have different effect of dopamine like having food can increase dopamine by 50%. Let’s say by consuming a particular thing you generate a particular amount of dopamine. But this pleasure decreases over time i.e. to have same level of pleasure one has to increase the dosage of consumption. This applies to traders as well. To earn higher profits, higher risk should be taken.

Dopamine is for shorter range. Testosterone is the chemical for longer range. Blood samples were taken for traders at different times and testosterone was correlated with traders profit & loss account.

When people face stress, that time body may react in different ways like increased hear rate, increased blood pressure, sweating, passage of urine (not in all cases) etc. One has to break the cycle of Euphoria or testosterones or else it will lead to clinical situations.