Physiology of Finance – EquityManiac

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Today we thought to take a very different topic related to finance, common to each one but uncommon when you try. we want to gradually increase the knowledge of our beloved readers in the financial field but what arises when they actually initiate trading or investment in the stock market. what are our mindsets, how do we analyze profits and loss which satisfy our emotions?.

Emotion plays a major role in the investing field. what holds a person from profit to loss is the sentiments of mindset.

In the world of emotions, most of the times mind play with our body. Mind distracts our goals, targets and we always forgot to distinguish between the desires and goals. Let’s play a mental trick to understand this concept.

Cham Cham Recipe with Step by Step Photos - Bengali Chum Chum Recipe

I posted an image above!!! can you guess this sweet dish?. yes, It is cham-cham a famous Bengali sweet which we consume on our favourite occasions. It is made with the help of milk dipped into chasni and filled with dry fruits. Your mouth starts watering right!! you try to find out the nearby sweet shop to find this delicious sweet.

So let’s come back to the point, Neither you smell this, neither you have consumed this sweet right then also you had a craving by looking at this image, here your mind played with your body with an extensive supply of saliva makes your mouth watering and try to create a momentum to eat this dish and distracted from your core reading or focus from the work.

Now, this is very common between humans!!! and that’s why advertisements make a major revenue for the companies because they give a craving to buy, to satisfy our egos, status symbol and satisfying our non-core desires.

You should also know that body can also take up the mind process. Many times body gives the mind to get focus or get into work. when can the body instruct to the mind?

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So I will use some biological terms to explain this topic (sorry for this, no option).

People are very rational you can never predict one person’s psychology and neither compares them. Every person has a different mindset and a different opinion but when people stops thinking rationally then there is no difference between animals and humans. People always think of pleasure. This satisfaction of pleasure is earned by the release of dopamine & testosterone.

What is dopamine?

Dopamine is a type of neurotransmitter. Your body makes it, and your nervous system uses it to send messages between nerve cells. That’s why it’s sometimes called a chemical messenger.

Dopamine plays a role in how we feel pleasure. It’s a big part of our uniquely human ability to think and plan. It helps us strive, focus, and find things interesting.

Dopamine messages to our mind which feels pleasure for the time. Drinking alcohol, smoking, consumption of nicotine, cocaine and many other activities which give us the immense release of dopamine and give a sense of pleasure or a sense of relief. You already knew what happens when people consume all the above things right!. Let me describe the dopamine scale.

Dopamine Scale

Food- 50%

Nicotine-200%

Cocaine-400%

Amphetamine- 1000%

This dopamine scale illustrates to us how much a person gets pleasure when he engaged in all these activities. Majority of the activities are highly intense and can make your death at a very early age. Dopamine also releases when we earn money because money also gives a sense of pleasure. Let us study how this dopamine affects our health in the stock market or in the business. Let consider person A visits a casino, he is playing for the first time and he had rewarded with 1000rs he continues for few days and he is now addicted to earning this 1000rs, now in the initial stage, he just earned few money where his dopamine gives him immense pleasure and he tries to repeat this activity every day to get the same amount of pleasure while now we have a concept in economics called marginal utility. when this person plays for 15-20 days he is no more feeling the same amount of pleasure and he tries to bet more and more to just get enough pleasure for the mindset, he is not focusing on the risk-reward ratio he just wants the same satisfaction and now he is betting without considering his ability of repayment and he dies with the debt and takes some unnecessary steps which end to darkness for his family and beloved ones.

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Law of Diminishing Marginal Utility - Definition, Examples, Graph

There was a research conducted on the animals and humans to understand the psychology between them, when the animal has given the same amount of drugs that a trader may consume for his pleasure, highly positive correlation was acknowledged between the animal behaviour and trading psychology, So as a trader when you are regularly involved in the market this dopamine function takes to the hell, on the other side the trader starts taking a higher amount of risk without considering the effect for the rewards. Now, this increases the stress for the traders. Continuously watching at the screen which will certainly play with our emotions and increase stress which responses to increases in heart rate, blood pressure, sugar levels, sweating, shaking of hands, incomplete sleep and goosebumps these effects play a physiological role, even without knowing the certain outcome that the position will cover the loss or make it profitable.

This burden of stress also leads to digestion problems, anger issues and having a deep break in harmony with our mindset. Yes! this is only for few hours, days or weeks, but this activity continues as it becomes an addiction and now the only option left for you to search for stress buster but what are the core part that initiates the stress?

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Novelty

Uncertainty

Uncontrollability

These 3 events are the major key centre for stress. We have to prepare our body to give some rest, to develop, to grow, to learn sustainability at the high-stress scenario.

Example-When you start weight lifting at the gym you start with biceps with the intense workout you will give a break to biceps to built up, while after a week you again focus on the biceps to build proper physic, same you have to treat to your mind to get a better outcome for the upcoming years.

Why focus on such an area where you are becoming a self-destructor for yourself and not enjoying your life at your pace. Comparison and competition always lead you to a very negative mindset, just feel free up to your mark and enjoy what you are capable of and neither chasing the rat race for what you are not being. you should lastly know your circle of competence ( If you haven’t read please click) and make a core focus in that area.

Thanks for reading,

EquityManiac.

Credits– John Coates writer of the book called “The hour between dog and wolf” and

Mr Rajeev Thakkar ( CIO of PPFAS Asset management company)

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Pujan Shah
Pujan is a Commerce Graduate from Mumbai and CFA Level-3 candidate. He does Financial Analysis, Financial Modelling, Valuation, Sector Analysis, and loves to read about every aspect related to Finance.
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