Vulcans, the ultra-logical race of humanoids from the Star Trek universe, would undoubtedly make the best investors. Cucumber-cool Mr. Spock would never find his rational investing decisions thrown into a tailspin by roiling emotions and unchecked urges.
People, on the other hand, are essentially at the mercy of their emotions. Your propensity to take risks can be swayed by the time of year or your mood. Or you can be primed to make riskier decisions by watching a movie.
Mercurial moods can mess up your own investing, but when everyone is acting on their emotions, it can have global implications. Emotional excitement can add fuel to a growing asset bubble, according to the conclusions reached by researchers from the Brazilian School of Public and Business Administration, the University of California Berkeley and San Francisco State University.
“Our underlying motivation is the hypothesis that, once started, real-world bubbles generate excitement and that excitement further inflates and sustains the bubble,” the researchers wrote in the paper, “Bubbling with excitement: An experiment.”
Here’s what happened
Subjects in the study watched a short movie clip and recorded their emotional state after the video. There were 3 types of clips: exciting, scary or calming. Study participants watched only 1 video and were purposely misled into believing that the video had nothing to do with the experiment they had signed up for.
After watching the video, subjects embarked on a game, trading a fictional asset for real money they were given by the researchers.
In the trading game made up of participants who watched the exciting videos, the price of the asset went up faster and hit a higher peak than the asset price among the participants under the sway of videos inducing fear or calm.
In the series of trades made by the participants who watched the calming video, the asset price appreciated the least.
The conclusion? The excitement generated by bubbles can make them grow bigger and faster. But it’s also a good reminder: Make all of your important investing decisions before your emotions kick in.
Use these 6 tips for getting your investment plan in order before you get excited.
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Senior investing reporter Sheyna Steiner is a co-author of “Future Millionaires’ Guidebook,” an e-book written by Bankrate editors and reporters. It’s available at all the major e-book retailers.