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The Biology of Investing by John R. Nofsinger

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Key Takeaways:

  1. Alfred Marshall, the economist who developed the supply and demand curves, recognized that people are affected by physiological influences when he said, “Economics is a branch of biology broadly interpreted.”
  1. Sleep deprivation impairs everything a person might do, from physical activity to complex decision making. Poor sleep quality directly influences brain functions through decreased activation and neural function.
  1. Actually, caffeine does not reverse the impact of sleep deprivation. Stimulants make one feel more awake, but do not improve financial decisions.
  1. First, sunshine leads to positive moods that cause the stock market to rise, people to take more risks, and investors to be more optimistic. Alternatively, seasonal affective disorder, the negative mood brought on by the decreasing amount of daylight in the fall and winter months, causes less risk taking and more pessimistic views.
  1. Is there a personality for investing? It appears that some personality traits and other noncognitive abilities are better suited to the investment process than others. One crucial aspect is risk aversion. If a person’s risk aversion is too high, then it is unlikely that they will purchase assets that will produce sufficiently high returns, which would cause a lower level of wealth over the course of his lifetime and a lower amount of money available for retirement.
  1. Does a person’s genetic code influence their investing decisions? The previous chapter examined this question using the genetic variation in twins and concluded that one-fifth to one-half of all financial and economic decisions can be attributed to biology.
  1. Gender appears to have a significant impact on financial decisions as there is strong evidence from multiple settings that women take less risk than men. This difference in risk taking is not just among the everyday person, but also among investors. Female retail investors hold less equity and trade less frequently than male investors. One argument is that women tend to take less risk in their portfolios because they are less overconfident and less likely to exhibit sensation-seeking behavior.
  1. Sleep is an essential factor in risk assessment and time preference decisions. People increase economic risk taking with poor sleep quality and more sleep disturbances. Poor sleep impacts women more than men in time preference decisions.
  1. Furthermore, it does not appear that stimulants such as caffeine can reverse the impact of sleep deprivation, although it has been shown to marginally improve cognition in certain contexts. Thus, stimulants do not appear to be the answer to tired financial professionals, especially given the potential side effects.
  1. Health and finance are two areas that appear to be uniquely intertwined. The literature documents a rational response of people in poor health being more risk averse since it is likely that they will need their money to cover their medical expenditure.
  1. Aerobic exercise and improved diet had direct positive effects on cognition and decision making.
  1. Conversely, companies that treat their employees well and truly care about their well-being tend to achieve 3 percent higher returns per year compared to their peers.

What I got out of it:

A fun dive into how things such as food, exercise, nutrition, caffeine, environment and more can impact your decision making.