28 October 2016
A chimp takes over our brain during stressful situations. The trick is to manage it so we can make good decisions. Photo: AFP
A chimp takes over our brain during stressful situations. The trick is to manage it so we can make good decisions. Photo: AFP

Why investors act like chimpanzees

Have you ever experienced this: Your stock drops 10 percent in one trading session, and after you are finally able to sell it, the stock rebounds and even hits a new high.

Don’t blame yourself. Blame your “inner chimp” instead.

Prof. Steve Peters, a sports psychiatrist who played a big role in the stunning success of the British cycling team in 2012 Olympics, says there is an “inner chimp” in the human brain.

The “human” is mainly based in the frontal lobe. It is associated with logical thinking and works with facts and truth. The “chimp”, mainly based in the limbic system, is an independent emotional thinking machine and works with feelings and emotions.

Also in the brain is a storage area for programmed thoughts and behaviors.

The “human” controls the brain most of the time, but the “chimp” takes over when a person is under stress or becomes emotional.

For example, if your girlfriend is late for your date for over an hour, you could ask her when she arrives: “Are you OK? I’m so worried.” That could help a lot in setting the mood for a romantic evening.

However, if you get angry and yell at her, “Where have you been? I’ve been waiting for you for over an hour!” that could lead to a totally different story.

The chimp would jump in when the situation is stressful — and it would make you fight, escape or watch on the sidelines.

In football games, the team that falls behind usually becomes irrational and breaks the rules in the last minute. Luis Alberto Suarez, the Uruguayan football star, has a tendency to lose his temper and even bite opponents when his team is losing the game.

In stock trading, most investors feel the pressure when the market tumbles. Most people would either choose to escape or adopt a wait-and-see attitude.

The effective management of our inner chimp would reduce the anxiety and help us make good decisions. Otherwise, we might fall into the vicious cycle of stress-anxiety-mistake-stress.

In fact, we need our chimp. It tells us something is going wrong. What we need to do is manage it. How well we are able to manage it could determine whether we succeed or lose.

When stress comes and we find ourselves reacting emotionally, we just need to follow a seven-step procedure. First, recognition and change; second, the pause button; third, escape; fourth, the helicopter and getting perspective; fifth, the plan; sixth, reflection and activation; seventh, smile.

Most decisions that are made irrationally are not good ones. In order to avoid making a poor decision, we need to take a pause and think twice and let the “human” jump in.

We should try to take a step back and look at the situation from a distance before making and implementing our plan.

When the stock price shoots up or plunges, investors constantly calculate their gains or losses.

However, we should ask whether the stock valuation has far exceeded the average over a period of time, say, a year or a decade — or whether the stock has offered a huge valuation discount.

Have you beaten the Hang Seng Index over the first half? Have you made any emotional and regretful decisions?

The bull market is still under way. Just learn to manage your inner chimp.

This article appeared in the Hong Kong Economic Journal on June 26.

Translation by Julie Zhu

[Chinese version中文版]

– Contact us at [email protected]


Columnist at the Hong Kong Economic Journal

EJI Weekly Newsletter