Navigating Wall Street is more of a mind game than ever.
By Sadia Latifi published January 1, 2009 - last reviewed on June 9, 2016
How did we enter financial freefall? Here's one contribution. People cheat more when they aren't dealing with real money. Abstractions—whether it's a poker chip or a stock option—make people more comfortable with fudging the rules. Start trading fancy derivatives and your morals just might come unmoored.
When people feel at the mercy of a volatile market, they're more likely to see false trends in financial data. Lacking control causes the mind to spot patterns in order to regain a sense of agency. When the patterns are illusions, bad trades can result.
Of Bulls, Bears, Elephants, and Donkeys
How the stock market performs alters collective temperament and thus how we vote for president. When the mood is bad, voters opt to boot the incumbent party. One analysis found that financial markets predict election results better than the other way around.
Corporations that take responsibility in their annual reports for negative events like profit declines have higher stock prices one year later than firms that blame outside circumstances. Fessing up signals that a company is in control of its destiny.
Street success depends on the right hormone balance. A study that measured the testosterone of male traders in London found that morning levels could predict the day's overall profitability. Testosterone boosts confidence and appetite for risk. Traders make money on average, so increasing trades just makes them more money—unless they become too fearless.
The Customer Is Always Right
If you're feeling daring and want to put more money in the market, think of companies you've had good personal experiences with. The stocks of firms with high and rising levels of customer satisfaction outperform other portfolio options in the long term. Investors generally undervalue the importance of smiling customers.