Dopamine is a chemical that is naturally produced in the body. In the brain, dopamine acts as a neurotransmitter and is associated with pleasure-related nervous systems. Dopamine, which is released in response to a pleasurable stimulus, enhances the desire for certain activities. In addition, more dopamine is released when a pleasurable or unexpected outcome occurs when only a predicted reward arrives.
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But if the expected reward is not achieved, the release of dopamine will stop completely. This suddenly puts a person at risk for some form of depression. The end result is that people like to succeed with a one in a million chance, even more than just as much windfall wealth, and just as extreme, when a certain expectation fails, feeling despair and hopelessness. They lose.
Dopamine association with traders
Dopamine is very important in financial science because of its powerful effect on risk-taking behavior. The beneficial effects of dopamine encourage people to go to Las Vegas, play poker, invest in growth stocks, and maintain diversified portfolios in order to achieve high profits. For example, if you hear that your neighbor has recently received a 200% return on Google shares, you may feel the need to call your broker immediately and buy the shares.
Even if you do not consider yourself an investor with a high risk-taking capacity, your brain will still guide you in a way that you want to achieve great success. Dopamine makes a person more satisfied with great success than a normal success – and the joyful anticipation of it prevents people from focusing on how unlikely they are to achieve major benefits. But dopamine also has a disturbing aspect that investors and traders should be aware of.
Once your brain is ready to anticipate a benefit, if the expectation does not end there, something unexpectedly happens. Although dopamine is active during the prediction phase, the flow of dopamine release stops immediately when the benefit becomes a loss. This is not unlike the feeling you get from opening the expected gift, when you realize there is only one worthless thing under the foil.
In this context, it is not difficult to imagine how dopamine works in the market’s overreaction to short-term dissatisfaction with returns. It is possible that dopamine may also play a role in the development of individual behavioral biases such as overconfidence, optimism, etc., which lead people to invest in investments that are unlikely to be profitable. In conclusion, we are almost certain that the presence of dopamine is a valid reason for greed.
Recommendations for dopamine control in traders
Awareness of the effects of dopamine is extremely important. The next time you feel the urge to enter into an investment and take risks that are obviously not in your best interest, ask yourself if it might be due to the effects of dopamine.
The desire to win and succeed is natural, but the desire to achieve really great success is a passion that, if you look realistically, may not be possible for you to fulfill. Take a step back, assess the risks, and think deeply about why you did it and how you would feel if it didn’t work out.
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