NO PAIN, NO GAIN
SCIENTISTS LINKING PHYSICAL PAIN AND PLEASURE TO
INVESTOR BUY AND SELL DECISIONS
By Dolores Kong
The Boston Globe
CAMBRIDGE - It looks like an outfit only the Marquis
de Sade could love. But the black body suit, with
water hoses running through it, isn't an instrument of
torture. It's a research tool for understanding the
peculiar suffering investors have come to know all too
well in recent weeks: watching the stock market
plunge, regain some ground, and then cascade ever
Dan Ariely, a professor at the Massachusetts Institute
of Technology, uses the specially designed two-piece
synthetic suit, along with computer stock market
simulations, online surveys, and other methods, to
investigate the agony - and the ecstasy - of
participating in the markets.
By better understanding the pain of investing, Ariely
and others in the research field known as behavioral
finance hope to help individual investors cope,
especially in times like these. With the Nasdaq
Composite index on a wild roller-coaster ride - up a
record 10.5 percent one day last week, then down 3.2
percent the next - the record number of investors in
today's market need all the understanding and help
they can get.
In the pain/pleasure lab, Ariely demonstrates how the
heavily ribbed garment works: When near-freezing water
flows through the suit and chills a research
volunteer's body, that represents physical pain. When
hot water warms the volunteer, that represents
On the computer, a simulated stock market crash
represents psychological pain, and a rising market,
Of course, there is no direct connection between the
suit and the gyrations of the stock market. No
volunteer is strapped into the device and then made to
watch as the market plummets. That would be true
torture. But Ariely, a specialist in both psychology
and marketing, sees remarkable parallels in the two
kinds of suffering.
"To me, it's the same," said Ariely, who teaches at
the Sloan School of Management and holds a dual
appointment at the Media Lab. "It could be [physical]
pain. It could be the stock market. It doesn't
In both cases, Ariely finds that people's perception
of pain depends on the pattern of the pain. For
instance, if the water running through the special
suit is at its coldest and most painful at the end of
the experiment - or if the stock market crashes near
the end of the trading day - that's harder to take
than if the biggest hurt happened at the beginning.
Anyone who has felt the pain of watching the
real-world stock market tumble this year might well
Should an investor sell everything and take the
losses, or buy beaten-down tech stocks in the hopes
they can only go up from here? Should he or she stare
at the losing ticker symbols streaming across the
bottom of the TV screen during financial news shows,
or unplug the tube?
The growing body of behavioral research suggests that
if investors realize what pains them, they won't
overreact to the emotional and psychological
intricacies of being in the markets.
For instance, if investors know that research has
found a stock crash at the end of the day to be more
painful than one at the beginning, perhaps they won't
sell for a loss in a knee-jerk reaction just before
the closing bell.
But that's not to say it's easy to change investor
"It's really hard. The brain sends us all kinds of
signals, fight or flight," said Hersh Shefrin, a
finance professor at the Leavey School of Business at
Santa Clara University in California, and author of
the book, "Beyond Greed and Fear: Understanding
Behavioral Finance and the Psychology of Investing."
So even though investors may know at some level it's
best to be in the market long-term and not overreact
to short-term movements, "Our mind interprets signals
from financial markets as if we're in the days of the
hunter-gatherer. We haven't evolved so our emotional
side knows the difference," Shefrin said.
From Santa Clara University to MIT, researchers are
exploring such fascinating - even painful - questions
about deep-rooted investor behavior as:
- Why do people tend to hold on to their losers too
long, and sell their winners too soon?
- Why do investors with decent track records begin to
see their performance suffer once they start trading
- And why do people feel more pain when the stock
market crashes near the end of the day?
Terrance Odean, assistant professor at University of
California at Davis's Graduate School of Management
and a leading behavioral finance specialist, has often
found pain - or the desire to avoid it - to be a
driving force behind buy, sell, or hold decisions.
In his studies of investors who won't sell their
losers, Odean said, he has found people want to "avoid
the realization of their loss that engenders their
regret. Regret is a form of emotional pain, and they
hope that if they put it off long enough they don't
have to experience it."
Investors may also hold on to their laggards because
they don't want to see the stock price skyrocket after
they sell for a loss. An investor might say: "If it
goes back up again, I'm going to regret having sold
it," according to Odean. "It's a double incentive just
to kind of hang on to it."
And there can be pain even when people sell for a
gain. "Yes, it's painful to sell winners too early. If
it really skyrockets, it's hard," said Odean, who also
has studied the performance of online traders and
In 1985, Shefrin of Santa Clara University helped coin
the phrase "disposition effect" to explain this
strange behavior by investors of "selling their
winners too early and riding their losers too long."
Shefrin hypothesizes it's human nature to sell winners
too soon because "we're anxious to have the pleasure
now," and to hold on to losers too long because "we
like to delay the pain."
MIT's Ariely and his colleague, Michal Strahilevitz, a
marketing professor at the University of Arizona,
Tucson, are finding in their online surveys that
investors appear to react differently to the pain of a
crashing stock market, depending on their
personalities and the psychological context in which
they place their investments.
For instance, people who trade frequently tend to be
more overconfident, have a less stable sense of
self-esteem, and worry more about their trades. Thus,
they feel the pain of a market meltdown more
"It's painful for everyone when you lose money, but
when you spend four hours a day trading . . . the pain
is that much more excruciating," said Strahilevitz,
who acknowledges she's an active investor herself.
"The more you monitor, the more time you spend looking
at your portfolio, the more pain you're going to feel
while things are going down."
Ariely and Strahilevitz also are conducting online
surveys about topics such as the complicated emotions
that go into a decision to sell and that lead people
to pick their own stocks. Ongoing surveys are
available at a Web site sponsored by the Media Lab and
the Sloan School of Management, ilab.mit.edu.
For Ariely and other researchers, there's no pleasure
from studying pain for the sake of it. Rather, the
gratification comes from better understanding pain, in
order to help investors understand their own behavior,
and develop ways to cope.
Ariely's bottom-line advice to numb the pain? "It's
better not to look at the stock market when it's not
SIDEBAR: Tips to ease the pain
Behavioral finance researchers suggest these steps to
take some of the sting out of a rocky stock market:
- Check your portfolio only after an up day, or only
on a quarter- to-quarter or year-to-year basis, so you
don't obsess about short- term downturns.
- Stop talking about stock tips or otherwise thinking
excessively about the markets.
- If you find it difficult to part with a loser, sell
half your position for the pleasure of the tax
write-off, while holding on to the other half in case
the price skyrockets.
- Put your investing in as psychologically positive a
context as possible. For example, feel good about
dividends you receive from certain stocks, even if
their share prices have taken a hit.
MINORITIES URGED TO BUILD WEALTH
URBAN LEAGUE EFFORT AIMS TO ENCOURAGE FAMILIES TO
By Dolores Kong
The Boston Globe
For the Urban League in Boston and around the country,
the civil rights struggle includes helping to make
black Americans economically self-sufficient.
But that doesn't just mean providing job-training and
home-buying programs for low- and moderate-income
families. It also means teaching higher-income
families how to invest successfully in the stock
market, and build wealth.
Next week for the first time, the Urban League of
Eastern Massachusetts is hosting an "Investing for
Success" workshop in Boston, as part of a nationwide
economic initiative of the National Urban League and
the Investment Company Institute Education Foundation,
a mutual fund industry group. Over the last few
months, the workshop has also been held in
Philadelphia, Los Angeles, and Houston.
Two years ago, the National Urban League found in a
study that black families lag far behind white
families in building wealth and accumulating assets.
For instance, even among families earning $50,000 or
more, blacks had barely half the median net worth of
their white counterparts, according to the "State of
Black America" report that came out in 1998.
As a result, the league called for a new civil rights
agenda that helps boost wealth among black families.
"Individual self- sufficiency, as important as that
is, cannot be the ultimate goal," according to the
report. "Black folks must push past that and go for
That message may be starting to get across, according
to a survey released earlier this year by Ariel
Capital Management Inc., a black- owned Chicago firm,
and Charles Schwab & Co. In two years, the percentage
ownership of stocks and stock mutual funds among high-
income blacks jumped 7 percent, from 57 percent
ownership to 64 percent today.
But among whites earning more than $50,000 a year, the
percentage of stock and stock mutual fund ownership
remained much higher, at about 82 percent.
The study also found that blacks remained more
financially vulnerable in retirement than whites, in
part because of family obligations and the tendency to
save more for their children's college education than
for their own retirement.
That's where the "Investing for Success" workshop
Pamela D. Everhart, assistant general counsel at
Fidelity Investments and a board member of the Urban
League of Eastern Massachusetts, will be leading the
workshop on Wednesday, 6 to 8 p.m., at the Swissotel
"This is particularly important to me, being an
African American myself, and realizing - just from
talking to the community - the knowledge gap," said
Everhart, who will be joined by Fidelity colleagues at
the workshop. "That night, I'll be getting people
familiar and comfortable with the concepts around
investing and the benefits of long-term investing."
Derede McAlpin, director of public information for the
Investment Company Institute, said the "Investing for
Success" program aims to inspire African Americans to
learn more about investing for retirement and to have
opportunities to accumulate wealth.
"One thing that's really important is the educational
spirit of the program. People can be assured that no
one will be pitching them for business. We're keeping
the focus educational," McAlpin said.
This is the first time the mutual fund industry group
is working with the National Urban League in hosting
such an event, and the first time the group has held
investing workshops for a particular minority
The institute also makes available mutual fund guides
in Spanish, and has done research on women and
investing and Generation Xers and investing. The
Investing for Success workshop is free and open to the
public. Reservations must be made by calling
877-358-5888 by Nov. 27.