Sent: 28-09-2010 10:48:09
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Emotional Intelligence and Investing
This is the last in the series on Emotional Intelligence, based on the series of article I have written for the ATC Digest.
Previous articles in this series have considered just what Emotional Intelligence is, how you can improve yours and how you can actually use it in the selling situation. This article looks at Emotional Intelligence in the investment environment and whether it actually helps in financial decision making.
Laurence Siegel, Research Director Research Foundation of CFA Institute starts by asking a very pertinent question: "Does it really help investment performance to be able to keep your head when all about you are losing theirs?" As he so right points out, logic would suggest the answer should be 'yes' as booms are followed by busts, which are followed, in turn, by new booms.
Of course, if people who do (or at least should) know better get caught up in the 'heat of the moment', what hope those who do not know better. Essentially this is an example of the conscious incompetent (the professionals who know what they don't know) behaving in the same manner as the unconscious incompetent (mums & dads who don't know what they don't know). The thing that makes them behave in the same way is of course emotion. We are not the sane rational creatures proponents of Modern Portfolio Theory would have us believe.
The authors of the research defined EI as the ability "to recognize and use emotions productively." Consequently in some situations, being emotional may pay off; in others, being coolly dispassionate will be more appropriate. Either type of response could be defined as emotionally intelligent because the criterion is whether the response is productive and produces a positive payoff.
Charles Ellis, a financial expert and author of several books, is convinced that emotions are rampant in the domain of financial decision. This therefore implies that those who are emotionally intelligent should be better investors.
In the research the authors looked at the relationship between investment decisions and emotional intelligence. They argue that Emotional intelligence is a person's ability to recognize and interpret emotions and to use and integrate them productively for optimal reasoning and problem solving. In this way, EI is similar to traditional intelligence, but EI uses moods or emotions as data or information. But, emotional intelligence should be distinguished from simply being "emotional." That is because an emotional person may feel and/or act more intensely than others while an emotionally intelligent person is one who is able to recognize and use emotions productively.
There has been a great of research showing that moods and emotions play important roles in reasoning, decision making, and social relationships. However, contrary to popular beliefs, moods and emotions play not only the role of "culprit" in these situations (and hence need to be eliminated or minimized) but often play the role of "adviser" by containing valuable signals and clues that can lead to good personal choices and decisions. The trick is to know how to use moods and emotions in the best way. The suggestion is that those who are high in EI are able to use and integrate their moods and emotions effectively. Those who are low in EI may ignore,
misinterpret, or be overwhelmed by their moods and emotions and thus may not reap the potential benefits of these cues. Given the pervasiveness of moods and emotions in all aspects of our lives, including financial decision making, the EI form of intelligence is gaining in acceptance
They summarize their findings by suggesting that investors who score highly on tests of Emotional Intelligence (EI) tend to exhibit behaviors that correlate strongly with good investment performance e.g., the use of low-cost fund options, and decisions not to trade too frequently
I provide more details in the ATC Digest article which should be appearing in the near future.
For those who wish to read the full research paper, the details are:
Emotional Intelligence and Investor Behavior
John Ameriks - The Vanguard Group
Tanja Wranik - University of Geneva, Switzerland
Peter Salovey - Yale University
It is available via the The Research Foundation of CFA Institute
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