I recently read the book Quiet by Susan Cain. The book focuses on the differences between introverts and extroverts and how better understanding the personality differences between the two can be beneficial in our everyday lives.
The Extrovert Investor
Whether you’re an extrovert or introvert can impact your investing strategies.
Cain describes a situation in which an individual close to retirement made a series of bad investment decisions on General Motors stock in 2008, around the time there was talk of a potential bailout.
This individual ended up losing $700,000 of his $1M retirement savings!
He realized he couldn’t afford to lose most of his retirement. But the investment seemed so much like a sure thing, he couldn’t help but continue to throw good money after bad as the stock continued to drop.
If you’ve ever invested in stocks, you’ve probably had a similar situation. Recently, I thought UnderArmour stock was undervalued and kept watching the losses pile up.
The rationale Cain provided was that he was an extrovert and therefore was more risk-seeking.
Let that sink in for a minute.
Extroverts on average are more risk-seeking individuals than introverts. This is due to how their brain reacts to dopamine. Dopamine is a chemical the body produces that controls our brain’s reward and pleasure centers.
This is Your Brain on Dopamine
Ever feel a rush after you got a raise? Remember how good the last chocolate bar you had tasted? Addicted to your Instagram notifications? That is caused by dopamine.
Let’s face it. We’re all addicts: dopamine addicts that is. While introverts are affected by dopamine, extroverts’ brains are more sensitive to dopamine, which is why they are more likely to seek high-risk high reward activities.
Since their brains are more sensitive, they build up a tolerance to the dopamine. This means that while a small reward may produce enough dopamine to register for an introvert, a larger amount of dopamine is needed to have a similar effect on an extrovert.
Understanding this makes it easy to see why so many individuals can make unwise investment decisions.
If you are searching for that rush of dopamine, your brain is probably only focused on the reward and not the potentially significant risks that come with it.
Have you ever considered an investment you knew was risky but rationalized it because if you were right the payoff would be huge?
Then you might be an extrovert.
Are Introverts Better?
Does this mean that every extrovert is doomed to make terrible investment decisions and introverts aren’t?
Of course not.
As an introvert, I’m fully aware that anyone is capable of making both sound and risky investment decisions. But what Cain’s book highlights is that extroverts should be aware that, on average, they are more likely to seek risky options and avoid truly analyzing the risks at hand.
So if you identify yourself as an extrovert (here’s a quick test if you aren’t sure), be cognizant of this when investing. Understand that while your gut is telling you this is a sure thing, maybe it really isn’t.
Everyone, despite their social preferences, has financial downfalls. Overzealous investments are my Achilles heel. Once I find a stock I like, I tend to want to invest immediately. This drive often clouds my judgment and knowledge that I should wait for a better price.
I’ve learned that it’s really never going to be now or never and you can get a better price if you just wait. Maybe the stock price doesn’t drop and you missed out on one opportunity, but at least you didn’t lose money by buying too early just to see the stock drop quickly. Plus, the chances are pretty good that the stock will either come back down in price or you’ll be able to find an equally good investment.
Understand Your Limitations
So if you think you may be prone to making quick, risky decisions here are a couple of tips that I use before making a final decision.
First, try setting up a checklist that you use to review an investment before making a decision. Include key attributes that you look for in a good investment (maybe sales growth or comparison to peers). You could also include risk and return ratings. Try to be honest with yourself. Remember investments can always go to 0 and then rarely have astronomical gains in a short period of time.
Giving yourself a day or two to reflect on the checklist is a good idea too. This will give you more time to process the investment and really determine if the risk/reward is out of line or not.
Another option would be to bounce the idea off of a friend or family member you know will give you honest feedback. Hearing from someone who isn’t involved in the investment is a great way to get objective feedback. Hopefully by better understanding your personality you can take steps to limit unnecessary risk-taking in your future investments and put yourself on a more secure financial footing.