The Biology Behind Our Investing Decisions

Posted

biology-of-investingYou may not go around grunting in a loincloth, but when it comes to managing your money, your behavior may not be much more advanced than a caveman’s.

At least that’s the implication of new research, which suggests that humans have evolved to be more tolerant of risk at certain times of the year. Specifically, we tend to be relatively risk averse during the fall and winter and more risk tolerant in the spring and summer.

In the study, researchers observed that people are more likely to invest in money market and government bond mutual funds in the fall and equity funds in the spring. (Money market and bond funds are typically considered safer because they provide regular monthly returns, while equity funds invest in public stocks and have more long-term growth potential.)

That means the market is much more volatile during the spring and summer, which is why investors are often advised to “sell in May and go away”—or get rid of their stock holdings and avoid the market until it calms down around October.

So what’s the caveman connection? Writing on PsychologyToday.com, study co-author Lisa Kramer explains that variations in investing behavior are actually based on our ancestors’ survival strategy. Millions of years ago, it made sense for people to stock up on resources like food during the warmer months so they’d have something to eat during the cold seasons. Those who neglected to save up in the spring and summer were unlikely to make it through the winter.

The choice to sell your stock holdings may not be a life-or-death situation like foraging for food, but this research still has some important takeaways for modern-day investors. For one, it’s a good idea to simply be aware of how your preference for risk (and, consequently, your investing habits) varies throughout the year.

So before you make an investment, consider whether you’ll still feel comfortable with the decision a few months later.