The Hindu Business Line : Why we like risky bets

One of my friends recently visited a casino and came back horrified! He wondered why so many people turn compulsive gamblers when they are aware that gambling is a losing proposition. His question should resonate in the ears of some who are compulsive stock market traders as well. Why do people behave this way?

Neurotransmitter

When you consume a product or service that you like, your brain releases a chemical called dopamine. This chemical is a neurotransmitter that lubricates the brain's reward pathway.

Some of us go to a casino to feel the experience. If you win a bet, you brain lights up as a Christmas tree, because it releases high levels of dopamine. Others are what neuroscientists call as pathological gamblers. Research has shown that such people lack a certain gene that limits their brain's ability to generate dopamine. These gamblers do not, therefore, experience enough pleasure as the brain is half-starved of the reward chemical. And that means that these people have to engage in larger and more frequent bets to feel stimulated.

Relative pleasure

Some people, like the pathological gamblers, feel compelled to trade daily in the stock market. And it is not just that. Suppose you have a choice of investing in two stocks. One stock is certain to go up by 10 per cent while the other is likely to go up by 20 per cent or decline by 10 per cent. Which would you choose?

You may, perhaps, prefer the first stock, as it provides you certain gains. But if you are an active trader, there are chances you will chose the second stock! Why?

The reason is because we derive relative pleasure. The first stock is sure-shot. Ironically, the dopamine neurons are not excited when you receive what you expect. On the other hand, the possibility that the second stock could have lost 10 per cent makes its 20 per cent return even more pleasurable. This, perhaps, explains why active traders take risky bets in the market.

(The author is the founder of Navera Consulting. He can be reached at enhancek@gmail.com)

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