Keep Emotions in Check with Money Matters

In December of 2005, Dr. JamesGuthrie did some tax-loss selling.Though he hated this phase ofportfolio management, it had to bedone to prevent carryover losses fromdragging down his entire portfolio.During the month, the share price ofBowWow, his doggie stock, fluctuatedwildly between $35 and $28, sometimesin the same day. This was far lessthan his cost basis of $53 per share,but he was afraid the price might dropeven further. He sold one half of BowWow at $35 on December 3.

The next time Dr. Guthrie went intothe market on December 17, it was adifferent story. That same day, theretired physician had a blow-out fightover the phone with his adult daughter.She threatened not to come home forChristmas, which meant he would notsee his grandchildren either. He wassad. In an effort to make himself feelbetter, he completed his second roundof tax-loss selling. He accepted theprice offered at the time he opened thestock quotes ($30 per share) despite thefact that Bow Wow rose to $35 almostdaily. What happened here?

Emotion affected Dr. Guthrie's decisionto trade at a reduced price, a factsupported by a Carnegie MellonUniversity study that showed sadnessand disgust drive people to sell at a discount.One third of subjects watched"The Champ,"a movie that elicitedgloom, while a second group watched adisgust-evoking scene from "Trainspotting."The third group, the controls,watched a neutral documentary.

The subjects were then asked toprice highlighter pen sets that theywould sell to one another. The neutralsubjects asked $4.58 for the highlighterswhile the participants exposedto the disgusting scene asked $2.74.Those that observed the sad film asked$3.06. Clearly, the neutral set valuedtheir pens more than individuals thatwere sad or disgusted, who devaluedthe items by more than one third.

The researchers concluded that sadnessprompted participants to try tochange their situation, which translatedto a greater willingness to sell theirpossessions. The findings also suggestthat disgust causes people to want torid themselves of property, meaningthat individuals were more inclined tosell at a cut-rate price.

Remember:

Incidental emotionsinfluence financial decisions. In fact,financial coaches teach self-awarenesstechniques to clients looking to improvetrading habits. Being able to predictthe effect our emotions have onour choices means that we can improveour financial outcome by keepingour feelings in check.

Shirley M. Mueller, MD, dissects barriers to

effective monetary decisions so they

become manageable. Her unique training

and experience as a practicing physician

board certified in neurology and psychiatry,

combined with her 7-year investment advisor career, contribute

to her expertise. She welcomes questions and comments

at MyMoneyMD@aol.com.