Investors not always thinking

NEW YORK – History shows that investors – both professional and amateur – too often let emotions drive their investment decisions.

But when it comes to outsmarting the market – or almost anything else – Whitney Tilson, of Tilson Capital Partners, has argued that we all suffer from overconfidence. In a popular presentation, he says that 82 percent of people say they are in the top 30 percent of safe drivers; 82 percent of Harvard Business School students say they are better looking than their classmates; and 68 percent of lawyers in civil cases believe their side will prevail.

“Much of economic and financial theory is based on the notion that individuals act rationally and consider all available information in the decision-making process. However, researchers have uncovered a surprisingly large amount of evidence that this is frequently not the case,” Tilson wrote in a paper called “Psychology & Behavioral Finance.”

One problem: We’re too emotional. A study published in Psychological Science pitted people with normal brains against people whose limbic systems, the brain’s emotional center, were impaired.

The paper asks whether a neural systems dysfunction that curbs emotion can lead, in some circumstances, to more advantageous decisions. The answer, in terms of investing, was yes.