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Inside, you’ll learn how to:
You can pocket an extra R2,000 tax free a month from the one investment most financial advisors ignore
The secret strategy long term investors use to keep R400,000 out of SARS pocket and in their hands
The one income investment that pays you FOUR TIMES MORE than any stock on the JSE
How to generate a R700,000 windfall starting with R10,000 using the oldest wealth trick in the world
How a Harvard psychologist made a pigeon lose its mind
In the 1940s, Harvard psychologist Burrhus Frederic Skinner – through an experiment – made a pigeon lose its mind.
You see, Skinner studied the science of incentives. He did this by giving thousands of animals different incentives to be rewarded with food.
Here’s what he did…
Sometimes a pigeon just had to hit a lever, and a food pellet popped out every time.
Sometimes it had to learn a pattern – two lever taps or a tap and a delay and another tap. Pigeons were remarkably good at learning this.
A big part of Skinner’s research was to determine what incentives were so powerful that they couldn’t be ignored and thus caused the pigeon to become obsessed beyond the need for food pellets.
Skinner discovered three types of incentives…
#1: Fixed reward: The pigeon taps the lever once and gets one food pellet.
The pigeon figures this out quickly and doesn’t get too excited about it – “This is how I get food. OK. Move on.”
#2: Changing reward: Today, the pigeon taps once to get the pellet. Tomorrow it will take two taps. Then the next day, a tap pattern.
This gets the pigeon excited. It’s kind of like a puzzle that stimulates them – “Let’s figure out how to get food today.”
#3: Variable interval reward: The pigeon taps the lever and gets food on average every hour. But that might mean five pellets in the next hour and then nothing for the next five hours. The pigeon will get the same amount of food over the course of a day, but at random and unpredictable times.
This turned them into addicts. They lost their minds. “I know food will come so I’m going to keep tapping but when is it coming? The suspense is killing me”.
The dopamine effect
Skinner wanted to discover how much dopamine you get for different rewards.
Fixed rewards are too easy to get excited about. Changing rewards offer enough buzz to want to figure out tomorrow’s puzzle.
But, variable interval rewards flood your brain with dopamine because that high is necessary to survive. The dopamine rush of a reward that you knew would eventually come but didn’t know when, is what keeps you hunting for more.
In Skinner’s study, the pigeons got so much buzz from variable interval feedings that they became compulsive and completely out of control.
And here’s the thing…
“You can move from the pigeon to the human case. [Variable interval] is at the heart of all gambling devices."
What he means is, variable interval rewards are why we compulsively check:
And it’s what makes the stock market so addictive.
You just never know how it is going to reward you…
The rush of dopamine is so strong that seeking the next reward becomes a thrill powerful enough to override good judgement.
Which is what we see all the time in investing.
Look at how often investors check their portfolios. Or how often they invest. Or how often they ask for predictions or want to know the next hottest stock tips. Just consider the Crypto Craze alone!
The stock market is a variable interval reward - which is one hell of a drug
Which way the stock market will go is never certain. Sometimes it goes nowhere for 20 years. Sometimes it rises 500% in a decade.
Its path is an uneven and unpredictable mess.
The thing is, we know stocks will reward us over time. But we have no idea when, or how, or what it will make us endure in the meantime.
Simply, the stock market is a variable interval reward - which is a hell of a drug.
The rush of variable winning is so strong that seeking the next reward becomes a thrill powerful enough to override good judgement. Just like a pigeon pecking a lever five times per second hours on end, the natural response to not knowing when an important reward will come isn’t patience. It is obsessively seeking.
Which is what we see all the time in investing.
There’s a reason the stock market has 24/7 news coverage but roasting coffee, massages, and chocolate don’t…
The stock market has variable rewards; the others have fixed rewards.
Look at how often investors check their portfolios. Or how often they invest. Or how often they ask for predictions or next hottest stock tips.
It’s a drug that keeps us hooked.
Two fundamental lessons investors can learn from Skinner’s experiment
Skinner’s experiments revealed that some pigeons obsessed themselves into exhaustion, by frantically waiting for food pellets nonstop for days on end.
Everyone knows an investor like that – obsessively checking their phone to see if the price moved up and how much money they have made.
So much of investing is not what you know, but how you behave. And behaviour is hard to teach, hard to control, and hard to even come to terms with.
The fact is, 10% of people are born natural investors. Another 10% of people can’t ever be taught how to invest successfully no matter their education.
The other 80% of investors could improve by spending more energy on how they respond to risk and reward vs. the active chase of searching for the next reward.
What an investor can take away from this is the art of patience and control.
See you next week.
The South African Investor