INVESTING Doctor links psychology and stocks

People attribute more power than they should to the markets, a psychiatrist writes.
DALLAS MORNING NEWS
The stock market is in sync with human moods -- swinging from manic to depressed, said Dr. John W. Schott, a psychiatrist with Harvard University Medical School and a pioneer in the field of psychology and investing.
Dr. Schott comes from a family of investors, dating to his immigrant great-grandparents. "My grandparents made a windfall during the Depression, and it was not uncommon for a stockbroker to travel to our house every Sunday," he said. "Investing was a normal part of life in our home."
But he did not set out to be an investment adviser or publish a newsletter on the psychology of the market. He was a medical resident and went into private practice in the 1970s.
"I quickly saw how much money issues were a part of the problems many of my patients were experiencing," he said. In 1985, he became an investment adviser and began to write books and lecture about people's behavior and the market.
Attributions
"When there is a bull market, people's greed gets out of control. Wall Street exploits that. Stocks become overvalued. You have paper millionaires," said Dr. Schott, author of "Mind Over Money: Match Your Personality to a Winning Financial Strategy."
"When there is a protracted bear market, people experience fear, anxiety and loss of self-esteem. Instead of recognizing this as the natural history of a business cycle, people say, 'I am stupid for letting this happen' or 'I made a mistake.' What they are doing is assigning arbitrary power and influence to something they have no control of. People who come into the market without an understanding of the nature of money and wealth will take these emotional tumbles."
It is more apt to happen because today's investors may have no "experience or memory" of the last extreme bear market, he said. "Ninety percent of all current investors came into the market 15 years ago. They are true neophytes. Not even the mutual-fund managers now, who are in their 30s, have experience with a real bear market."
Even if there were institutional memory, family history and latent emotional conflicts about money affect investment decisions at the individual and even the corporate levels, he said. "Our sense of mastery and control come from our accomplishments, and those unfortunately, in this age, are pegged to how much you get paid. When a person is asked what he is worth, the first response is a salary figure, not 'I am a good father, a good brother, a good Christian.' "
Contagious mania
Greed can lead to what Dr. Schott calls a "full manic phase with grandiose" notions. "A CEO can think: 'Only I can pull this off, so I am worth $15 million in bonuses. I don't have to answer to the board. I can play with the balance sheet.' It isn't long before other CEOs start thinking and behaving the same."
"It is rare that the money personalities of CEOs are probed in a psychological sense. But they should be. They are prone to the same emotional problems with money as anyone else. Board members are appointed with CEO approval, so they aren't paying attention, or they receive so much pay they look the other way."