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Wall Street to probe the minds of investors


Wall Street wants to delve deep inside the minds of Main Street investors. But will it use this powerful information for good?

In a string of announcements this spring, the educational arm of the NASD, formerly known as the National Association of Securities Dealers, granted more than $500,000 to researchers studying investors' psychological and gender biases, their susceptibility to fraud and their optimal learning strategies.

The grants represent growing acceptance of behavioral finance, the field of study that attempts to explain how emotions and judgment color investment choices.

This year, the NASD has announced five separate research grants that "had a component of understanding how and why people make decisions," said NASD Vice Chairman Mary Schapiro. "The fraudsters have already figured out how to prey on older people" by intimidating them into quick decisions, for example, she said.

Even legitimate investment firms already rely on emotional messages in advertising. Studying television ads, University of Virginia anthropologist Daniel Lefkowitz found shifting patterns in the emotional hot buttons used on investors.

After emotionless ads that began in the 1950s, the angry, empowered online investor characterized the advertisements of the 1990s stock bubble era, he said. Today's advertising stressing trusted investment advisers, he said, represents a shift back to an emphasis on nurturing and relationships.

The NASD studies are aimed at arming investors with tools to recognize attempts to play on their emotions, Schapiro said. By understanding how we make decisions because of our background, for example, we can better put that in perspective so it informs but doesn't overwhelm sound judgment, she said.

In one national survey, Iowa State University researchers hope to uncover explanations for why men and women show stark differences in their approaches to investing, from their risk tolerance to the way they buy investment products. Previous studies have shown that men trade more aggressively than women and that women are often reluctant to make decisions - both to their detriments.

"I want to get inside their heads and learn about all the personal characteristics that affect their investment behaviors," said Tahira Hira, the Iowa State professor conducting the two-year study.

Ultimately the professor hopes the research falls into the hands of actual investors, helping them to better understand themselves and their financial biases so they can make more-informed decisions.

She acknowledges that in reality, though, it is the marketing arms of investment firms that hungrily await results of studies like hers. Still, she believes the results will help - not hurt - investors because they will assist firms in providing services better suited to individuals' temperaments.

The NASD's educational division also is funding research by the Consumer Federation of America to discover what typical investors know about mutual funds and how they receive - and want to receive - information.

The study will help firms make more effective disclosure statements and design more informative sales pitches, Barbara Roper, director of investor protection for the Consumer Federation, said in announcing the award.

If the unintended consequence of this greater knowledge about what makes investors tick is that companies will have better marketing weapons with which to sell us advice and products, what can investors do to make sure they're equipped to scrutinize those pitches carefully?

One prominent academic in the field is skeptical that much can be done to change our gut responses, no matter what Wall Street gleans from studying investor psychology.

"Chances are that we won't easily overcome our biases," said Terrance Odean, associate professor at University of California at Berkeley. He has studied gender differences in trading and the effects of excessive trading on investment performance.

A simple and obvious solution, Odean said, is to buy and hold index funds.

E-mail Janet Kidd Stewart at

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