September 13, 2007 / 5:20 PM / in 11 years

Hot-headed investors make better decisions: study

NEW YORK (Reuters) - Sometimes it’s best not to keep your cool.

Kevin Maloney calls out a trade on the floor of the Chicago Mercantile Exchange April 25, 2007, after the Dow Jones industrial average cracked the 13,000 mark for the first time. Hot-headed stock investors make better decisions, a study in the Academy of Management Journal showed. REUTERS/John Gress

In fact, hot-headed stock investors make better decisions, a study in the Academy of Management Journal showed.

Adding emotions to the decision-making process can enhance creativity, engagement and decision efficiency, Myeong-Gu Seo of the University of Maryland and Lisa Feldman Barrett of Boston College wrote in a study published in the August/September issue.

The greater the average intensity of an individual’s feelings, the higher their investment returns, the professors found. The study monitored 101 stock investors in a simulated trading exercise spanning four weeks.

“Contrary to the popular belief that the cooler head prevails, people with hot heads — those who experienced their feelings with greater intensity during decision-making — achieved higher decision-making performance,” they wrote.

The conventional wisdom that emotions can make you irrational has less to do with how intense your feelings are than with how much you understand them, the study showed.

In other words, those investors who listened to their emotions were better able to regulate them.

But showing emotion on the trading floor is still a controversial subject.

“I’m no friend of emotion in trading,” said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey, who has been trading stocks for more than 25 years.

“It’s much more important to be disciplined.”

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