Effective Affect: Bullish and Bearish Emotions and Their Role in Your Investments

It was Aristotle who coined the phrase: “It is easier to conquer a nation than it is to conquer oneself.”

It does make sense, since his pupil, Alexander the Great, was never quite able to break free of the noose of his own alcoholism.

But wouldn’t you say that self-conquest sounds a little too, oh, I don’t know, outdated? Old fangled? Passé? Even extreme, perhaps?

It may to certain ears. But for hundreds of years, philosophical anthropologists – among many other types of scholars – have been seeking an explanation for that mysterious interplay between intellect and will, thought and desire, and logic and passion. Medieval thinkers would liken a person’s substantial makeup to that of a nation’s gubernatorial structure: the intellect being the ruling entity, and the will and the emotions making up different parts of the governed populus. In modern day jargon, we could say that the prefrontal cortex is the preferred ruling body, while the limbic system is to follow.

Now, why am I getting into this? Because many of us know how human interiority is structured, and how it’s supposed to interact. But too many of us don’t know how to use that very same interiority, and we let our desires perform their coup d’état all too often. That’s why we frequently slip into doing what we don’t really want to do, because we know what we truly ought to be doing.

This brings us back to Daniel Kahneman’s distinction between Systems 1 and 2 in our decision-making processes. System 1 always referring to the immediate, intuitive, and fast thinking, whilst System 2 refers to thorough, logical, slow thinking. The ideal in your financial operations is for System 1 to listen to System 2. Financial failure comes when System 1 rules the show. Daniel Kahneman writes,

“He went on to study the characteristics of students who score very low on this test – the supervisory function of System 2 is weak in these people – and found that they are prone to answer questions with the first idea that comes to mind and unwilling to invest the effort needed to check their intuitions. Individuals who uncritically follow their intuitions about puzzles are also prone to accept other suggestions from System 1. In particular, they are impulsive, impatient, and keen to receive immediate gratification. For example, 63% of the intuitive respondents say they would prefer to get $3,400 this month rather than $3,800 next month.”

Those were the results from Shane Frederick’s Cognitive Reflection Test. In other, similar tests, it has been shown that the children who were able to resist immediate gratification for the sake of a greater reward in the end would go on to be more successful in life.

The greater your intellect’s command over the rest of your empire, the greater will your savings be. Just remember: Rome wasn’t built in a day!