Dopamine and the stock market
How your expectations shape your reality.
Most dopamine neurons in the midbrain of humans, monkeys, and rodents signal a reward prediction error; they are activated by more reward than predicted (positive prediction error), remain at baseline activity for fully predicted rewards, and show depressed activity with less reward than predicted (negative prediction error). [1]
In simple terms the future will fall into one of three categories in your mind:
- According to expectations (baseline dopamine)
- Above expectation (positive dopamine)
- Under expectations (depressed dopamine)
I look at the stock market (28.08.2020) and wonder: Why are we at record highs? Lots of people have lost their jobs, companies and people take safe bets in uncertain times, supply chains have been wrecked and overall the lookout is not that great.
The second quarter of 2020, the current‑dollar GDP decreased 30%. I think chances are low that it will increase during 2020 or during 2021 for that matter.
Dopamine prediction error plays a role in current market highs. Everyone basically predicted that GDP would decrease during 2020. Thus, anything bad didn’t actually affect our dopamine circuits because it went according to prediction. It might even have gone better than predicted because of doomsday scenarios that were painted on the wall when Corona started spreading.
Why do our dopamine levels have anything to do with trading stocks? Well, dopamine in general terms is the motivation chemical — it motivates you to do things. A general depression of dopamine would logically lead to more people being anxious — and selling stocks. That has not happened, because of dopamine prediction error.
Instead, people go along as if nothing happened and we’re getting more dopamine in our systems — because we’re currently exceeding expectations compared to what was projected. Which as we have learned, leads to a positive dopamine increase. Which leads to more trades and generally higher stock prices. How long can this last? How long until the outlook cannot be sufficiently grim to out-do reality? Frankly, I’m not sure.
However this is all great and awesome — until someone gets sad. Until our reality is lower than our expectations. Then anxiousness will probably spread in in the form of dopamine depression, and in the stock market as well. What I just have written down feels very basic, like economics 101. Yet it seems we have not understood this, and still follow our instincts…
Perhaps that is what everyone is gambling on — and the trillions of $$$ being pumped into the world economy. Actually come to think of it, the primary reason for printing more money might be to make people relax on a very basic human level… Fascinating is it not?
Sources:
[1] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4826767/
Continuation ramblings:
If that is the case, could we not make people relax in more sustainable ways? Monetary printing seems to be the short term, drug-ish way of solving the symptoms and not the underlying issue. Rather, shouldn’t we tell people it will probably be really bad and then we won’t be surprised when the shit hits the fan? Nobody wants to be the bearer of bad news, because that doesn’t give dopamine kicks.
What we basically want is a correct prediction. But a correct “negative prediction” will lead to people doing negative things for the stock market in the here and now. Which is bad because it might nurture a longer depression. Damnit its a hard question!
