Investment Euphoria & Money Madness: The Inner Workings of the Psychology of Investing--for Financial Advisors and Their Clients

273 Pages·2000·1.24 MB·English

by  Harry Gunn

Investment Euphoria and Money Madness
The Inner Workings of the Psychology of Investing—for Financial Advisors and Their Clients
Harry "Bud" E. Gunn

i
.
.
.
This book is available at a special discount when ordered in bulk quantities.
For information, contact Special Sales Department,
AMACOM, a division of American Management Association, 1601 Broadway,
New York, NY 10019.
This publication is designed to provide accurate and authoritative information in regard to the subject
matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal,
accounting, or other professional service. If legal advice or other expert assistance is required, the
services of a competent professional person should be sought.
© 2000 The Glenlake Publishing Company, Ltd.
All rights reserved.
Printed in the Unites States of America
ISBN: 0-8144-0576-2
This publication may not be reproduced, stored in a retrieval system, or transmitted in whole or in part,
in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without
the prior written permission of the publisher.
AMACOM
American Management Association
New York • Atlanta • Boston • Chicago • Kansas City
San Francisco • Washington, D.C.
Brussels • Mexico City • Tokyo • Toronto
Printing number
10 9 8 7 6 5 4 3 2 1

ii
.
.
.
Dedication
To my wife Vi, my soul mate and partner in all I do. Also, to my sons,
Bud and Bill, great sources of joy and encouragement,
and
To a very important person in my life, My Friend, My Pal, My Brother,
Bill Gunn.

iii
.
.
Table of Contents
About the Author vii
Introduction ix
I 1
Understanding Yourself: The Key to Better Performance
II 9
Improving Rapport with Your Clients
III 27
How People Function
IV 43
Mood Disorders
V 59
Thought Disorders
VI 75
Cognitive Disorders
VII 93
Personality Disorders
VIII 111
How to Be Aware of a Client's Psychological State
IX 127
How Personality Shapes Investment Philosophy
X 143
How Self-Knowledge Can Help the Broker
XI 157
Avoiding Liability
XII 175
Helping the Investor Stay Psychologically Fit
XIII 191
The Broker's Quiz
iv
.
.
.
XIV 195
Dealing with Obnoxious People
XV 211
Overcoming Guilt over Success
Glossary 231
Index 237

v
.
.
.
About the Author
Harry "Bud" Gunn is a Clinical Psychologist who has helped individuals deal with their fears,
conducted workshops for stress management and improving communications skills and has applied
psychological techniques to improve investing. He is the author of numerous publications including The
Test for Success Book, Fear of Success and Guilt over Success, and The Test Yourself Book and
Manipulation by Guild among others. Dr. Gunn was educated at Beloit College, Purdue University,
The University of Chicago, and received his Ph.D. from Loyola University, Chicago.

vi
.
.
.
Introduction
Many people in the world of investment might question the need to study psychology. Some argue that
they are "numbers" people, not social reformers. Still others, disavowing any emotional problems, feel
they don't need to engage in self-analysis. Many firmly believe they make only rational or
logical—never emotional—decisions.
However, for everyone there is an intertwining of reason and emotion, so that the demarcation is not
always clear. Money has a way of stirring the emotions and clouding higher thought processes. Money
also changes people. The nice, quiet, compliant person can become a screaming maniac when
investments are not successful.
There are three main reasons why the broker needs to understand psychology:
1. To understand his or her own individual equation of the broker and thereby maximize performance.
2. To improve rapport and understand the client's covert strategies.
3. To avoid liability because of failure to detect a client's emotional deterioration.
Psychology is in part the study of human behavior, which includes perception, decision making, goal
setting, motivation, and social interaction as well as emotional expression and adjustment.
Psychologists are not primarily interested in simply finding something wrong with people but rather
helping people become even bigger winners at their trade.
That is why I have written this book. I wish success to all who deal with investments—after all, you
might be making one for me one day!

vii
.
.
.
Chapter I—
Understanding Yourself:
The Key to Better Performance
The most difficult person to take a good look at is yourself. Yet your personality will play a major role
in how you perform in the investment world. If you can know yourself, you will have a significant
advantage.
Personality and Performance
Why is self-knowledge important? There are two primary reasons:
1. Our personalities determine how we relate to others, and of course that means to clients.
2. Our personalities heavily influence our investment approach.
Consider the following examples:
A broker who could be described as flamboyant, exuding confidence, likes to make decisions on his
own. He tends to look for investments that could make the big gain. He is likely to seek the more risky
investment and then hang on too long, at the top as well as the bottom. Little gainers do not appeal to
him, but by waiting for more profit he may register a loss.
Another broker overly identifies with his investment work. He empathizes with the market to such an
extent that when it goes down, he gets down. Depression robs anyone of the ability to make sound
business decisions. When everything looks unfavorable to a depressed person, a number of bad things
can happen. At one extreme the broker may just lose interest, become withdrawn, and fail to keep up
with current events.

1
.
.
.
At the other end the broker may feel helpless; in order to feel in control he may make impulsive
decisions, selling stocks that are down without waiting for a rebound or even selling those that are
already on the upswing. Of course, when the market is noticeably on an upswing, there may be a
tendency to overbuy.
Another has a personality type that is pessimistic. Though this may seem like the one before, it isn't.
Here the emotional state is related not to external conditions but rather to personal disposition. When a
stock starts to go up, the pessimist will sell quickly because of concern that it will soon tumble.
Potentially big profits are lost with the quick sale. But of course losses are also not as severe.
The optimist, on the other hand, expects things to go well. As a result gains can be maximized—unless
he stays with the investment the whole way. At the low end, though, there is the expectation that things
will bounce back. Losses can easily be high.
There is another personality type that makes a major impact upon investment strategy. This person
suffers from the "fraud complex." She suffers from low self-esteem; whenever things go well, she
expects a turnaround. She usually experiences heavy anxiety when she is successful because she thinks
she's a fraud. She's sure she doesn't deserve it. You have to watch this type because you never know
at what point the complex will set in. Can she gain 10 percent? 25 percent? 30 percent?
She's like the golfer who has a career round going but is just waiting for his game to fall apart. She
brings on her own defeat, either by taking excessive chances or by creating inner tension that disrupts
thinking and rhythm. With investments, the problems for this personality type are primarily at the high
end; she can be very accepting of failure because it does lower anxiety.
The real issue is how much success you can comfortably expect. Some may deny the prevalence of
this complex, yet how many times have we heard someone say, "Things are going too well." There is a
common myth that we can jinx things by being excited when things go well. That is most unfortunate
because rewards increase motivation, and we all need that.
Then there's the analyzer. He won't make an investment without analyzing every aspect. He may even
have several systems that cancel each other out. He may be so slow in making decisions that he falls
behind the trends. Usually, too, people who are highly compulsive are not good listeners. Following
what is logical to them, they don't expect others to understand their logic.

2
.
.
.
Which brings us to the non-listener. She may also have a mixture of other traits (e.g., heavily
introverted), but she just does not focus on what others are saying, or for that matter feeling. Whatever
the causes, this approach has two main weaknesses; she doesn't get enough information from others,
and she doesn't share enough information with the client. If client and broker are not on the same
wavelength, that could mean serious legal problems down the road.
Just as it's possible to identify with the market, it's possible to overidentify with a client. I once worked
with a broker who took an almost parental role with his clients. Their problems became his. When a
client felt a need for the stability of long-term investments, the broker pursued that goal. When that
same client suddenly wanted money for a lavish vacation, the broker went along by selling some of
those long-term investments. The broker changed his investment strategy constantly at the whim of the
client.
''Just think what that means, Dr. Gunn," the broker said. "I need a new plan of attack every time my
client's needs change." No wonder he looked depressed and tension-ridden. The opposite can also be
the case: These are people who can never make any commitment. One such broker went through
three wives, several homes, and a variety of dress styles. Call him a compulsive change seeker.
Sometimes he would make an investment in the morning and sell it by noon. He couldn't even commit
to a stock buy. The very complicated plans he would make on Monday morning rarely made it
through the week.
Another personality type is Mr. Bravado. This person keeps a batting average of all his "bets," though
he avoids any talk of his misses. Taking a loss is unthinkable to him—he'll hang on for years rather than
admit a mistake and move on. Until a stock is sold, he feels it's not in the loss column. Of course, while
waiting for that low stock to rise in value, he's missed dozens of stocks moving upward. Better to just
admit the mistake; no one hits them all.
Some brokers come on very strong. I've noticed that among those who make sales phone calls; as
soon as you answer there's a barrage about some stock, prior recommended, that has soared.
We can all agree that confidence has value. The trouble is that like everything else, it can be overdone.
There may also be problems if there is not a clear understanding of what is expected. Some clients
tend to think that a broker who hits once can do it again. Not so—and if things don't work out there
might be legal action.
Those who invest are no different from the rest of humanity. When things don't go well, we look for
some excuse, someone else to blame it

3