Investing With Gratitude - Behavioral Matters Insights from the application of Behavioral Finance | Issue 44 January 28, 2021
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Behavioral
Matters
Insights from the application of Behavioral Finance | Issue 44
January 28, 2021
Investing
With
Gratitude
By: Michael A. Ervolini, CEO
INTRODUCTION
Behavioral Matters is a series of essays on the application of Behavioral
Finance written specifically for professional investors and portfolio managers.
“Gratitude is an antidote to negative emotions,
a neutralizer of envy, hostility, worry, and
irritation. It is savoring; it is not taking things
for granted; it is present-oriented.”
- Sonja Lyubomirsky 1
When it comes to generating excess returns active managers can leave no stone unturned. A growing
body of research suggests that integrating gratitude into investment processes may be an overlooked
yet ready source of incremental performance. The type of gratitude required goes well beyond
managers merely thanking their lucky stars for their careers. Mindful gratitude – consciously counting
your blessings – has been shown to be helpful in overcoming unproductive behavioral tendencies. And
that can lead to stronger and more consistent outperformance. This essay explores the role of gratitude
on buy, sell and sizing decisions. It highlights connections between findings from gratitude research and
common behavioral tendencies observed across hundreds of portfolio managers. Insights from
neuroscience relating the prefrontal cortex and emotions to gratitude are discussed. The essay
concludes with a simple yet highly effective technique for elevating gratitude in your life and using it to
make better choices.
© 2021 CABOT INVESTMENT TECHNOLOGY, INC. // INVESTING WITH GRATITUDE: ISSUE 44 | 2
THE POWER OF MINDFULNESS
Neuroscience makes clear that emotions are essential to formulating rational choices.2 Just how
important emotions are, and precisely how they influence decisions, is becoming ever more understood.
For example, anger frequently leads to risk taking while fear results in risk aversion.3 Similarly, seeking
pleasure can lead to over-confidence whereas the desire to avoid pain can produce pessimistic
thinking.4 And simply thinking about risk can produce feelings that the uncertainty has been eliminated,
referred to as the allusion of control.5 While there are numerous ways that emotions can derail analytic
thinking, emotions can also be harnessed to keep your decisions aligned with your intentions. And that
is where gratitude comes into the picture.
The feeling of gratitude may be just what you need to reign in unproductive impulses. Numerous
studies indicate that experiencing gratitude can offset unconscious urges which lead to poor choices,
including those involving investment decisions. For example, a heightened sense of gratitude can
attenuate the desire for immediate gratification – fostering patience and allowing investors to benefit
fully from strong buys. Gratitude is also shown to help modulate risk seeking when moderation is a
better choice. Interestingly, in studies where gratitude is quantified its benefits tend to be monotonic
(i.e., the more gratitude experienced the more unproductive behaviors are ameliorated.)
“
“In studies where gratitude is quantified
its benefits tend to be monotonic (i.e., the
more gratitude experienced the more
unproductive behaviors are ameliorated.”
© 2021 CABOT INVESTMENT TECHNOLOGY, INC. // INVESTING WITH GRATITUDE: ISSUE 44 | 3
TIME VALUE
One of the most profound ways gratitude affects choices is its
ability to elevate patience when confronting temporal
assessments. Consider cash flow analysis. Identifying
mismatches between current market prices and derived
estimates of fair value is at the heart of fundamental investing.
Analyses supporting such comparisons require many inputs. One
such input is the rate at which future cash flows are discounted
in order to equate them to a present value. Poorly understood, is
that individuals may discount cash flows of comparable
magnitude and quality very differently depending upon their
emotional state. The result being that the difference between a
buy and sell decision can depend more on how one feels versus
what the numbers suggest.
The role of gratitude in relation to discounting has been
investigated by the research team DeSteno, Dickens and Lerner.6
One study measured the temporal choices of individuals across
three emotional states: induced or primed to feel happy, primed
to feel gratitude, and those in a neutral state. Priming was
accomplished by asking participants to reflect on specific
experiences consistent with the emotional group to which they
were randomly assigned. Participants were then asked to spend
five minutes writing down some of their reflections. At this point
each participant was presented more than two dozen rounds of
choices where they could accept a smaller amount of money “Gratitude has a
immediately versus a larger amount anywhere from one week to clear effect on
six months in the future.
the time-value
of money.”
© 2021 CABOT INVESTMENT TECHNOLOGY, INC. // INVESTING WITH GRATITUDE: ISSUE 44 | 4
TIME VALUE
DeSteno et al found that gratitude has a clear effect on the time-value of money. Across their
experiments they observed that grateful participants were more patient. They were more willing to wait
for larger payoffs down the road rather than accept a lesser amount immediately. On average grateful
participants preferred $85 in three months over an immediate payout of anything less than $63. In
contrast the happy and neutral participants were willing to trade-off the larger future payoff for just $53
today. The grateful participants’ choices reflected less impatience. They used a lower implied discount
rate to arrive at a present value of the future larger amount. According to DeSteno et al, the research
also showed that the higher the levels of gratitude reported by participants the higher the current
payout required (i.e., an inverse relationship between level of gratitude and implied discount rate).
Similar correlations for either happy or neutral participants were not observed. The significance of this
last finding is that greater patience is not simply a function of feeling good but has to do specifically with
brain activity that occurs while experiencing gratitude.
Reduced impatience for future payouts can be useful in many aspects of asset management. It can help
ostensibly long-term investors resist the desire to cash in young winners and in doing so forfeit
additional alpha (i.e., avoid risk aversion).7 The research suggests that gratitude can enable teams to
remain true to their strategy and process in the face of extensive volatility or a market headwind (i.e.,
avoid style drift). It is possible that gratitude also may strengthen the resolve of capital allocators –
allowing sufficient time for managers to recover from short-term underperformance and deliver upon
the mandates for which they were chosen (i.e., avoid chasing hot funds).
© 2021 CABOT INVESTMENT TECHNOLOGY, INC. // INVESTING WITH GRATITUDE: ISSUE 44 | 5
EXPECTED VALUE
“Gratitude can help dampen excessive risk
“
seeking – particularly with regard to
capturing additional gains.”
Risk taking is central to successful investing, especially for active management. Excessive risk taking,
however, can play havoc on portfolio results. And discerning the relative riskiness of a choice when the
pressure is on is no mean feat. The reason is that underlying every buy and sell decision is what Keynes
referred to as animal spirits: “— a spontaneous urge to action rather than inaction, and not as the
outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”8 This
innately human preference for action can cause unconscious urges to overwhelm analytic thinking.
Fortunately, recent studies suggest that such animal spirits can be tamed with a bit of gratitude.
Yufeng Zhanga, Zhuo Job Chenb and Shiguang Ni9, have studied the effects of gratitude on choices
involving risky trade-offs. Zhanga et. al. hypothesize that the mindfulness which accompanies feelings of
gratitude can alter one’s assessment of a risky proposition. Specifically, they believe gratitude shifts
unconscious motivations away from size of payoff and more toward probability of pay-off. The overall
effect of emphasizing likelihood over magnitude aids in suppressing excessive risk taking, their research
suggests. In one of their studies participants were told that they had won a lottery. They then were
asked to choose between two methods of payoff: (i) a specific amount of cash for certain, or (ii) the
option of flipping a coin, whereby heads would result in a doubling of the payoff and tails zero. As
anticipated by the researchers some individuals chose the smaller certain payoff and others went for
the 50% chance of doubling their gain. Once finished the participants were asked to complete a
questionnaire that measured their levels of gratitude.
What Zhanga et al found was consistent with their conjecture: “… as hypothesized, the effect of gratitude
was significant indicating that people of higher gratitude were more risk averse for monetary gains than
people lower in gratitude, and the effect held true regardless of the monetary size.” This and other
studies conducted by Zhanga et al offer compelling evidence that gratitude can help dampen excessive
risk seeking – particularly with regard to capturing additional gains. By lowering impulsivity individuals
afford themselves the opportunity to focus on likelihood rather than magnitude and, in doing so,
perhaps better align their actions with their intentions.
© 2021 CABOT INVESTMENT TECHNOLOGY, INC. // INVESTING WITH GRATITUDE: ISSUE 44 | 6
ANATOMY OF GRATITUDE
Elevated feelings of gratitude influence activity within the prefrontal cortex, this being the location of
executive functioning. A conceptual description of this brain region by researcher Christina Karns
explains: “It holds abstract representations of the inner and outer world that help with complex
reasoning, one’s representation of oneself and even social processing.”10 More directly related to
investing and suggestive of how behavioral tendencies are formed, Karns elaborates: “Anatomically, this
region is wired up to be a hub for processing the value of risk and reward; it’s richly connected to even
deeper brain regions that provide a kick of pleasurable neurochemicals in the right circumstances.”
The prefrontal cortex evaluates and learns primarily on its own, explains Karns: “The ventromedial
prefrontal cortex is connected to other brain systems that help you experience reward. These high-level
systems in your frontal lobes are constantly assessing the value of your decisions. This part of the brain
helps you place various things in a hierarchy of how rewarding you find them to be. It may help you
determine which decisions, goals and relationships to prioritize.” This process enables you to steadily
improve within a strong learning environment – one where action and subsequent result are easily
tracked. Here the prefrontal cortex can calibrate what’s working and what’s not. It can then release its
neurochemicals to reinforce successful choices with a jolt of pleasure, encouraging you toward doing
your best.
In contrast, asset management is a weak learning environment. Decisions taken today may require days,
weeks, months, or even years to play out. And, of course, there will be many other important decisions
to make before the results of the earlier choices are known. Sorting out which decisions are adding
alpha and which are eroding it is impossible amongst such poor feedback. And this weak learning
environment has a lot to do with why and how professional money managers develop unproductive
behavioral tendencies.
While there are numerous debiasing techniques to choose from, elevating one’s level of gratitude is
simple to achieve, low cost, and highly effective in many circumstances. All that is required is sufficient
self-awareness regarding just where unproductive behaviors are lurking within your investment
processes and the desire to improve. Now that is something to be grateful about.
© 2021 CABOT INVESTMENT TECHNOLOGY, INC. // INVESTING WITH GRATITUDE: ISSUE 44 | 7INTO PRACTICE
The benefits of gratitude can be yours with a modest investment. It need take only about five minutes, a
few times a week, during which you: first, reflect upon things for which you are grateful, and then jot
them down. That’s it. Elevating your levels of gratitude a few times per week can help retrain your
prefrontal cortex. Thus, enabling you to push back against old unproductive decision patterns and allow
for more effective intentional choices to reign.
While seemingly minor the added step of recording a few grateful recollections is very helpful. Doing so
activates an important set of neural connections – enabling you to realize the maximum benefit from
your efforts. Researchers Brown and Wong have studied the effect of gratitude journaling in detail. They
report: “Most interestingly, when we compared those who wrote [about gratitude] with those who didn’t,
the gratitude letter writers showed greater activation in the medial prefrontal cortex when they
experienced gratitude in the MRI scanner. This is striking as this effect was found three months after the
letter writing began.” 11 A handsome payback for a relatively small investment.
© 2021 CABOT INVESTMENT TECHNOLOGY, INC. // INVESTING WITH GRATITUDE: ISSUE 44 | 8CONCLUSION
Despite industry folklore to the contrary, emotions are not the
bane of asset management. Rather they are a necessary and
potentially harnessable aspect of normal brain activity. Feelings of
gratitude, for example, have been shown to relax impatience
regarding future gains and lessen the desire to gamble in pursuit of
greater profits.
The research points to eliciting a sense of gratitude as having a
meaningful impact on the prefrontal cortex and how it motivates
choices. Elevating feelings of gratitude can be accomplished in just
minutes of focused concentration each week. Studies show that
recalling what you are grateful for and making a few notes about
your thoughts can help better align the decisions you make with
intention. Perhaps adding a bit more gratitude to life is just what
you need – besides, it can’t hurt.
ENDNOTES
1. Sonja Lyubomirsky, Ph.D., is professor of psychology at UC Riverside and the author of the best-selling books The How of
Happiness and The Myths of Happiness.
2. Joseph Ledoux, The Emotional Brain (Simon and Schuster, 1998)
3. Michael A. Ervolini, “Fear, Anger and Risk,” available at www\cabotintech.com\essays.
4. David Tuckett and Richard Taffler, “Phantastic Objects and the Financial Market’s Sense of Reality: A Psychoanalytic Contribution
to the Understanding of Stock Market Instability,” International Journal of Psychoanalysis 89, no. 2 (2008): 407.
5. Daniel Kahneman and Dan Lovallo, “Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking,” Management
Science 39, no. 1 (January 1993), 26.
6. DeSteno, D., Y. Li, L. Dickens, and J. S. Lerner. “Gratitude: A Tool for Reducing Economic Impatience”, Psychological Science, 2014.
7. Michael A. Ervolini, “When Adding Is Subtracting,” available at ww\cabotintech.com\essays.
8. John Maynard Keynes, "The General Theory of Employment, Interest, and Money,", Palgrave Macmillan, 1936.
9. Yufeng Zhanga, Zhuo Job Chen b and Shiguang Ni, “The security of being grateful: Gratitude promotes risk aversion in decision-
making”, The Journal of Positive Psychology, April 2019.
10. Christina Karns, Ph.D., “Gratitude has rewarding connections in brain, research finds”, The Washington Post, Dec. 23, 2018
11. JOSHUA BROWN and JOEL WONG, “How Gratitude Changes You and Your Brain,” The Gratitude Project, UC Berkeley, JUNE 6, 2017
© 2021 CABOT INVESTMENT TECHNOLOGY, INC. // INVESTING WITH GRATITUDE: ISSUE 44 | 9ABOUT CABOT
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