Philippa Huckle is an international authority on Behavioral Finance. She’s appeared on an elite financial panel with Economics Nobel prize-winner, Daniel Kahneman, and her work is regularly featured in the international media. In 2009 she was named “Hong Kong’s Most Extraordinary Woman In Finance”.

Philippa heads up The Philippa Huckle Group, an investment advisory firm which manages large portfolios for an international client base of wealthy individuals. The firm is recognised as pioneers in successfully integrating Behavioral Finance as a crucial part of the investment advisory process. Philippa uses her blog to help investors get a grip on how to harness Behavioral Finance to be better investors.

Behavioral Finance examines human psychology to understand why investors make mistakes. Most importantly, it shows you how to avoid these mistakes yourself. Here, Philippa shares some of her latest work on the subject:

Using the ‘Cuddle Drug’ to Improve Your Portfolio

Your brain produces a hormone called oxytocin (also known as the “cuddle drug”). Oxytocin is both a nuisance and a help when you’re investing. Understanding how the cuddle drug affects your feelings will make you a calmer, clearer investor.

George Elliot wrote, “That quiet mutual gaze of a trusting husband and wife is like the first moment of refuge from a great weariness or a great danger.”

The good news is, much of the same benefit can be gained from your pet. And it’s true – I feel very calm, happy and content when I cuddle Mrs Mooncake’s furry little ears and tickle under her chin. In fact, gazing at her sweet face, I have to say I even feel like a wiser, better person.

Well, scientists have solved the mystery – cuddling your pet triggers the release of a hormone called oxytocin (also known as the “cuddle drug”). It travels out from your pituitary gland and into your blood system, causing those warm and mushy feelings we know so well.

Of course, nature always has a purpose. Scientists first studied oxytocin in mothers and discovered that breast-feeding, oxytocin-fuelled mothers experience feelings of similar intensity to a cocaine high. This keeps mums at it, and babies well-fed.

Oxytocin is the reason we develop an attachment to things we’re around for a while, whether it be Mrs Mooncake, a person, or even a thing. The more you’re around that object, the more oxytonin is released and the more attached you become. Behavioral Economists have given this trait of attachment the somewhat clunky name of “The Endowment Effect”. Simply put, this means that once you own something you’ll automatically start to value it more than others would. That’s why we like our own stuff, and why it’s so hard to throw out your favorite pair of old jeans – oxytocin causes “sentimental value”.

Companies, shares and investments can also activitate oxytocin in our brains. This can make you feel attached to specific investments, particularly if you chose them yourself. This is why a lot of people have a “bottom drawer” of investments collected over the years that really should be given a good spring clean and repositioned; things like decimated dot-com stocks from the 1990s, neglected pension funds from earlier jobs and – the most difficult of all – investments received as inheritance from a beloved member of the family. In Behavioral Finance, the Endowment Effect goes hand in hand with “Status Quo Bias”: the reluctance to make changes. Oxytocin-fuelled attachment is at the root of it all. Spring cleaning your collection of investments can feel as unappetizing as getting out the bin bags to sort through your wardrobe. But both need to be done on a regular basis – and you’ll always feel better afterwards.

Dose up on oxytocin for calmer portfolio decisions. Oxytocin is both a nuisance and a help when you’re investing. It’s a nuisance when it creates unhelpful attachments to investments that need to be sold, but it’s helpful because it can calm you, in the way you feel when you sit with your cat on your lap or your dog by your feet. It’s always preferable to make decisions in a calm state of mind. Panic selling happens when investors are in, well, a panic. Scientists have found that injecting a dose of oxytocin into highly stressed animals quickly calmed them. Imagine if regrettable, panicky actions could some day be avoided by swallowing an oxytocin pill to calm those destructive stress hormones!

Still, the day hasn’t yet come when investors can pop into the pharmacy to pick up a pack of oxytocin tablets in preparation for a clear-thinking portfolio review. In the meantime, use your knowledge of oxytocin to help yourself make more rational investment decisions:

W: http://www.philippahuckle.com