Investor Expertise as Mastery over Mind: Regulating Loss Affect for Superior Investment Performance

Abstract

For most people, investing in stocks is a stressful experience, and this is particularly true in a loss situation. The emotional stress from a significant loss is quite likely to hamper effective decision making with respect to future investments. In three separate studies, with a combined sample of 60 professional investors and 154 lay investors, the authors compare differences in the magnitude of gain and loss affect felt by experts and lay investors as well as differences in affect regulation strategies employed. The findings demonstrate that professional investors are more effective than lay investors in coping with ups and downs of investing. In particular, professional investors show a lesser degree of gain and loss affect than lay investors with regard to both anticipated and experienced affect. Additionally, professional investors demonstrate a pronounced tendency to reappraise a loss situation as a positive learning experience, and to attribute failure in investment to themselves rather than blaming the market or blaming others. These types of affect regulation strategies result in a lower loss affect experienced by professional investors, which in turn leads to greater loss realization and better investment performance.

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