Investing Implications Of Dopamine

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In their recent episode of the VALUE: After Hours Podcast, Cassel, Taylor, and Carlisle discussed Investing Implications Of Dopamine. Here’s an excerpt from the episode:

Jake: All right. This segment comes from, I finished recently reading this book called Behave by Robert Sapolsky. He’s a professor at Stanford, who teaches about neurobiology and a bunch of other stuff, and spends his summers with baboons for the last 30 years in Africa studying them.

Hence, my little background of some monkeys is the little tip of the cap to Robert, who actually, honestly, is on my top five of if I could have lunch with anybody, and just pick their brain, and chat with him, he’s on there. Because I think he’s so interesting and so smart.

This segment is on dopamine, specifically, which is a neurotransmitter in your brain that actually, I think it would be useful if maybe what– As I’m going through, you guys think about potentially business and investing implications.

Because I’m increasingly of the belief that the dopamine actually drives the success of every single business. The consumer behavior is all driven by dopamine. All right. I’m going to go through and share some facts about dopamine that might be fun, or entertaining, or just edifying.

At first past, the dopaminergic system, which describes like these multiple parts of the brain that function bit differently depending on how much dopamine is in there. It’s about reward. There’re various pleasurable stimuli that will trigger release of dopamine in your brain. Drugs like cocaine, and heroin, and alcohol trigger the release.

Tobias: Have you tried Robinhood, though.

Jake: Well, so, we get to that.

Tobias: Coming.

Jake: If you block that release, though, something that was previously rewarding, the stimuli becomes aversive. It’s chronic stress and pain will deplete dopamine and decrease your sensitivity to it. That’s what produces the symptoms of depression and it’s called anhedonia, which is the inability to feel pleasure. That chronic stress and pain, Toby of your portfolio over the last– [crosstalk]

Tobias: I was going to say, it’s a Deep Value Investor.

Jake: [laughs] It depleted your dopamine in a big way, decreased your sensitivity to it. And now, of course, we have to talk sex releases dopamine in every species that’s ever been examined, which if you think that a chicken is an egg’s way of making another egg, it makes sense. As you might guess, these responses to sexually arousing stimuli, they’re greater in men than they are in women. The finding is that, it’s not specific to humans. Apparently, male rhesus monkeys will go for– They’ll forego the chance to drink water when they’re thirsty in order to see pictures of basically crotch shots of female rhesus monkeys.

[laughter]

Tobias: How did they figure that out?

Jake: In the lab.

Tobias: I don’t.

Ian: [laughs]

Jake: Other pictures of the female rhesus monkey and other contexts, they’ll still go drink the water, but it’s the crotch shots, apparently.

Food also evokes dopamine release in hungry individuals of all species. But if you’re full, there’s actually no activation. It’s interesting. Another thing is, we respond to pleasurable aesthetics. In one study, people were listening to music, like, new music. The more that their accumbens was activated, which is an older part of your brain, the more likely they were to buy the music afterward and they could actually correlate that.

We’re Wired To Punish Norm Violations

There’s also activation for cultural inventions. Picture like males looking at pictures of sports cars will trigger your dopamine. Research from economic game shows that there’s dopamine triggered when you punish someone who’s a jerk in the game, who’s cheating. And punishing of any norm violations in society is a triggering and a satisfying thing.

Tobias: Weird.

Jake: Yeah. We’re wired to punish norm violators. You could say like Karen is driven by dopamine effectively. Winning an auction will release dopamine, losing it will inhibit dopamine release. No wonder, it can be painful to chase stock prices with limit orders that never get filled. [chuckles] You can see why Buffett never participates in auctions, because he’d see that he’d be subjecting himself to chasing dopamine.

The Hedonic Treadmill That We All Live On

Here’s a depressing finding. Take a monkey, put him in a lab. He learns that if he presses this lever 10 times, he gets one raisin. All right, nice. He gets 10 units of dopamine released. Now, take that monkey, and he presses it 10 times, and he gets two raisins. Oh, score, like it’s 20 units of dopamine.

Now, the lever continues to do this two raisins for every 10 presses, but the dopamine response actually trends back down to the 10-unit release, even though, you’re still getting two raisins. You become habituated. Now, reward that monkey with a single raisin for his 10 pushes and now, the dopamine levels decline, and he’s upset, he’s angry.

This is basically the hedonic treadmill that we all live on. I think it explains a ton of man’s miseries, basically, we go around pushing the lever 10 times that we’re getting more raisins from society than we ever got as a species, and yet, we’re still unhappy. And nothing is as good as the first time that you experience it.

Jake: Other monkey studies have shown that the dopamine system is actually, it’s scale free. They take a monkey, and they train them to expect either two or 20 units of reward, and then they give them either four or 40 for a surprise ward, and it shows actually the same burst of dopamine.

The scaling doesn’t matter. If you bring them back to one or 10, you get a decrease, even though, 10 is way more than the two that they were getting before. Basically, if you get what you were expecting, you get this steady dribble of dopamine. But if you get more reward or you get it sooner than expected, there’s a big burst of it. Of course, if you get less than what you’re expecting or it happens later, you get a decrease in dopamine.

This system, unfortunately, I think for our modern version of ourselves evolved in a completely different environment. Your ancestors might have occasionally stumbled over a beehive and got access to a bunch of sugar, and then triggered this huge dopamine hit. And now, we have hyperpalatable foods on every single corner like you just can’t get away from it.

We used to have very subtle, hard-won pleasures. And now, it’s all bright, flashing lights, loud noises, confetti over the top sexuality. We live in this artificial deluge of intensity that is just hammering our dopaminergic systems in a way that most of our evolution would have been completely foreign.

Next segment is about, like, dopamine is also about anticipation. Take our well-trained monkey, put him back in the lab, and a light comes on in his room, and that signals the start of a reward trial. He goes to the lever, presses it 10 times, gets his raisin. There’s this small increase in dopamine for each raisin as you’d expect.

However, there’s actually lots of dopamine released when the light first comes on, which is the signal to the start of the reward. Once the monkey becomes habituated to that, the dopamine is less about the reward and more about the anticipation of the reward. Dopamine, in that context is really about mastery, and expectation, and confidence, like, “I know how this works and this is going to be great.” That’s when you get it triggered.

Near Misses Send Dopamine Soaring

But here’s where it gets a little bit weird. The light comes on, and that signals the start of a reward trial, the monkey presses the lever, it gets the raisin, but only 50% of the time. That’s the twist on this part of the study. Suddenly, there’s far more dopamine released. And why?

Well, nothing feels dopamine release like that. Maybe of an intermittent reinforcement, so, that chance of winning. Of course, near misses send the dopamine soaring. Of course, Las Vegas figured this out a long time ago. Randomness to it, 50% of the time, maybe winning and then showing you seven-seven, cherry. Wow, so close to winning like dopamine through the roof.

Another study showed that, if you take two identical betting situations, so, the probabilities of reward are the same, but the information that’s given about the contingencies of the reward, like, how would you win are different. The situation with less information, a lot more ambiguity about it than risk activates the amygdala, which is your fear center, and that actually silences the dopamine signaling.

What is perceived to be a well-calibrated risk, it becomes addictive, because that triggers dopamine. But where there’s ambiguity, it’s just agitating. That goes back to what we were talking about with the uncertainty of that next quarter, like, hating uncertainty way more than actually even perceived risk. And Mr. Market, I think identifies that pretty readily.

Dopamine is also responsible for goal-directed behavior. It brings the value of the reward of that resulting work and it actually gives rise to motivation, and often, those are from projections that come from your prefrontal cortex. This is kind of where delayed gratification and willpower come in.

But what about something where our species is very odd and we’re able to imagine scenarios years out. You go to school for 10 years to get some job, whereas there’s no rhesus monkey that’s like, “Oh, I’m going to wait. In three years, if I work hard at this, I’m going to get this outcome.” There’s this much more short timeline.

The dopamine actually gradually ramps up as a function of the length of the delay, and the anticipated size of the reward. It turns out that it’s this weird concoction of your dopaminergic system, your frontal cortex, your amygdala, which is the fear, your insula, which is an old part of your brain.

They all code for different aspects of what the reward might be, the magnitude of it, how long it thinks it’s going to take, the probability of winning, and it concocts it into this entire thing that basically will influence whether we managed to do the harder more correct thing over time. Will power is made up of all of these things. Last interesting thing, because I know I’ve been rambling on here for quite a while.

Tobias: That’s good.

The 7R Variant

Jake: The 7R variant of this dopamine receptor, DRD4 is associated with impulsivity and novelty seeking. If you have this 7R variant, you’re more likely to go after new experiences. What’s amazing is that, if you look at a map of the prevalence of the 7R variation in the populations today of the world, you could actually track how humans migrated out of Asia and they went island hopping down into Micronesia, and all of Philippines, and all down through these islands that are in that area like Oceania.

The further you go south, the more 7R variant that you see. And then also, if you go over the Bering Strait, and down through North America, and down into South America, the further you in South America, the more that you see the 7R variants.

Basically, the reason that people are spread at different parts of the map is related to how much novelty seeking they had. They’re looking for new experiences, and they just keep going, and traveling. That’s all driven by the response to dopamine. All right. That’s all I got. I’m ready to take the rest of the show off.

Tobias: [laughs]

Jake: But I don’t know if you guys want to try to chime in with some business stuff, that might tie this all back together.

Tobias: I thought that was great. How do we harness the dopamine receptors for good rather than evil? Because I think San Francisco Tech Companies, Bay Area Tech Companies have figured out how to harness it for evil, get you scrolling on Instagram, or TikTok, or whatever. How do you use it for good?

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