From Of Dollars and Data: History is riddled with investor after investor who couldn’t quit while they were ahead and eventually ended in ruin. Jacob Little, Jesse Livermore, Isaac Newton, Mark Twain … shall I continue?
But the bigger question remains: why does it happen to so many people from so many different backgrounds?
It’s because of biology. It’s because we’re human.
Neuroscientists have found that the same area of the brain activates when someone is on cocaine or winning a lot of money. Capital gains is a hell of a drug. So don’t forget your humanity if you get a windfall. You may think it is easy to resist, but the record of history suggests otherwise.
The problem with thinking we can resist temptation is that we have no information on what it actually feels like to be in that situation. It’s outside of our realm of experience. It’s beyond all expectations. As a result, our ability to imagine how we will react is faulty. For example, while I can say with high certainty that I can resist heroin in my current state, I can’t say with certainty that I can resist heroin if I am already on heroin.
The issue presents itself when we model things within certain limits. Just like those who worked on [Space Shuttle] Challenger before it exploded. They only tested the O-rings within a certain range of temperatures. Outside of the normal range and things can start to act abnormally. The same is true for people and how they are likely to respond to gaining large amounts of money.
This all happens because you and I are not static beings. You will react to circumstances and your behaviour will morph and shift with the chemicals surging through your brain. You will become someone else.