The Country Club Effect

country_clubI recently read a study on a phenomenon called “Fictive Learning,” written by Read Montague, a neuroscientist at Virginia Tech.  Basically, fictive learning is the fact that investors not only learn from their mistakes; they also learn from the mistakes they might’ve made.

From my own observations in 12+ years of portfolio management and financial planning, I’ve learned that investors struggle to buy value and they struggle to buy momentum.  What I mean is, when a good stock has been beaten up and gone down, they struggle to buy it, in fear that it’ll continue to slide.  Furthermore, when a stock has created a new or recent high, they struggle to buy it because they fear it’s reached its peak (and that it’ll fall from that point, forward).

In 2007, Montague began simulating stock bubbles in a brain scanner, as he attempted to understand irrational investor behavior.  His experiment went like this:

  • Each subject was given $100 and some basic information about the “current” state of the stock market.
  • After choosing how much money to invest, the players watched nervously as their investments either rose or fell in value.
  • The game continued for 20 rounds, and the subjects got to keep their earnings.
  • Instead of using random simulations of the stock market, he relied on data from famous historical market bubble, such as the Dow of 1929, the NASDAQ of 1998, and the S&P 500 of 1987, so the neural responses of investors reflected real-life bubbles and crashes

The study concluded that people regretted not placing larger bets on investments that fared euphorically well, even if they made a little money in the investments they did own.  This was fascinating in that, investors were not satisfied with their modest earnings – rather, they were stimulated much more by the “profit that could’ve been.” Basically, they beat themselves up over the money they missed rather than enjoying the less exciting money they did earn.  In the scenario of the NASDAQ bubble in the 90’s, investors continually piled on in search of higher profits.  Even though it looked like a bubble in every sense of the word, they were convinced “it was different this time.”

Ironically, when the bubble burst (it took awhile, but) the investors eventually started bailing out of the market as it collapsed.  The same regret that caused them so much pain by not missing gains also caused them to sell, regretting how expensive the losses were after the market completed its cycle.

Taking it a step further, Montague did a study on social comparison where he noticed the competitive nature of investing that he named “The Country Club Effect.”  Investors hearing their friends talk about all the money they were making in the market caused feelings of regret and jealousy.  During fMRI observations, whenever the investor “beat” his/her friends by owning an investment or portfolio that performed better than the friend in question, it resulted in a euphoric, drug-like high in the brain.  This same feeling corresponded with those same investors taking riskier-than-normal bets on investments in order to “get ahead” or “catch up” to their friend (or foe, depending on how you look at it).

Since the market bottomed in 2009, I’ve experienced conversations with an increasing number of clients and prospective clients alike, who display behavior similar to those in this experiment.  If they’re not clients of ours, they’re making investment decisions to social comparison.  Even some of our clients have become stuck between a rock and a hard place, thinking about their modest returns as compared to their co-worker’s supposed recent, “hot” run.  It’s a lot like coming back from Vegas on the plane.  The only people you hear talking are those who made money – and of course, they never discuss the losing bets they placed.

At the end of the day, navigating the markets has a lot less to do with the fundamentals and a lot more to do with supply and demand.  Markets will trend, bubbles will form, and bubbles will burst… it’s human nature to “go with the herd” and sob over your mistakes, only to make those same mistakes again and again.  The market always waits to collapse until it can disappoint the largest possible number of investors – and it’s that last, most conservative investor that piles on… that’s the one the market’s waiting for before it starts its next decline.

If you or someone you know has any questions regarding portfolio management, estate planning, or financial planning, please contact us and we’d be happy to confidentially discuss your/their personal situation further.

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All the best,


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Data as of market close – 10/21/13







S&P500 Return (US Stocks)







NAREIT Index (Commercial REIT)







DJ-UBS Commodities Index – TR







Barclays Capital  Aggregate Bond Index







MSCI World ex-US (International Stocks)







Notes: S&P 500, MSCI World ex-US, Barclay’s Capital US Aggregate Bond, & DJ-UBS Commodity Index returns exclude reinvested dividends and the three-, five-, and 10-year returns are annualized. All stated returns are rounded to the tenth percent.  All data above sourced via Factset.  Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

  • The opinions mentioned in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
  • To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
  • Past performance is not guarantee of future results.
  • Economic forecasts set forth may not develop as predicted.
  • The views and opinions expressed in this commentary are those of Adam Koos and do not necessarily represent the views of LPL Financial and its affiliates.
  • Investing involves risk including loss of principal.
Adam Koos
Adam Koos
Adam Koos, CFP® is an award-winning financial planner and owner of Libertas Wealth Management Group, Inc., located in Dublin, Ohio. Over the past 10+ years, his common sense financial planning advice and trademarked “Defense First” portfolio management has caught the eyes of both investors, as well as the media.