Be like Kirk, not like Spock, on Wall Street - Passion may prevail over logic

As an investor, are you Mr. Spock, a rational, unemotional decision-maker who weighs all the options, or Captain Kirk, who is likely to respond with his feelings?

At first glance, Mr. Spock would seem to have the advantage and make the best judgments about which stocks to buy.

Not necessarily, say a trio of visiting scholars at the Federal Reserve Bank of Atlanta. Captain Kirk is more likely to do the right thing, they argue in a research report - just as he did on the bridge of the Enterprise on TV's long-running Star Trek series.

"Though Spock fully analyzes each situation, he gets too caught up in the details," say the economists. "Emotion allows Kirk to focus and enhances his ability to make critical decisions."

The Atlanta Fed's foray into the discussion was written by Lucy Ackert, a professor at the Michael Coles College of Business at Kennesaw State University; Bryan Church, a professor at the DuPree College of Management at Georgia Tech; and Richard Deaves, a professor at the Michael C. DeGroote School of Business at McMaster University in Hamilton, Ontario.

The issue is whether investors behave rationally or irrationally in buying and selling stocks and other securities.

The prevailing theory on Wall Street, represented by Mr. Spock, is the efficient market hypothesis, or EMH. It says that investors are rational agents who act in their own self-interest and that markets are efficient - meaning that relevant new information is immediately reflected in stock prices.

On the other side of this debate is the so-called science of behavioral investing, which Yale professor Robert Shiller made famous three years ago in a book, Irrational Exuberance.

That's the memorable phrase Federal Reserve Chairman Alan Greenspan uttered in a December 1996 speech when the stock market was beginning to rise rapidly - too rapidly, he suggested, and for the wrong reasons. Was emotion ruling reason?

Shiller is said to be the economist who gave Greenspan the idea for that phrase, based on the idea that investing can be irrational, fueled by emotion and momentum rather than sober research. Shiller declared that the emotional state of investors was "no doubt one of the most important factors causing the bull market" that peaked in early 2000 and then collapsed.

University of Chicago professor Richard Thaler, another founder of behavioral economics, was even more blunt: "In a rational world, (the tech bubble) would never have happened."

Critics of the EMH argue that some investors trade less on information than on "noise," or stock activity caused by computerized program trading and other phenomena that do not reflect general sentiment. They may think they are trading on information when they aren't.

The Atlanta Fed scholars enter the debate with a basic observation: In essence, there's no such thing as pure reason devoid of emotion. And in those instances where it seems to exist - as in people with brain injuries - the absence of emotional response is an impediment to rational action.

Far from interfering with sound decision-making, they say, "emotion actually enhances an individual's ability to make rational choices."

"Perceptions encompass emotional aspects, which subsequently guide judgment and decision-making. Furthermore, theorists recognize that emotion and cognition are interdependent, rather than competing, influences," their report concluded.

Behavioral analysts look at actions such as investors who tend to hold on to losing stocks and sell their winners, just the opposite of professional investors.

These researchers have found that an investor's willingness to take a risk is guided more by fear of loss, and the accompanying pain, than the lure of gain, with its feeling of pleasure.

As for irrational exuberance, research firms such as Yankelovich Partners in Atlanta have found that some of the investing in the 1990s was motivated by a feeling of superiority on the part of the investor.

"There was a sensibility tied to people's exaggerated sense of control and empowerment that contributed to the willingness to participate in the market," said Yankelovich President J. Walker Smith.

Is the prevailing wind of stock market analysis about to shift toward the behaviorists?

Probably not, the Atlanta Fed scholars concluded. The efficient market hypothesis paradigm, or overview, appears secure for the time being because it continues to work as a tool for analysis.

"Though recent models explain certain aspects of financial decision-making that appear to be inconsistent with the efficient market hypothesis, financial economists are without a superior paradigm," the scholars said.

"While some argue that in certain situations, emotion may `get in the way' and lead to suboptimal decision-making," the scholars assert, "we believe that emotion is an important aspect of the human condition that can actually enhance decision-making."

Put another way, a stock market without emotion would be like Casablanca without As Time Goes By.

Top 77 Reasons Why Captain Kirk Is Better Than Captain Picard

1. KIRK HAS SEX MORE THAT ONCE A SEASON
2. ONE WORD: HAIR
3. KIRK CAN BEAT UP A KLINGON BAREHANDED
4. PICARD IS A FRENCHMAN WITH AN ENGLISH ACCENT
5. KIRK WOULD DATE BEVERLY CRUSHER- AND DAMN THE CONSEQUENCES!
6. KIRK NEVER DRINKS TEA. EVER.
7. DIPLOMACY FOR KIRK IS A PHASER AND A SMIRK
8. KIRK WOULD PERSONALLY THROW WESLEY CRUSHER OFF HIS BRIDGE
9. TWO WORDS: SHOULDER ROLL
10. KIRK ONCE SAID "I'VE GOT A BELLYACHE AND IT'S A BEAUTY"
11. KIRK WOULD NEVER SING TO CHILDREN IN A CRISIS
12. KIRK CAN ALMOST DRIVE A STICK SHIFT
13. KIRK, ALMOST SINGLE HANDEDLY, REPOPULATED THE EARTH'S WHALE POPULATION
14. KIRK SAYS, "PRIME DIRECTIVE? WHAT PRIME DIRECTIVE?"
15. KIRK KNOWS 20TH CENTURY CURSES
16. KIRK MADE DUE WITH OBVIOUSLY LOW-PERFORMANCE TECHNOLOGY
17. KIRK NEVER PRETENDED TO BE A BARBER IN ORDER TO GAIN A TACTICAL ADVANTAGE
18. KIRK WASN'T SHY ABOUT TAKING HIS SHIRT OFF
19. KIRK NEVER ONCE STOOD UP AND HAD TO STRAIGHTEN HIS SHIRT
20. ONE WORD: VELOUR
21. KIRK CAN BEAT A VULCAN AT CHESS
22. WHEN KIRK WAS PICARD'S AGE HE RETIRED FROM ADMIRAL AND TOOK TO CLIMBING ROCKS
23. KIRK LIKED A GOOD BELT OF LIQUOR EVERY NOW AND THEN
24. ONE WORD: IMAN
25. KIRK LOOKS GOOD WITH A RIPPED SHIRT
26. KIRK SAYS, "SHOOT FIRST AND WAIT FOR RETALIATION"
27. KIRK'S FIRST OFFICER NEVER TELLS HIM TO STAY ON THE BRIDGE
28. KIRK NEVER LEAVES THE ROOM TO BAWL SOMEONE OUT
29. TWO WORDS: FUNKY SIDEBURNS
30. KIRK NEVER ASKS HIS BARTENDER FOR ADVICE
31. KIRK NEVER ONCE SAID,"ABANDON SHIP, ALL HANDS ABANDON SHIP!"
32. KIRK IS NOT POLITICALLY CORRECT
33. KIRK WAS NEVER DUMPED BY A WOMAN FOR AN INTERGALACTIC BUSYBODY NAMED AFTER A LETTER IN THE ALPHABET
34. IF A KLINGON WERE EVER ON KIRK'S BRIDGE, KIRK WOULD LIKELY BE DEAD
35. EVER HEAR OF A BAR SHOOTER CALLED "MAKE IT SO"? NO? HOW ABOUT A "BEAM ME UP, SCOTTY,"THEN? SEE THE DIFFERENCE
36. ONE WORD: MINISKIRTS
37. KIRK NEVER WENT ANYWHERE WITHOUT A WHOLE BUNCH OF GUYS IN RED SHIRTS
38. KIRK HAD MORE DATES THAN HIS FIRST OFFICER
39. THE EXTENT OF KIRK'S KNOWLEDGE OF KLINGON VOCABULARY CAN BE ROUGHLY TRANSLATED AS "GO F#CK YOURSELF."
40. PICARD'S MIDDLE NAME ISN'T TOUGH OR AWE-INSPIRING LIKE TIBERIUS IS
41. IF KIRK FINDS A STRANGE SPINNING PROBE, HE BLOWS IT UP
42. PICARD NEVER MET JOAN COLLINS
43. PICARD FLUNKED HIS ENTRANCE EXAMS TO STARFLEET
44. PICARD HASN'T FATHERED ANY CHILDREN; KIRK PROBABLY MILLIONS
45. TWO WORDS: LINE DELIVERY
46. PICARD GREW UP AT A QUAINT LITTLE FRENCH VINEYARD, SQUISHING GRAPES WITH HIS TOES, WHILE KIRK SLUNG BALES OF WHEAT AND HAY IN IOWA TO PUT HIMSELF THROUGH SCHOOL
47. KIRK EMPHASIZES HIS ORATIONS WITH PERTINENT HAND GESTURES
48. KIRK ONCE MADE A CANNON OUT OF BAMBOO, SULPHUR, POTASSIUM NITRATE AND CHARCOAL, AND THEN FIRED DIAMONDS INTO THE HEARTS OF HIS ENEMIES. (NEED WE SAY MORE?)
49. KIRK IS NOT PUT OFF BY GREEN SKIN
50. KIRK ONCE FOUGHT A GREEK GOD AND WON
51. KIRK BARELY ASKS FOR SUGGESTIONS AND IF HE DOES HE ONLY ASKS SPOCK
52. KIRK DOESN'T LET THE DOCTOR TO TELL HIM WHAT TO DO
53. ONE WORD: FISTCUFFS
54. KIRK'S NAME IS HATED THROUGHOUT THE GALAXY
55. KIRK APPRECIATES SHAKESPEARE, BUT HE DOES NOT LET IS SHOW
56. YOU CAN NEVER LOCK UP KIRK FOR VERY LONG
57. KIRK'S EULOGIES CAN ACTUALLY MAKE YOU CRY
58. KIRK CAN CLIMB UP A JEFFRIES TUBE AND FIX ANYTHING
59. KIRK NEVER HIRED AN ENGINEER WITH PUNK GLASSES
60. THE KLINGONS DIDN'T HAVE A WORD FOR SURRENDER- UNTIL THEY MET KIRK
61. KIRK'S BRIDGE IS NOT BEIGE
62. TWO WORDS: CRANE SHOTS
63. PICARD ALLOWS CATS ON BOARD, WHILE KIRK BEAMS AWAY EVEN REALLY CUTE THINGS, LIKE TRIBBLES
64. KIRK IS A CULTURAL ICON, PICARD IS JUST SOME GUY WHO IS REALLY NICE
65. KIRK LOOKS DISTINGUISHED IN READING GLASSES, AND NOBODY DARES TO CALL HIM "FOUR EYES"
66. KIRK WOULD NEVER TOUCH SYNTHAHOL
67. KIRK CAN EASILY INFILTRATE GANGSTERS, NAZIS AND EVEN THE PENTAGON
68. PICARD LIKES PAINTING NUDES FOR ART'S SAKE
69. WHEN KIRK DOESN'T TRUST THE ROMULANS, HE FIRES AT THEM. WHEN PICARD DOESN'T TRUST THEM, HE GETS FIRED AT
70. KIRK NEVER, EVER, WORE A WIENERWRAPPING SPEEDO BANANA HAMMOCK ON SHORE LEAVE
71. KIRK NEVER HAD HIS COMMAND CODES LOCKED OUT BY SOME PIMPLY ACTING ENSIGN
72. KIRK DOESN'T TEST THE ENGINES, HE JUST FIRES THEM
73. WHEN KIRK SAYS "BOLDLY GO" HE MEANS IT
74. TWO WORDS: FLYING KICK
75. KIRK TRAVELED THROUGH THE GREAT BARRIER, MET GOD, AND WAS NOT EVEN IMPRESSED
76. KIRK WOULD NEVER LET HIS CHIEF OF SECURITY WEAR A PONYTAIL
77. ONE WORD: GUTS

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