Three hundred and sixty seven people recently took part in a series of experiments at the College of Management Academic Studies in Rishon LeZion, Israel. They were all undergraduates studying business administration, so they had a reasonable understanding of investing, probabilities, and risk. (The professors leading the study were Avi Israel and Eyal Lahav, from the finance faculty, and Naomi Ziv, a psychologist).
In three experiments, the subjects had to make a highly simplified version of the asset allocation challenge we all go through when we manage our own portfolios, and try to balance stocks and bonds. The subjects were asked each time to allocate a hypothetical portfolio across two assets — a “risky” one with variable returns, and a risk-free one with a modest but guaranteed return.
But there was one twist to the experiment. The students were first separated into three groups. One group had to make these decisions while listening to some slow, calming music (by an artist called Karunesh). One had to listen to electronic techno music by “Deadmau5.” The third operated in silence.
What happened?
The results were remarkable. The experimenters thought the music would distract everyone. But it didn’t. Each time, the subjects who listened to slow, calming music found it easier to take on smart, rational risks.
Kenny G, anyone?
In each experiment, the “risky” asset offered a better overall bet than the supposedly “safe” one, because it offered a higher average expected return. For example, in one experiment the “risky” asset was either going to pay out a 5% or a 30% profit, with the probabilities evenly split.
Average expected return: 17.5%.
Meanwhile the ‘risk-free’ asset was going to pay out just 10%.
The calming music helped both the men and the women in the study take on bigger smart risks. But the women gained more.
The real money amounts involved in these experiments were trivial, with maximum possible gains of only a few dollars. So any temptation to blow the study just to walk off with a guaranteed profit was minuscule. Participants were operating on math.
Logically, none of those in the experiment should have invested much, if anything, in these mediocre, “risk-free” assets. Yet many did. Those investing in silence allocated on average 30% of their portfolio to the ‘low risk,’ low return asset.
But those listening to calming music sliced that number by a fifth to 24%. (Electronic techno music did nothing to help your brain power).
The calming music helped both the men and the women in the study take on bigger smart risks. But the women gained more. Women overall tended to invest more in the low return asset, but the mellow music in the background helped them narrow the gap.
A big factor was whether the people said they liked the music or found it irritating and distracting. In a fourth experiment, involving multiple assets, the results from the slow music were mixed. For example, women who found it distracting ended up making worse decisions than if they’d just been investing in silence.
OK, so it doesn’t have to be Mr G. Slow, relaxing music by anyone will do. Miles Davis. Ella Fitzgerald. Chopin. Singing whales, if that works for you.
Overall, concluded the researchers, in the first three experiments “low-tempo music led to more risky decisions... than high-tempo or no music,” while in the fourth experiment, “low-tempo music led to more risky decisions... than high-tempo music.” And across all four, “participants who subjectively perceived the music as helpful made riskier decisions.” It bears repeating: In these experiments, taking more risk was rational.
Calming music, in short, can relax the brain and make us smarter about taking intelligent risks.
The results gel with some other studies. For example, past research has suggested that loud, fast or intrusive music reduces our ability to think (This will come as no surprise to anyone, except the people who choose the music in coffee shops). It’s also suggested that relaxing music may increase it.
Over the past century, stocks have produced vastly superior long-term investment returns. For example, over an average 20-year period, the S&P 500 SPX, -0.05% has produced an average total return of about 500%. Short-term deposits, such as Treasury bills: Just 90%.
Yet members of the public have often missed out. They’ve found it emotionally difficult to invest in stocks because of the volatility. (And they usually, alas, make an exception around the peak of a bull market).
Investing your retirement savings in stocks is more likely to make you rich.
Listening to Kenny G is more likely to make you to invest your retirement savings in stocks
Ergo, listening to Kenny G is more likely to make you rich. Quod erat demonstrandum. Cue saxophone.
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