Are you a Habanero Investor?

“But the chili sensation isn’t just warm : it hurts. It is a form of pain and irritation. There’s no obvious biological reason why humans should tolerate it, let alone seek it out and enjoy it.”

These words, written by John McQuaid, hit home. I love hot food. I put hot pepper on everything. I grew my own habanero peppers, the second hottest behind the dreaded ghost variety. They actually looked like cute little orange pumpkins. Their appearance shielded their evil. I almost killed my wife with one. Brilliantly, I decided to put one into a frying pan and turn up the heat as I scrambled some eggs. Evidently, the heat released the capsaicin (heat-producing ingredient) into the air. My wife, who was in the other room, began choking and gagging. She came running out of the bedroom with her eyes tearing. I realized I had created my own version of pepper spray and had treated my wife as if she had been a Hong Kong protester. Luckily I am still married, but this got me thinking. Why would people prepare and eat such food that has the ability to create such pain and harm?

In McQuaid’s article, “Our strange Love of Spicy Foods”, published in the Wall Street Journal (1/2/2015), he talks with Dr. Paul Rozin, professor of Psychology at the University of Pennsylvania. Dr. Rozin believes that this strange behavior is unique to humanity. He states, “Humans condition themselves to make aversion gratifying.” Evidently, in the human brain, sensations of pleasure and aversion closely overlap, according to Dr. Rozin. Endorphins are released similar to exercise and pleasure that gives the feeling of a “rush.” People seek out danger in order to gain the pleasure of relief when it all stops. To prove this point, Dr. Rozin gives examples of people crying at sad movies and jumping into freezing water.

What does this have to do with investing? My theory is this might explain a lot of excessive risk-taking we often see in the markets by both small individual investors and large institutions. Whether we observe J.P. Morgan’s “Big Whale” or home-based day traders, their motivations are the same: They want that endorphin rush. How else could you explain, things like naked options, triple leveraged ETFs, FX trading seminars, and commodity futures? These types of activities tend to end badly. Do people really think they are going to hit the jackpot with this craziness? Could the rush of jumping in, experiencing intense pain, and then relief by exiting the position with huge losses serve as the real motivation? The “feeling good” part of getting out of the position and ending the pain may explain a lot of things. I wonder if there is a study documenting the dietary intake of capsaicin and reckless trading? I traded foreign currencies for an international bank years ago and, looking back, I can best describe it as a form of masochism. This is no different than eating hot peppers.

I could certainly relate to contestants in hot pepper eating contests. Sitting with a losing position as it slowly moves against you can be compared to those poor souls who scream, gag, and pass out while consuming fire-filled ghost peppers. Trading and speculating are, in my mind, acts of self-induced torture. The only explanation for such behavior may be the intersection of pleasure and pain in our complex unique human brains. As William Bernstein once said, “If you want excitement in your life, it’s safer and cheaper to take up sky-diving than to seek it in your investment portfolio.” In the end, the emergency room visit induced by consuming the “Carolina Reaper” may be a lot cheaper than getting your kicks by purchasing a triple leveraged oil bull ETF in a crashing market, trying to catch the bottom.