Guard Against ‘Cocaine Brain'

No one cares as much about your investments as you do, so it pays to be vigilant

- GREG HOFFMAN

‘Cocaine brain” is a term used by the successful Indian-American investor Mohnish Pabrai to describe a state of mind that he actively tries to dampen down. Apparently neuroscientists have found the prospect of making money stimulates the same brain circuitry as cocaine.

In such a heightened state, investors can forgo calm, rational analysis in favour of rash decisions. Decisions that may, as they say, be made in haste and repented at leisure.

Recently I’ve seen a few people who looked like they were in “cocaine brain” mode attending investment conferences. These were “quick pitch” events where a company’s representative (usually the chief executive) had 10 or 15 minutes to present to the audience. Many of them are skilled, charismatic presenters and it’s easy to be swept up in their stories and imagine that riches lie ahead. You can almost feel your hand reaching for the “buy” button as they speak.

Software-as-a-service (SaaS) is one popular theme. Artificial intelligence (AI) is another. And several companies are applying technology to improve health and education services. Then there are the ever-present biotechnology upstarts, hopeful that they’re on the path to developing a treatment for some malady. All are potential hot buttons that could trigger a “cocaine brain” response in an investor.

And it’s here that the ideas of an 18th-century mathematician and Presbyterian minister named Thomas Bayes can be of assistance.

Bayesian probability

Bayes’ work focused on the probability of an event based on prior knowledge of conditions that might be related to the event. Here’s an example.

If a coin were flipped five times and it came up heads every time, would you consider it a fair coin?