Consider this. You book a standard hotel room in a certain city. Despite an early confirmation, you find that your room has been assigned to someone else due to an upcoming conference. The hotel, however, assigns you a special suite at no additional cost! Should you accept the offer?

You will, needless to say, have a good experience if you accept the free upgrade. But what if you were scheduled to stay in the hotel for 5 days and the hotel manager moves you to a standard room (the one you initially booked) from the second day? Will you still have a good experience at the hotel?

If you are typical consumer, you will be disappointed with the standard room! Why? You were in a special suite. The facilities available in a suite are obviously better. You do feel good about the opportunity you had to enjoy the suite for a day at no additional cost. But you are also disappointed for having to “step down” to a standard room after a day. And that disappointment will cause you to be unappreciative of the facilities available in the standard room. Why do you behave this way?

Dopamine surge

You can blame it on your brain. This happens because of your ungrateful dopamine neurons. Dopamine, a naturally-produced chemical, is a neurotransmitter that activates the pleasure centre in your brain. You feel a dopamine surge when you receive rewards. And your dopamine levels increase when such rewards come as a surprise. The problem is that the dopamine is fixated on the lost opportunities much more than the opportunities that you enjoy! That is why you experience a let-down when you move from a suite to a standard room.

It is no different when it comes to your experience with investments. Suppose you buy 100 shares of a certain stock at Rs 200. You then watch the stock move up to Rs 250. While you are glad that you have an unrealised gain of Rs 5,000 (Rs 50 times 100 shares), your dopamine neuron is fixated on the possibility of earning more. And this has significant implications.

Research suggests that when there is a significant difference between what actually happened (profit of Rs 5,000) and what might have happened (profit of Rs 50,000, if you had bought 1,000 shares), there is a feeling of regret. And this feeling can prompt you to buy more shares at a higher price, subjecting your investments to higher risk. Which brings back to your suite experience: Next time you are offered an upgrade at a hotel or by an airline, think twice before accepting it.

(The author is the founder of Navera Consulting.)

Related Topics
comment COMMENT NOW