Sleeplessness Causes Us To Make Poor Investments

Scientific American noted yesterday that a lack of sleep makes us take riskier gambles:

A team of Duke University researchers examined the brains of 29 healthy volunteers using functional MRI, which tracks changes in blood flow in the brain, while the subjects performed a variety of gambling tasks.

After a full night of sleep, participants behaved like most people tend to in the real world: guarding against financial loses and cautiously pursuing gains.

But when deprived of a night’s sleep (kept awake in the lab from 6 p.m. until 6 a.m.), the volunteers “moved from defending against losses to seeking increased gains,” the researchers reported. This shift “suggests an unfounded rise in expectation for gain,” a condition the team describes as “an optimism bias.”


Upon examining the fMRIs, the researchers noticed that when making financial decisions in the gambling games, sleep-deprived individuals had greater activation in the ventromedial prefrontal cortex, an area of the brain associated with fear, risk and decision-making, compared with when they were well rested. The sleep-deprived group also showed a drop in activity in the anterior insula, a region implicated in emotion and addiction, relative to when they had slept.

These changes might be linked to the excess dopamine the sleep-deprived brain tends to fire off in an effort to help keep alert. This neurotransmitter, which is linked to pleasure and reward, might be at least partly to blame for sleep-deprived subjects’ increasing sense that they have better odds of winning big—and their lessening fear of losing.


These effects could also extend to areas where the stakes are even higher, such as the trading floor or the hospital, where workers often perform their duties when they are less than well rested. “I think it’s critical that society as a whole grapple with the data generated about the detrimental effects of sleep deprivation,” Michael Chee, a professor at Duke’s Neurobehavioral Disorders Program in Singapore and a co-author of the new study, said in the statement.

Interestingly, caffeine doesn’t help. As Scientific American notes:

Because these effects seem to run deeper than just apparent torpor, a shot of espresso—or even stronger stimulants—might not short-circuit the sleep-deprived brain’s tendency toward unwarranted optimism, Venkatraman added. “Countermeasures that combat fatigue and improve alertness may be inadequate for overcoming these decision biases,” he said.

A surge of dopamine is not the only reason that sleepnessness makes us bad investors. As WebMd reported in 2000:

A sleepy person’s brain works harder — and accomplishes less.


“Sleep deprivation is bad for your brain when you are trying to do high-level [thinking] tasks,” study co-author J. Christian Gillin, MD, tells WebMD. “It may have serious consequences both on performance and on the way your brain functions.”

Gillin’s team at the University of California, San Diego, and the San Diego VA Medical Center found that the brains of some sleep-deprived study participants tried to overcome the language-center shut-down by shifting activity to another part of the brain.

The International Journal of Occupational Medicine & Environmental Health (IJOMEH ) noted last January:

Sleep deprivation results in poor memorizing, schematic thinking, which yields wrong decisions, and emotional disturbances such as deteriorated interpersonal responses and increased aggressiveness.

The “schematic thinking” results from the brain’s attempt to use the parietal lobe – which usually processes visual information – to think through problems normally handled by areas of the brain slowed down by sleeplessness, including the temporal lobe (normally involved in language processing), the thalamus, frontal and occipital cortex and motor speech centers.

As the University of California at San Diego noted in 2002:

A team of researchers from the UCSD School of Medicine and the Veterans Affairs Healthcare System, San Diego used functional magnetic resonance imaging (fMRI) technology to monitor activity in the brains of sleep-deprived subjects performing simple verbal learning tasks.

They were somewhat surprised to learn that regions of the brain’s prefrontal cortex (PFC) displayed more activity in direct correlation with the subject’s sense of sleepiness; the sleepier the subject, the more active the PFC.

Furthermore, the temporal lobe, a brain region involved in language processing, was activated during verbal learning in rested subjects but not in sleep deprived subjects. Additionally, a region of the brain called the parietal lobes, not activated in rested subjects during the verbal exercise, was more active when the subjects were deprived of sleep.


“It is possible that when the prefrontal and temporal regions were affected by sleepiness, the brain shifted the verbal processing to another system in the parietal lobes that could compensate for the loss of function. This suggests that parietal lobes might play a special role in the brain’s compensation for sleepiness,” said Gregory G. Brown, Ph.D., associate professor of psychiatry at UCSD and a member of the team.

There are, of course, times when visual, schematic thinking is key to decision-making, such as when we are comparing graphs to determine market trends. But if we use schematic thinking when other types of thinking are required, we might make bad investing decisions.

Interestingly, people are are chronically somewhat sleep deprived can suffer same of the same impairments in thinking as people who go completely without sleep for a night or two. As the IJOMEH article quoted above notes:

The consequences of chronic sleep reduction or a shallow sleep repeated for several days tend to accumulate and resemble the effects of acute sleep deprivation lasting several dozen hours.

However, chronically sleep-deprived people are usually less aware of the impairment of their thinking than those who skip an entire night of sleep.

A 2007 study by Harvard Medical School and the University of California at Berkeley showed that lack of sleep causes the brain to become incapable of putting an emotional event into the proper perspective and incapable of making a controlled, suitable response to the event.

This is important to investors because – if we overreact to good news or bad news from the market in general or our particular investments in particular – we’ll react in an unproductive manner.

Similarly, a 2007 study by Walter Reed Army Institute of Research showed that sleep deprivation greatly impairs decision-making processes that depend heavily on emotion:

The findings, along with previous brain-imaging studies, suggest that sleep deprivation has a particularly debilitating effect on decision-making processes that depend heavily on emotion. “When people go for more than 24 hours without sleep there are dramatic decreases in brain activity in the prefrontal cortex [the area of the brain involved in processing emotions and decision-making],” says Killgore. “It basically goes to sleep.”

Given that most of us have a lot of emotion around money – making it, not losing it – sleeplessness can greatly affect our ability to make smart investing decisions

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