Sleep Well Before Investing

Via Scientific American, I came across this old (2011) article by Katherine Harmon highlighting the importance of not trading or gambling while tired. 

We all know the importance of staying hydrated of course, but here's more evidence on the importance of sleep before making investment decisions: 

SHORT ON SLEEP, THE BRAIN OPTIMISTICALLY FAVORS LONG ODDS

Sleep deprivation can lead to plenty of unwise decisions, which researchers have long tied to flagging attention and short-term memory. But a new study shows how just one night of missed sleep can make people more likely to chase big gains while risking even larger losses—independent of their tapering attention spans.

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."

As expected, subjects' attention levels dropped throughout the night they were kept awake. But this decline was not tied to the shift in gambling behavior, suggesting deeper changes in the brain that might be affecting a person's attitude toward risk and value.

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.

The findings suggest that an all-night stint at the blackjack table or logged into an online poker game can be an extra gamble. These sleep-deprived players "are facing more than just the unfavorable odds," Vinod Venkatraman, a graduate researcher in Duke's psychology and neuroscience departments and a co-author of the new study, said in a prepared statement. "They are fighting a sleep-deprived brain's tendency to implicitly seek gains while discounting the impact of potential losses."

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.

And 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.