Social networks, dopamine, and their relation to investing

September 17, 2017

Sean Parker, of pseudo-Facebook fame, this week spoke openly about the social media "monster" he helped create. It's here.

Over ten years ago I spent a lot of time working in the social media industry, in the very early days, before the term had been coined. I left the industry in part because what Parker is saying is accurate.

Silicon processors that compute nearly 600 billion instructions per second are watching every action and data input on the network. Executives in social media know that the end goal is dopamine - you have to do something in software that will trigger a dopamine release in the user's brain, or the user will not come back. If the user does not come back, you can't sell ads. And more importantly, the same "network effect" that created the exponential growth in a social network can run in reverse, leading to rapid failure.

Behind the scenes, an immense amount of computing power is dedicated to learning what makes a user post, what makes them click, what invokes an emotion of any sort, and what convinces them someone else cares. It's a giant psychological machine, and it learns as it goes.

But Mark Zuckerberg should take the rosy glasses off, because what's going on under the public relations veneer is computer science inflicting emotion, and it's often not pretty. If he needs new spectacles, I hear Snapchat has a a hundred thousand or so he can borrow.

The problem in stock markets is that they share some of these characteristics. The omnipresent stock tickers are doing the same thing: generating emotion, releasing dopamine, tricking your brain into thinking something is important when it's not - it's just recent. Recent does not mean important.

This constant knowledge of what things are recently worth is not beneficial to you as an investor, and it's not beneficial to you as a human. It generates anxiety, and it's addictive. Because it's addictive, it means you'll keep coming back for more information, and now the media channel, or website, is in a similar spot as a social network.

Let's think for a moment about an investment that does not announce to you what it is worth every morning at 9:30 AM (when the markets in the U.S. open). Imagine buying a building and owning it for a long time. At some point an event like the 2008 - 2009 crash may happen. Many buildings saw their equity value approach, equal, or pass below zero in late 2008. (The John Hancock tower in Boston being one of them.) But because your building doesn't wake up and tell you that your investment is worth zero, it doesn't bother you as much, and you just keep owning it. You go about your daily work, and over time it recovers its value, and you have not made the bad decision of selling low.

We spend a lot of time at One Day In July countering the idea that more information is better. I'll end with a quote from mathematician Blaise Pascal:

"Most of men's [and women's] problems arise from their inability to sit quietly and alone."