Kiplinger's published a rather interesting article last week, looking at the possibility that playing poker can make you a better investor.

The article looks at the psychological issues that are present in both investing and gambling decisions. Kiplinger's interviewed Andrew Lo, the director of the Massachusetts Institute of Technology Laboratory for Financial Engineering (wow), who is considered "one of the leaders in the field of behavioral finance." Lo goes farther than saying that the psychological issues driving investing and gambling decisions are similar; he contends that these issues are "identical."

Yesterday, we were all surprised to see the Dow Jones Industrial Average fall back below 8,000. The Dow finished down 427 points to land at 7,997. In other words, just enough to freak people out at being below 8,000. Everyone noticed that it hadn't been this low since 2003, nearly six years ago. In other words, if have you spent the last six years putting money away in your 401(k), depending on what dividends you got, you may as well have put your money in a money market fund.

We've got about 450 points to go in 2003. The lowest it got that year was 7,524 in March. In the olden days, 450 points on the Dow would seem like an improbable swing, taking weeks or months. Not so in highly volatile 2008. A 450-point-drop would represent about a 5% drop -- a higher percentage loss than it was just a few months ago.

After that, 2002 has a low of 7,286. To get there the Dow would have to fall 711 points or 8.8% from Wednesday's close. Once that happens, though, the floor drops out. I'm not talking about technical support here, just psychological and historical support. See, if the Dow drops below 7,286, then we're heading into 1997 territory. That's the last time the Dow was below 7,286. If it breaches that threshold, we're heading back to October, 1997, when the Dow was at 7,161.

If that happens, it would mean that a lot of the gains of the late 90s have been wiped out. An entire decade lost. It may be just a number and just psychological, but it will certainly bum me out.

I'm always on the lookout for pearls of investment wisdom -- information on the down and dirty rudiments of securities analysis is important, but the more subjective "investment psychology" material can be just as key to investment success.

In an interview (subscription required) with the Wall Street Journal, Lorenzo Di Mattia, manager of Sibilla Global Fund, a hedge fund, explained that good trades are often painful while bad trades can feel wonderful: "Actions that make us feel good are usually a lot less profitable than the ones that make us feel bad or stupid. The best trades are usually painful."

It makes perfect sense -- we're pack animals, and going with the herd feels good. But it often leads to disaster -- the internet stock bubble, Beanie Babies, etc. Buying the stuff no one else wants can make you feel like a social outcast, but history has shown that that's often a good strategy.

It's a lot like dieting -- the stuff that feels good at the time can lead to a pretty bad-looking body. For more on the science of behavioral economics, check out Why Smart People Make Big Money Mistakes.

Testosterone, the reason that men are so lame, has an important effect on stock traders, according to researchers at The University of Cambridge.

The study found that while testosterone can be helpful in the short term for some, it can also lead to over-confidence and unchecked risk-taking. Stan O'Neal and Brian Hunter, say hi.

One of the authors of the study says that, "If people want to get practical, it would be good for both banks and the financial system as a whole if we had more women and older men in the markets."

At least one legendary trader is allegedly on to this. A lawsuit filed by a former junior trader at Steven Cohen's SAC Capital alleged that his boss made him take female hormone pills to curb his aggressiveness and make him a better trader. (For more on that bizarre case, check out my post from October.)

When Bear Stearns (NYSE: BSC) CEO James Cayne was golfing, playing bridge and, allegedly, smoking weed during the subprime meltdown, there was universal outrage -- How could the man at the top be off indulging in hobbies while Rome was burning?

The legitimacy of illegal drugs (or golf for that matter) as a hobby aside, the New York Times points out the importance of hobbies in maintaining a balanced life, and also suggests that they can actually improve performance.

Challenging and stimulating hobbies may inspire ideas that will help you at work - leading, for example, to a new approach to making presentations, solving problems or meeting a client's needs. "Any time you take a break from routine, you develop new ways of thinking," said Gail McMeekin, a psychotherapist and owner of Creative Success, a career coaching company in Boston and author of "The Power of Positive Choices."

It's a very interesting article -- Unfortunately, it seems, "hobbies" are on the decline as people become increasingly busy, and prefer to devote what little free time they have to video games or television.

But here's what I wanna know: If I take up tiddlywinks or the opera as hobbies to improve my job performance, shouldn't I be able to take at least a portion of what I spend on them as a business expense for tax purposes? Eh? Eh?

A piece (subscription required) in The Wall Street Journal links corporate success with executives' private lives.

The article says "... according to a recent study by three finance professors. Mining a trove of Danish government data on thousands of businesses, they were able to track links between CEO-family deaths and the companies' profitability over a decade."

Interestingly, corporate performance tends to rise after the death of the CEO's mother-in-law. No joke.

What's interesting about the study is that, assuming the findings are valid, the death of a CEO's family member would appear to be a material event: On average, it does indeed effect the future of a company, just as legal issues, sales shortfalls, and macroeconomic factors can.

I suspect that my older brother secretly commissioned this study, and I'm inclined to doubt the validity of its findings. But if it's true, I may be destined to a life as a miserable failure.

According to data from Vistage, the largest CEO organization, first-borns are, in addition to having slightly higher IQ's, more likely to succeed in business than their younger siblings. Of the respondents, 43% were born first, 23% born last and 33% landed somewhere in the middle. The story on AOL Money & Finance has some quotes from notable first-born business leaders offering explanations for their success. Some felt more pressure to be role models as children and, as older siblings, had to take on leadership responsibilities that may have been great preparation for management.

The achievement gap between children and their younger siblings appears to be explained by environmental factors. If you're a parent, giving your younger son additional responsibility and authority -- perhaps a pet to take care of -- may be one way to counter-act the discrepancy.

But one thing that I can't find a study for is this question: Are older siblings happier than their younger brothers and sisters? That's what really matters.

Just as battles with depression and other psychological issues can lead to eating or weight problems, they can also lead to financial problems. That's the focus of a recent column by Liz Pulliam Weston. ADHD can lead people to neglect their finances, and depression can lead to "retail-therapy," bouts of overspending used to elevate moods.

Weston writes:

If your head is wired differently, it may help explain why your previous efforts to get your financial life under control haven't worked. Proper diagnosis and treatment, plus approaches to money management that take your condition into account, could help you get your finances on track.

This is an interesting side to the relationship between psychology and money that I've never really thought about. The classic book Why Smart People Make Big Money Mistakes looks at some of the financial fallacies that tend to plague all people, but it makes sense that disorders could lead to special financial issues.

As long as I'm discussing a great column by Ms. Weston, I should mention her awesome book, Your Credit Score: How to Fix, Improve, and Protect the 3-Digit Number that Shapes Your Financial Future.

The psychology of money is one of the most fascinating aspects of investing. An article in yesterday's New York Times took a look at how the denominations of currency effect our spending. In one study, students in Hong Kong were asked to create a budget based on an imaginary paycheck of 9,000 Hong Kong dollars. Those students devoted an average of 532.35 dollars to food spending, about 6%. Two weeks later, the students were asked to imagine that they had moved to the fictional country of Tristania, where a Hong Kong dollar equaled 18 Tristanian dollars, and therefore their pay was 162,000 Tristanian dollars. The same students spent 30% more of their budget on food. When students were told that in Tristania they only received 500 Tristanian dollars, the opposite happened: Students spent less on food.

This is a classic example of the ways that our minds play tricks on us when it comes to money, leading us to make decisions that could hardly be characterized as rational. The study reminded me of stock splits, which seem designed to trick investors into thinking a stock is a better deal than it is.

To learn more about financial fallacies, pick up a copy of Why Smart People Make Big Money Mistakes.

New data regarding the growth in income for the rich vs. the poor came out recently, and the income gap appears to be expanding. According to the New York Times:

Income inequality grew significantly in 2005, with the top 1% of Americans -- those with incomes that year of more than $348,000 -- receiving their largest share of national income since 1928, analysis of newly released tax data shows.

The top 10%, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.

Economists have debated, and will continue to debate what exactly the significance of the income gap is. But rather than focus on that, I'm going to talk about it from a psychological/behavioral finance angle.

Inequity aversion is the often irrational tendency for people to care more about how they fare in comparison to others, rather than in absolute terms. People care about how their salary compares to their coworkers, oftentimes more than about whether they are satisfied with the amount of money. And it's not just in people. According to a study published in Nature several years ago, monkeys like to keep up with Jones's too.

Monkeys were trained to hand a researcher a small stone, and were given a piece of cucumber as a reward for completing the task. Monkeys completed the task in pairs, separated by transparent screens so they could also observe each other. In cases where one monkey was given a more desirable prize -- a grape, more than half the time, the other monkey would refuse to eat the cucumber, sometimes becoming angry and throwing it.

So I'm not going to talk about the economics of income inequality. But it's an important issue if only for this reason: It bothers people.

This is an article that I've been wanting to see for a long time: The new issue of Money features a story called The Weird Science of Pricing: Seven elementary lessons in why things cost what they do and how to use that knowledge to get a better deal. The story is not currently available online, but it's worth picking up a copy of the April issue for it, or you can just read it in the grocery store.

The piece focuses on the tricks retailers use to get you to think you're getting a good deal. Did you know that pricing items at $9.99 instead of $10.00 works because we read from left to right, and process information in that order? This makes me wonder -- would someone who is in America but speaks Hebrew (which is read right to left) for their first language be susceptible to the 99 cent gimmick? Also, what is up with Wal-Mart's "Every Day Low Price" of $1.97?

If the psychology of marketing and money interests you, order a copy of Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the New Science of Behavioral Economics. On Amazon, it's only $9.75.

As promised, I am here to deliver my re-cap of this weekend's edition of the Suze Orman show. Her latest book, Women & Money, is probably the most frilly of her books, focusing on the 8 Qualities of a Wealthy Woman: harmony, balance, courage, generosity, happiness, wisdom, cleanliness, and beauty. Isn't that cute?

While I watch the show regularly, it seems that since she began doing segments featuring her topics related to women and money, the show has become less about personal finance and more about pop psychology. There may be nothing inherently wrong with this, but it will be less interesting to certain viewers, myself included.

Wall Street is replete with cliches about the importance of going against the common thinking: Sheep getting slaughtered, lemmings running, J.P. Morgan's shoe-shine boy, contrarian investing, etc. Then there are the cliches urging investors to do just opposite: Don't fight the trend, the trend is your friend, etc.

There are entire books advocating these two schools of thought. There's David Dreman'sContrarian Investment Strategies and Charles Mackay's Extraordinary Popular Delusions and the Madness of Crowds that discuss examples of herd behavior, mass hysteria and, in some cases, the effectiveness of simply betting against mass sentiment. Then there's James Surowiecki's The Wisdom of Crowds that talks about how the crowds are so often right.

FinancialNext.com is putting this question to the test: Is it better to follow the crowd or fight it? There, you can vote on questions such as "Will there be more new homes sales in February than January?" and "Will there be a recession in 2007?" Then, the results will be tabulated, and we will see who was right -- the minority or the majority. This is an interesting idea, but will work best if lots of people vote. So go over there and let us know what you think!

As unbelievable as it may sound, Princeton University found that the company name and stock ticker symbol affect the performance of its stock in the days following its initial public offering (IPO).  Specifically, stocks with easier pronounced company names and ticker symbols perform better on their first days of trading.

Two Princeton University psychologists studied IPOs on NYSE and AMEX and found that investors prefer to buy new offerings of companies with an easier name.  Similarly, the case is true with the stock ticker symbol.  For example, the ticker BAL would perform better than BDL right after the IPO.

So while investors all try to invest from a rational mind set, we are apparently susceptible to mental and emotional influences, suggesting psychology should also be considered as contributing to economic theory, according to the researchers.

While the effect is the same regardless of company size, the researchers are quick to point out that this not an indicator of long-term performance. Nor should the study be given significant consideration by investors and influence their IPO decisions, the researchers say -- especially since investors will hopefully correct this now that the study has been released.