Emotions: The Killer App for Humans

Emotions have been a killer app at least twice in human history. The first time, emotions helped us win the evolutionary race for survival. The second time, will emotions help us self-destruct?

Teaser: This article also discusses stock and options trading. Read on to learn how to trade better.

Warning: I am not trained in any field related to evolution or biology or psychology. These opinions and ideas are presented solely as my thoughts to encourage discussion, not as facts, or even reasonable hypotheses.

Since emotions live in the forebrain and in the hindbrain a quick review of the brain will help us to understand how emotions might work. The forebrain includes the cerebrum, which has grown so big it makes our foreheads bulge out in comparison to great apes. The neocortex is the thin wrinkly sheet that covers the outside of the cerebrum. The neocortex is where we do “thinking.”

The brainstem is located at the top of the spine, directly below the cerebrum. The brainstem, sometimes called the hindbrain or reptilian brain, connects the cerebrum to the spine and to our actual body. The brainstem does much more than simply connecting. It modulates, interprets, and expands higher-level instructions from the cortex, such as “take a drink from the coffee cup,” into specific, timed instructions to each of the hundreds of muscles involved in drinking from a cup.

Several hundred million years ago, before the development of the forebrain, the hindbrain actually ran the whole body without any help at all. And therein lies the tale of the evolution of emotions.

Emotions: A Killer App for the Forebrain in early human evolution.

As the mammal forebrain began to grow and evolve, it took an increasingly larger role in making decisions, planning, and other activities, often called executive functions. Prior to this, the hindbrain ruled the body. It controls not only the voluntary muscles, but also involuntary functions, such as heart rate and breathing rate. Just as important, the hindbrain controls critical chemicals in the body, such as testosterone, adrenalin, insulin, and sugar.

The hindbrain still controls the body and body chemicals today. Of the twelve nerves originating in the brain to control the body, ten originate in the hindbrain. Only two nerves–olfactory (smell) and optic–originate in the forebrain.

When your forebrain wants you to enjoy a swallow of coffee, it does not send messages to your hand to grab the cup. Rather, it directs your hindbrain to execute all the synchronized, fine-grained muscle movements to make sure the coffee ends up in your mouth, not in your lap. Literally, your forebrain does not have any connections to the individual muscles. It sends the high-level directive, then delegates all the details to the hindbrain.

The forebrain does not, and never has had direct control over individual muscles. Delegation is a very generous word for the relationship between the hindbrain and forebrain. It is much more like a troubled partnership. Most of the time the hindbrain executes directives from the forebrain without any modification. However, in one area the hind brain is extremely careful and cautious about directives from the forebrain.

The hindbrain is hard-wired to protect the physical body. It follows its own prime directives, informally known as the four F’s – fight/flight, reproduce, and food. When the hindbrain receives an instruction from the forebrain, it first checks to see if that instruction violates any of its own prime directives. If not, then it usually executes the instruction, When the hindbrain detects some conflict with its own prime directives, it just ignores that instruction or modifies it considerably. 

For any instruction related to the four F’s, the hind brain is in charge and regards instructions from the forebrain as only suggestions, and weak ones at that.

Have you ever tried to hold your hand over a fire, or tried to jump off a high dive, or a bridge, or ski a steep, scary slope, or any other physically dangerous activity? Your forebrain might think it is a good idea, but your hindbrain zealously protects your body from actions that might cause physical damage. Ever gotten really hungry or thirsty? You might get a little grouchy or distracted. Ever been in love? Thoughts of that person might get overwhelming.

Likely you felt reluctance, even fear while considering dangerous activities. While considering a loved one, perhaps you felt comfort, nurturing, and maybe even desire for your partner. How do these emotions arise, and where did they come from?

The wiring between the forebrain and hindbrain is mostly one-way, from forebrain to hindbrain. The forebrain can pass very specific instructions to the hindbrain. For communication the other way, the hindbrain has a much narrower channel, which is largely used for communication regarding progress of the body in fulfilling the instructions from the forebrain.

For the important issues, like the four F’s the hindbrain has no effective hard-wired channel to get the attention of the forebrain. It can tell when the body is running low on water or food, because it senses the body directly. The new forebrain, invented by evolution, has no such connections. Without a good upstream communication channel, the forebrain might forget to eat, drink, procreate, or even run from danger.

If the hindbrain could talk, it could simply say “We’re hungry. Let’s get lunch.” But the speech and language control centers are located in the forebrain, so there is no help there for a frustrated hindbrain. As the forebrain became more powerful, the hindbrain ran a significant risk of failing to accomplish its prime directives – the four Fs.

The hindbrain has one tool that can affect the forebrain, and that tool is control of the chemicals in the body. Over evolutionary timespans, the hindbrain learned to increase certain chemicals in response to specific body needs – hunger, thirst, danger, etc. These particular chemicals affected the brain primarily. Over time the forebrain learned to connect these chemicals with specific bodily needs. Working together the forebrain and hindbrain developed a complex communication based on the mix and the levels of chemicals in the forebrain.

Through this chemical channel the hindbrain could communicate with the forebrain to improve the health and safety of the body. And it did not end there. This channel could improve the survival and growth of the human species.

Human male/female pairs produced, on average, more children who were healthier and stronger, and themselves had more children. In other words (mostly) monogamous male/female pairs improved survival rates for individuals and the human species.

The hindbrain experimented with chemical levels when males and females engaged in certain behaviors that increased bonding and success in raising children. Now we can say that dopamine is the “attraction chemical.” But is it inherently the attraction chemical, or did the hindbrain just happen to pick it to adjust and then the forebrain gradually adapted?

Several hundred million years ago, selected chemicals became the mechanism for the upstream between the hind rain and the forebrain. Today, we might say, “I was so scared…” when we really mean, “My levels of adrenalin and testosterone were both elevated so high, I had to run away from the danger.”

These emotions increased the survival rate of proto-humans high enough to win the evolution race of the time. Early human history appears to be filled with many proto-human sub-species. Perhaps the eventual winner—homo sapiens—was just a little more in touch with his and her needs, due to the killer app of emotions.

Emotions: A “Killer” app for the new culture of the age of intelligence?

Our forebrains, ever restless and creative, have profoundly reshaped our environment and even our physical world.  Today we are at much higher risk of death from over-eating than from malnutrition. More people die from other humans than from lions, tigers, and bears. More people die from diabetes and heart disease than from lions, tigers, and bears. Yet the hindbrain continues to make sure we eat all the food we can find.

Our hindbrain, and the emotions it uses to communicate, are no longer so well-tuned to our environment. In so many situations our emotions can lead us astray, to see danger where there is none, even while being totally blind to certain dangers of this new world.  Jeff Hawkins, in his book A Thousand Brains, suggests that the hindbrain and its emotions are the core existential risk facing the human race.

Will our emotions lead us so far astray that they may become the “Killer” app for the human race? It may not be likely, but such a fun pun.

Emotions may be a “Killer” app for financial investing.

Emotional mistakes are so common and well-known in financial investing as to get names, such as FOMO, TINA, and others.  In their seminal book Thinking, Fast and Slow Daniel Kahneman and Amos Tversky developed a long list of emotional mistakes, which they politely called “biases.” Recency bias, anchoring effect, endowment effect, status quo, loss aversion, and goal gradients are just a few. Why does “only one percent” evoke such a different emotional response than “fully 99 percent?”

As you may know, I trade options as a hobby. I also write programs that use machine learning to analyze options and to improve the results of my options trading. My trading is at the avid amateur level, about 80 option trades each month. For me, certain option trading situations evoke very specific emotions, almost all of them motivating exactly the wrong response. For option traders and many investors, emotions can be a “killer” app for financial performance.

Consider these two situations:

Option trade #1

• Option Type: Short Call
• Option premium: 2%
• Strike Price 7% OTM
• Expiry: 21 Days Out
• Option called at expiry
• ARR for the trade: 153%

For this option, the stock closes above the strike at expiry, so you, the holder of the short call, must sell the stock at the strike price. You make 7% on the stock price increase and keep the 2% options premium. The 9% gain on the trade in 21 days yields an annual return rate (ARR) of 153%. Nice work. You are delighted.

Option Trade #2

• Option Type: Short Call
• Option premium: 2%
• Strike Price: 7% OTM
• Expiry: 21 Days Out
• Option called at expiry because stock gained 25%
• ARR for the trade: -300%

At expiry, the stock is up 25%, because of a great earnings report. Sure, you made 9% on the option trade, but you lost 18% of the stock value increase. Your return for those 21 days is 16% (9% gain – 25% loss, or an annual return rate of -300%. Ouch.

As you already figured out, option trades #1 and #2 are the same trade. Why do the two different descriptions evoke such strong reactions, and where is the fallacy? At the end of the 21 days you have data that you did not have 21 days ago when you made the decision to sell a call. This is the “future data” fallacy, also known as “coulda, woulda, shoulda.” It can be a killer for option traders. It has a deeper root cause, which is the Goal Switching fallacy. When you made the trade 21 days ago, you evaluated it as an option trade, and it delivered strong results as an option trade. Now, 21 days later, you evaluate it as a stock trade and feel very disappointed.

Strictly from an accounting view, your evaluation of the trade should not include the stock value increase beyond the strike price, because that is not part of your option trade. This is one more clue that you switched goals in evaluating the trade.

The Goal Switching fallacy is especially common in option trading because the inherent nature of options is the commitment to a future action. It looked pretty good at the time, but now, with new information I did not have then, I don’t wanna.

One interesting cure for these emotions is to create a strong set of rules for your options trading and your investing trades. This is the “Not my Fault” fallacy. The rules made me do it, so it’s not my fault. Very satisfying emotionally, and it slows down our knee-jerk reactions enough that we don’t do anything foolish, like break the very rules that deliver great results.