1 Easy Way to Become a Better Investor

Maybe bankers had good reason to screw up so massively in the years leading up to the financial crisis. And maybe you can learn from one of their biggest mistakes.

A recent paper (link opens PDF file) from USC's Alexandra Michel used nine years' worth of research to detail the health impacts of working as an investment banker. I wasn't sure whether to be amused or appalled by this Robert Rubin quote at the beginning of the paper:

I was intent on not letting my back pain interfere with ... [Goldman Sachs (NYS: GS) ] ... , so I did everything I could to keep functioning. For many months, I'd have to lie down at the office on a couch. ... I was in the hospital three times ... and each time I ran the arbitrage business from my bed. I was on the board of Studebaker-Worthington, and I participated in one meeting lying on the conference table.

Clearly, Rubin was willing to work through significant health problems at Goldman Sachs.

Look around the Street and it's no different if we're talking about Bank of America (NYS: BAC) , Citigroup (NYS: C) , JPMorgan Chase (NYS: JPM) , Morgan Stanley, or any major investment bank. As Michel argues, the grueling life on Wall Street has severe impacts on the body including colds, back pain, heart problems, addictions, and... sleep problems.

It's plain that bankers' grueling hours leave little time left over to get a healthy amount of sleep (Michel: "Bankers worked up to 120 hours per week even when there was nothing urgent to do."). Here's what one banking associate bragged to -- er, told -- Michel:

I have learned that there is nothing you cannot do. I also learned about my amazing capacity for work. I would not have thought that I could go without sleep for such extended periods of time. But that's just because I have never pushed myself to that extent.

It's nice to assume that by pushing yourself hard you can overcome the body's needs, but it's a big mistake -- which can lead to even bigger mistakes. In 2007, a team led by Prof. Vinod Venkatraman published a paper titled "Sleep Deprivation Elevates Expectation of Gains and Attenuates Response to Losses Following Risky Decisions." The paper boiled down to this: When you're sleep-deprived, you're more likely to get excited by the upside of a gamble and less concerned about the potential downside.

Sound familiar? Pre-crisis Wall Streeters were doggedly fixated on the upside of chopping up, sausage-ing, and selling crappy mortgage paper -- among other ill-advised activities -- but paid little mind to what could happen if their models turned out to be wrong.

These outcomes make a lot of intuitive sense. If you stress the body through sleep deprivation, you end up throwing it into survival mode, making upside gambles seem worth it ("I'm desperate!") while reducing the consequences of downside outcomes ("Who cares, we're screwed as it is!"). Throw a bunch of extrinsic job-related stress on top of that and you could probably turbocharge the process.

Would we have had a financial crisis if Wall Streeters habitually got more sleep? I'm not ready to go that far, but I think some cooler heads may have prevailed.

It's not just Wall Street
You've heard this song before: Americans don't sleep as much as they should. Reality may be worse than you think. University of Chicago's Diane Lauderdale studied the gap between self-reported sleep and actual sleep from 647 research participants and found that although, on average, they said that they slept 6.8 hours per night, their actual sleep was closer to 6.1 hours.

This has all sorts of downsides. As the University's press release put it: "Lack of sleep has long been connected with reduced ability to concentrate, trouble learning, decreased attention to detail and increased risk of motor vehicle accidents. More recent studies have tied chronic partial sleep deprivation to medical problems, including obesity, diabetes and hypertension."

You can add financial risk-taking to the menu as well.

This has very practical implications. Most investors are going to find the best long-term results by anchoring their portfolios around diversified, low-cost indexes like Vanguard Dividend Appreciation (NYS: VIG) or the S&P 500-mirroring Vanguard S&P 500 ETF, or a well-diversified collection of high-quality individual stocks. But if you're low on sleep, your reward sensors are going crazy, and your risk sensors have given up and gone to sulk in a corner, you may suddenly think it wise to make Sirius XM Radio the largest position in your portfolio.

Get some sleep... then, read this
In your busy, fast-paced world, it may well be impossible to consistently get seven to nine hours of sleep. One thing you can control, though: You don't have to make investment decisions every day. So plan ahead. Give yourself some advance notice, deciding when you're going to sit down with your portfolio, and make sure that you're well rested before you do. The science is on your side.

Then -- and only then! -- bring that well-rested, ready-to-invest view to one of The Motley Fool's latest special reports, "The 3 Dow Stocks Dividend Investors Need." You can score a free copy by clicking here.

At the time thisarticle was published The Motley Fool owns shares of JPMorgan Chase, Bank of America, and Citigroup. Motley Fool newsletter services have recommended buying shares of Goldman Sachs Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Fool contributor Matt Koppenheffer owns shares of Bank of America, Morgan Stanley, and Vanguard Dividend Appreciation ETF, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

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