Go with your gut, we're told. Play to your instincts.

But for many people, going with that gut feeling can keep us out of the market when we most need to be in it. Ignore your gut, keep your cool, and invest with your brain.

Playing it cool
In 2005, researchers at Stanford University gave a group of people $20 each. Each person took part in a coin-flipping game lasting 20 rounds. Some members of the group had brain lesions that affected their ability to feel emotion, but did not affect their ability to process information.

At the beginning of each round, players were asked whether they would participate. If they did, and won the toss, they earned $2.50. If they lost the toss, they'd lose $1. Investors who didn't play kept the buck.

According to logic, everyone should have played every round, because the average expected outcome -- $1.25 -- outweighed the expected outcome from not playing -- $1.

The people who couldn't feel emotion did much better, on average. They participated in 44% more tosses (84% of the total number of tosses) and won almost 13% more than did people in the other group.

Further analysis showed that the people without brain damage declined to play more often as the game progressed. In addition, they declined more often if they had lost in the previous round. Fear, not logic, was guiding their decision-making.

Things that make you go "hmmm"
If fear affects even a $20 low-stakes game, you can bet it affects how people invest their life savings. When stock prices fall, investors get emotional and want to get out, even when the drop has no rational basis, and the most logical choice is to ride out the decline and buy even more.

Nokia (NYSE: NOK), for instance, dropped more than 50% in the spring and summer of 2004, when people feared it would lose even more market share. Today, the strong fundamentals it had the whole time have propelled it roughly 45% higher than its pre-drop high, and almost 190% higher for those who bought near the bottom. Investors who saw past the emotion driving Nokia's drop did very well indeed.

While some companies have fallen lately for good reasons, others have dropped because investors fear a bear market. The companies listed below, for example, have all plunged significantly without substantial changes to their long-term situations.


Market Cap (billions)

Drop From 52-Week High

Advanced Micro Devices (NYSE: AMD)



Garmin (Nasdaq: GRMN)



J.C. Penney (NYSE: JCP)



Level 3 Communications (Nasdaq: LVLT)






Suntech Power (NYSE: STP)



Sources: Yahoo! Finance and Capital IQ, a division of Standard & Poor's.

If you focus on the business and ignore the fear swirling around the market, one or more of the above might make a good investment at this point, just as Nokia was for investors in the summer of 2004.

Our very own cool thinkers
Over at Stock Advisor, Fool co-founders Tom and David Gardner are doing just that. They certainly acknowledge the current bear market, but they're not getting fearful and advising subscribers to sell everything and move into bonds. Instead, they continue to look for good businesses that can weather this downturn and emerge stronger than before.

In fact, two of the above companies, Garmin and NVIDIA, are current Stock Advisor recommendations. Along with more than 100 other active picks, these stocks have given the brothers an average return more than 36 percentage points ahead of the S&P 500. If that sounds like something you'd like to take part in, give the newsletter a 30-day trial. There's no obligation.

Jim Mueller once took part in a psychology study and blew the curve. He won't tell us which way, though. He owns shares of Garmin, but holds no financial position in any other company mentioned. Garmin is also a Global Gains selection, and Suntech is a Rule Breakers recommendation. The Fool's disclosure policy thinks its psychology is stable, but you never know.