New Book: Your Money and Your Brain

Humankind evolved to seek rewards and avoid risks but not to invest wisely, by Jason Zweig

In the introduction to Ben Graham's Intelligent Investor, Warren Buffett writes, "To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework." This article and book will help you invest successfully.

"You buy high only to sell low. You try to time the market. You follow the crowd. You make the same mistakes again. And again. How come?"

"Your brain developed to improve our species' odds of survival. You, like every other human, are wired to crave what looks rewarding and shun what seems risky."

"To counteract these impulses, your brain has only a thin veneer of modern, analytical circuits that are often no match for the power of the ancient parts of your mind. And when you win, lose or risk money, you stir up some profound emotions, including hope, surprise, regret and the two we'll examine here: greed and fear."

"Our brains come equipped with a biological mechanism that is more aroused when we anticipate a profit than when we get one. "

"...learning the outcome of my actions was no big deal... Thus our seeking system functions partly as a blessing and partly as a curse. We pay close attention to the possibility of coming rewards, but we also expect that the future will feel better than it does once it turns into the present. "

"The anticipation of reward... is more important for memory formation than is the receipt of reward."

"your reflexive brain is highly responsive to variations in the amount of reward at stake, it is much less sensitive to changes in the probability of receiving a reward... When possibility is in the room, probability goes out the window. It's no different when you buy a stock or a mutual fund: Your expectation of scoring a big gain elbows aside your ability to evaluate how likely you are to earn it. That means your brain will tend to get you into trouble whenever you're confronted with an opportunity to buy an investment with a hot - but probably unsustainable - return."

"...we are often most afraid of the least likely dangers and frequently not worried enough about the risks that have the greatest chances of coming home to roost... the odds that U.S. stocks will lose a third of their value in a given year are around 2%. The real risk isn't that the market will melt down but that inflation will erode your savings. Yet only 31% of the people surveyed were worried that they might run out of money during their first 10 years of retirement."

"When people made their own choices, they were right 84% of the time. When the peer group all made the wrong choice, however, the individuals being tested chose correctly just 59% of the time... you go along with the herd not because you want to but because it hurts not to. Being part of a large group of investors can make you feel safer when everything is going great. But once risk rears its ugly head, there's no safety in numbers."

"Understanding how those feelings - as a matter of biology - affect your decision-making will enable you to see as never before what makes you tick, and how you can improve, as an investor."

Read the article, buy the book.