This Is Your Brain on Money

Read entire Jason Zweig article here.

Here are five ways your brain can trick you into making financial blunders, and how to avoid them:

1. Familiarity breeds admiration, not contempt.
Psychological research shows that we're attracted to the familiar... "Whenever a stock, an industry, a market, a country, or an investing theme is familiar, you'll like it better. But familiarity is very dangerous."

2. The pattern you swear you see is probably an illusion.
The brain is built to detect patterns, even when confronted with an arbitrary occurrence. "A small streak of random luck looks to us like part of a longer pattern of reliable foresight." After someone learns a set of circumstances through which they made money, the brain will fire up with the pleasure chemical dopamine when those conditions occur again. "If you see something once, then twice, you automatically, involuntarily expect it a third time."

3. Everything is relative.
The brain will hook onto a number and then compare subsequent figures to the initial one, a phenomenon known as "anchoring and adjustment." Quoting Warren Buffett, who says he "always likes to look at investments without knowing the price, because if you see the price, it automatically has some influence on you."

4. Tune out the play-by-play.
If you're someone who obsessively monitors the prices of your holdings, watch out. Several studies by Princeton Nobel laureate Daniel Kahneman and other researchers have found that the more often people watch an investment move up and down, the more likely they are to trade in and out short-term -- and the less likely they are to earn a high return over the long term."

5. Beware of group-think.
"When the market gets really greedy or really fearful, basically everyone's brain starts to work the same way... That's why many people buy high and sell low." "To avoid following the herd, set your own financial policies and rules, and stick by them "The worst imaginable thing you can do is listen to Pied Pipers who tell you 'here are seven tricks to beat the pros at the game.' That game will make you miserable."

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