Your Money And Your Brain How the New Science of Neuroeconomics Can Help Make You Rich

CHAPTER ONE Neuroeconomics BRAIN, n. An apparatus with which we think that we think. --Ambrose Bierce "How could I have been such an idiot?" If you've never yelled that sentence at yourself in a fury, you're not an investor. There may be nothing across the entire spectrum of human endeavor that makes so many smart people feel so stupid as investing does. That's why I've set out to explain, in terms any investor can understand, what goes on inside your brain when you make decisions about money. To get the best use out of any tool or machine, it helps to know at least a little about how it works; you will never maximize your wealth unless you can optimize your mind. Fortunately, over the past few years, scientists have made stunning discoveries about the ways the human brain evaluates rewards, sizes up risks, and calculates probabilities. With the wonders of imaging technology, we can now observe the precise neural circuitry that switches on and off in your brain when you invest. I've been a financial journalist since 1987, and nothing I've ever learned about investing has excited me more than the spectacular findings emerging from the study of "neuroeconomics." Thanks to this newborn field -- a hybrid of neuroscience, economics, and psychology -- we can begin to understand what drives investing behavior not only on the theoretical or practical level, but as a basic biological function. These flashes of fundamental insight will enable you to see as never before what makes you tick as an investor. On this ultimate quest for financial self-knowledge, I'll take you inside laboratories run by some of the world's leading neuroeconomists and describe their fascinating experiments firsthand, since I've had my own brain studied again and again by these researchers. (The scientific consensus on my cranium is simple: It's a mess in there.) The newest findings in neuroeconomics suggest that much of what we've been told about investing is wrong. In theory, the more we learn about our investments, and the harder we work at understanding them, the more money we will make. Economists have long insisted that investors know what they want, understand the tradeoff between risk and reward, and use information logically to pursue their goals. In practice, however, those assumptions often turn out to be dead wrong. Which side of this table sounds more like you? You're not alone. Like dieters lurching from Pritikin to Atkins to South Beach and ending up at least as heavy as they started, investors habitually are their own worst enemies, even when they know better. Everyone knows that you should buy low and sell high -- and yet, all too often, we buy high and sell low. Everyone knows that beating the market is nearly impossible -- but just about everyone thinks he can do it. Everyone knows that panic selling is a bad idea -- but a company that announces it earned 23 cents per share instead of 24 cents can lose $5 billion of market value in a minute-and-a-half. Everyone knows that Wall Street strategists can't predict what the market is about to do -- but investors still hang on every word from the financial pundits who prognosticate on TV. Everyone knows that chasing hot stocks or mutual funds is a sure way to get burned -- yet millions of investors flock back to the flame every year. Many do so even though they swore, just a year or two before, never to get burned again. One of the themes of this book is that our investing brains often drive us to do things that make no logical sense -- but make perfect emotional sense. That does not make us irrational. It makes us human. Our brains were originally designed to get more of whatever would improve our odds of survival and to avoid whatever would worsen the odds. Emotional circuits deep in our brains make us instZweig, Jason is the author of 'Your Money And Your Brain How the New Science of Neuroeconomics Can Help Make You Rich', published 2007 under ISBN 9780743276689 and ISBN 074327668X.