Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality [Hardcover]

Terry Burnham (Author)

Book Description

Publication Date: February 8, 2005

Everyone from journalists to market pros are turning to behavioral finance to explain, analyze, and predict market direction. In contrast to old-school assumptions of cool-headed rationality, the new behavioral school embraces hot-blooded human irrationality as a core feature of both individuals and financial markets. The 2002 Nobel Prize in Economics was awarded to scholars of this new scientific approach to irrationality. In Mean Markets and Lizard Brains, Terry Burnham, an economist who has a proven ability to translate complex topics into everyday language, reveals the biological causes of irrationality. The human brain contains ancient structures that exert powerful and often unconscious influences on behavior. This "lizard brain" may have helped our ancestors eat and reproduce, but it wreaks havoc with our finances. Going far beyond cataloguing our financial foibles, Dr. Burnham applies this novel approach to all of today's most important financial topics: the stock market, the economy, real estate, bonds, mortgages, inflation, and savings. This broad and scholarly investigation provides an in-depth look at why manias, panics, and crashes happen, and why people are built to want to buy at irrationally high prices and sell at irrationally low prices. Most importantly, by incorporating the new science of irrationality, readers can position themselves to profit from financial markets that often seem downright mean. Mean Markets and Lizard Brains skillfully identifies the craziness that is part of human nature, helps us see it in ourselves, and then shows us how to profit from a world that doesn't always make sense.

Editorial Reviews

From the Inside Flap

In Mean Markets and Lizard Brains, Terry Burnham—an economist who has a proven ability to translate complex topics into everyday language—reveals the biological causes of irrationality and its connection to the way we invest. The human brain contains ancient structures that exert powerful and often unconscious influences on behavior. This "lizard brain" may have helped our ancestors eat and reproduce, but it wreaks havoc on our finances. Going far beyond cataloguing our financial foibles, Dr. Burnham applies this novel approach to all of today's most important financial topics—the stock market, the economy, real estate, bonds, mortgages, inflation, and savings. This broad and scholarly investigation provides an in-depth look at why manias, panics, and crashes occur and how you can profit from this knowledge.

The investigation into the economic implications of the lizard brain began in the late 1970s—and led to a 2002 Nobel Prize in Economics being awarded to the scholars of this new approach—but only recently have individual investors and market professionals begun to exploit these findings to explain, analyze, and predict market direction. In contrast to old-school assumptions of cool-headed rationality, the new school embraces hot-blooded human irrationality as a core feature of both individuals and financial markets.

Mean Markets and Lizard Brains converts cutting-edge intellectual developments into practical investment steps. Filled with in-depth insights and real-world advice, this guide:

• Provides a timeless blueprint for effective and low-stress investing through a thorough examination and explanation of the lizard brain.
• Summarizes the key findings of the science of irrationality and reveals the biological forces that cause even the smartest of people to make systematic mistakes.
• Sets the macroeconomic stage for choosing investments, with discussions of the economy, inflation, and the value of the U.S. dollar.
• Evaluates investments based on understanding how the lizard brain operates in today's global macroeconomic landscape.

By understanding and taming the lizard brain, you can position yourself to prosper in financial markets that often seem downright mean. Mean Markets and Lizard Brains skillfully identifies the craziness that is part of human nature, helps us see it in ourselves, and then shows us how to profit from a world that doesn't always make sense.

From the Back Cover

Praise for Mean Markets and Lizard Brains

"A thought-provoking read that gives insight to human behavior and your investment strategies."
—Isiah Thomas, President, Basketball Operations, New York Knicks

"Mean Markets and Lizard Brains translates neuroeconomics and cutting-edge theories of human behavior into practical advice. While the causes of costly decisions often lie outside our conscious awareness, they need not remain a mystery. The writing is provocative and insightful."
—Professor Vernon L. Smith, Nobel Prize winner in Economics

"A lively and entertaining account of the emerging field of neuroeconomics, where Fear and Greed meet Nature red in tooth and claw, with some surprisingly practical implications for individual investors, portfolio managers, and other market prognosticators."
—Andrew W. Lo, Harris & Harris Group Professor, MIT Sloan School of Management, and director of MIT's Laboratory for Financial Engineering

"Mean Markets and Lizard Brains is a whole new way of approaching the world of finance. It explains why we should question the financial advice of our friends, colleagues, and advisors. For years, my wife and I have relied upon Terry's financial advice. We are glad that this excellent book makes his discoveries available to everyone."
—Mark-Paul Gosselaar, actor, NYPD Blue

"Should be required reading for anyone trying to understand financial markets. It is the first book positioned at the intersection of finance, biology, and psychology —but it does not require knowledge of any of these fields. The author, one of the pioneers in the field of economics grounded in biology, combines accessibility with rigor. Reading it (along with everything Burnham writes) is a delight."
—Nassim Nicholas Taleb, author of Fooled by Randomness

See all Editorial Reviews

Product Details

• Hardcover: 320 pages
• Publisher: Wiley; 1 edition (February 8, 2005)
• Language: English
• ISBN-10: 0471602450
• ISBN-13: 978-0471602453
• Product Dimensions: 6.3 x 1.1 x 9.2 inches
• Shipping Weight: 1.1 pounds (View shipping rates and policies)
• Average Customer Review: 4.0 out of 5 stars  See all reviews (40 customer reviews)
• Amazon Best Sellers Rank: #1,333,602 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

52 of 55 people found the following review helpful

3.0 out of 5 stars Misleading- A traditional investment book w/a neat cover June 26, 2005

By Steve Sun

Format:Hardcover

The decision to purchase Mean Markets was not pre-meditated. I was wandering around the bookstore and happened to see Mean Markets displayed fairly prominently at Borders. I was intrigued by the title and the lizard on the back. At the very least, the book looked like an unconventional investment book. Oddly, what made me purchase the book was seeing a very positive blurb from Nassim Nicholas Taleb on the back. I consider Nassim's latest book "Fooled by Randomness" one of the best investment books over the last few years. In the blurb, Taleb actually says, "Should be required reading for anyone trying to understand financial markets...." I took the blurb seriously since Taleb doesn't seem like the type to give blurbs to books he doesn't like. In Fooled by Randomness, he specifically cited occasions he gave bad reviews or didn't allow blurbs. I should've taken some caution in seeing Isiah Thomas and Mark-Paul Gosselaar (former star of Saved by the Bell) also providing blurbs.

Among other things, the books intent is to serve as a primer to behavioral finance and teach how to invest according to the new findings. While the book is very readable, it's not particularly innovative or useful for a non-beginning investor.

The first of the three sections, "The New Science of Irrationality" is by far the most interesting. Mr. Burnham shows us that there is effective two parts to our brain: the pre-frontal cortex and the rest, which is the lizard brain. The pre-frontal cortex is responsible for analysis. The lizard brain controls our instincts and impulses. Our goal in investing should be to rely on the pre-frontal cortex and limit our lizard brains.... In certain environments, such as hunting for food or playing football, our impulses and lizard brains are perfectly fine for dictating decisions. Conversely, the markets are an area that our minds are not suited for. For example, humans are notoriously bad at calculating conditional probabilities.

The second section is (oddly) a primer on issues facing the US and global economy. Mr. Burnham provides the conventional bull and bear case for the global economy. The chapter tackles many of the major issues including the twin deficits, productivity, interest rates and inflation. For the reader without any knowledge of these issues, the section is very useful. That said any reader who reads the Economist Magazine or pays any attention to macro-economic issues will gain little. There's nothing new the chapter introduces. Mr. Burnham barely discusses how the new science of irrationality allows us to better analyze the global economy.

The third section, very similar to the second, is a primer on the major assets classes: stocks, bonds and real estate. The only difference is that he's bearish on all three. Once again, he provides a very clear explanation on why the asset classes won't do as well. However, he again deviates little from the standard investment book or for that matter magazine article on the markets. There's no new method irrational analysis.

From a different perspective, Nassim Nicholas Taleb statement that this is a "must read" isn't completely inaccurate. While there are certain topics not covered by traditional investment books, the bulk of the book really is just an overview of the issues facing the economy and the markets. For the reader who's not at all familiar with these issues, this book will get him caught up.

However, the book really isn't about lizard brains or the new science of irrationality. I get the impression that Mr. Burnham simply wanted to write a traditional book. My guess is that his publishers needed some type of hook. They then inserted the lizard brain stuff. At the end of the day it's a traditional book and doesn't provide much further insight than any other book. Read more ›

10 of 10 people found the following review helpful

5.0 out of 5 stars Fun and interesting read! January 9, 2006

By Rolf Dobelli HALL OF FAMETOP 1000 REVIEWER

Format:Hardcover

Conventional wisdom about investing suggests that people are basically rational, markets are basically efficient, and nobody can earn a reward without some risk. One corollary of this conventional wisdom is that individual investors ought to own stocks. Individual investors have been acting conventionally wise - but that may be exactly the wrong thing to do. Author Terry Burnham draws on the relatively new science of behavioral economics - informed by insights into human reasoning that have been discovered by cognitive researchers - and offers investment advice dramatically at odds with conventional wisdom. Burnham, a former Harvard professor with ample experience in finance, puts his thoughts in pop language, drawing not on market studies but on movies and other references to current culture, to make many of his most salient points. What he loses in `gravitas', he gains in entertainment value. We find that this investment book manages to be fun to read, while providing the grain of salt readers should take to temper more conventional economic advice.

26 of 31 people found the following review helpful

5.0 out of 5 stars If You can Afford Just One Book, Buy This One August 8, 2004

By Greencho

Format:Hardcover

From "Essays on Genetic Evolution and Economics" to the widely acclaimed "Mean Genes", Terry Burnham has been a leader in applying learnings from sociobiology broadly. His gift is making complicated academic research accessible to all. His novel message is that our underlying human behavior, honed through thousands of years of genetic evolution, actually gets in the way of our logical thought processes when it comes to playing the stock market, buying a house, or trying to save up for our kids' college education. Nowhere are his great insights more valuable than in analyzing the problems we face when making these personal investment decisions, as he does in "Mean Markets and Lizard Brains : How to Profit from the Science of Irrationality".

Professor Burnham weaves insightful personal anecdotes from his vast array of experiences (i.e., as an academic, entrepreneur, investment banker, day-trader, biologist, and United States Marine), and combines them with sound analytical economic thinking (i.e., as a PhD economist from Harvard with up-to-date knowledge of the latest thinking on irrationality). The result is a detailed description of the basis for our poor instincts in financial decision-making, as well as a prescription for improving our performance in this context. Everyone wants to make money by investing wisely, and yet few of us are able to rise above our "Lizard Brain" tendencies. This book goes beyond describing our shortcomings; it teaches us how to think for ourselves in over-riding those "Lizard Brain" inclinations.

I once described "Mean Genes" as the best book I ever read. "Mean Markets and Lizard Brains" challenges that bold assertion. By simplifying a complex topic (i.e...., managing your money) with new insights drawn from disparate learnings, Terry Burnham has written a most unusual kind of "how-to" book -- one that does not promise vast riches with little or no effort, but rather vast insight coupled with always practical and realistic advice. If your are looking to learn as you rebalance your portfolio, read this book. Read more ›

6 of 6 people found the following review helpful

5.0 out of 5 stars How people have built in problems with thinking rationally and how to exploit irrationality in markets May 1, 2007

By Craig Matteson HALL OF FAMETOP 500 REVIEWER

Format:Hardcover

What a cool book! Terry Burnham wants to help his readers understand that while we fancy ourselves users of reason and rational beings we still have blind spots in our thinking and behavior that can get us into a great deal of trouble when making investment decisions. That is, unless we are explicitly aware of these problems and consciously work to train ourselves to avoid them and be continuously on guard against falling into their pit.

Burnham organizes the book into four parts. The first chapter is the introduction and presents the gist of the book. What is a mean market? The fact that markets can defy the accepted bromides about rational markets and wipe out investors surprisingly quickly and without any hint of mercy. The idea of cosmological indifference comes to mind. The author's vivid image of the "Lizard Brain" refers less to any explicit structure in the brain or any claim to specific evolutionary path to brain development.

Instead, Burnham is referring to the fact that we all have a set of tendencies, hard wired ways of perceiving the world, and bred in behavioral tendencies that worked well in keeping our ancestors alive in the ancient world. However, they are as out of place in our technological world as a lizard might be at the Met. For example, our brains are very good in seeing patterns. The problem is we often see patterns where none exist. On the other hand, we are terrible at perceiving frequencies. However, with training and discipline we can learn to deal with both of these natural tendencies. Without being aware of these potential problems, we too often get ourselves in trouble....

The first part weighs the traditional Efficient Market Hypothesis (EMH) of rational markets against the oceans of evidence that people do behave irrationally. Here is where I differ slightly with Burnham. My understanding of EMH does not require that each individual act rationally or that any given price at any instant in time be the "right" price. Instead, it indicates that in the aggregate that most irrationality cancels each other out and resources get allocated surprisingly efficiently. As for prices, the notion is not that the price is free from being too high or too low, but that there is a "right" price at all that will be in the area of most of the trading with some of it too high and some too low.

However, the EMH doesn't help the investor account for irrationality or how to avoid its dangers in one's own behavior or capitalize on its existence in others. And this is where the book's strengths are to be found.

The second part takes us through a survey of evidence of irrationality in the American markets and the limits of growth that are so often ignored in pricing equities. The author also takes us through the uses and perceptions of money, barter, inflation, and deflation. All interesting and useful information.

In part three we get Burnham's actual views on how to pull all this together in viewing Bonds, Stocks, and Real Estate for investments at the time of this book (2005). Burnham is an economist and discounts the optimism of many people who tout these products. I think he makes a great deal of sense. However, it is up to you to make your own decisions.

Part four provides two chapters full of principles for us to apply in making our own investment decisions. The first chapter gives "timeless advice". That is, those principles that are applicable in any type of market at any time. The second chapter offers "timely advice". That is, advice that is market condition specific. Burnham gives us principles to apply in rising or declining markets and how to know when to use them.

The issue is whether we have the discipline to apply them or will we surrender to the emotional pull of the lizard brain and find ourselves in trouble.

Burnham makes this subject quite lively, is able to put some nice color to it with some good anecdotes, illustrative stories, and some actually funny jokes.

Recommended. Read more ›