Customer Reviews

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

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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.

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.

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.

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.

The new science of irrationality shows us that "We are built to be exactly out of sync with financial opportunity," writes Dr. Terry Burnham, coauthor of the international bestseller "Mean Genes." Writing in the same personable style that made "Mean Genes" hard to put down, Dr. Burnham accomplishes the Herculean feat of making the study of economics seem like an enjoyable pastime. This Burnham accomplishes with the help of the new behavioral school of economics, a school that holds-contrary to the classical school of economics-that humans are not rational when making economic decisions.

The human brain's prefrontal cortex is responsible for most of abstract cognition. The "lizard brain is verbal shorthand for the less cognitive, less abstract mental forces that influence human behavior," Dr. Burnham writes. Shaped in the Pleistocene era, the lizard brain thrived by seeking patterns, looking backwards, and repeating successful behaviors - three traits that can lead to failure in financial markets (and in other areas). Most financial analysts recommend looking backwards, i.e., looking at historical financial trends. That is like driving your car by looking in the rearview mirror.

Even if you aren't an investor, read this delightful book. Markets affect everyone. And Dr. Burnham offers plenty of Mean Genes insights useful in everyday life. "When I check into a hotel, I never get the key to the mini bar," Dr. Burnham recounts in an anecdote readers of "Mean Genes" will appreciate. "Without the key, I don't need willpower to avoid any late-night temptation to devour junk food. I have found that most temptations are better avoided than resisted."

I'm acting on Dr. Burnham's advice, and, just as I did with Mean Genes, I've found myself quoting from "Mean Markets and Lizard Brains."

A great read; appeals to the counter-intuitive insights of successful investors and explains a lot of human nature and how destructive it can be from an investment standpoint.
I found his advice at the end however strange and incorrect. He argues against adding to a position when it goes down in price. I have added to positions and this I have found to be very effective. For similar reasons, he argues against dollar cost averaging, which I have also found to be profitable. The reasons both of these strategies can be useful are that they are counter intuitive, so his opposition to these strategies seems out of place with the rest of the book. Also, in both these instances, I find his justification not to be persuasive.
The author is clearly a smart guy who writes well. I would have given the book 5 stars if it were not for those 2 issues. I purchased the book on Amazon.com and would recommend that every investor read this book.

I found my time well spent reading this book. For would be readers - it seemed to me that there really were two parts to this book:

1. An investigation of irrational economic decisions by investors with roots in our evolutionary history.
2. A reasoned (but somewhat superficial) analysis of current macroeconomic situation (US debt, current account deficit, stock valuations).

And there are numerous references to modern studies that help debunk some of the myths of investing and finance. I particularly enjoyed learning about 'survivorship-bias'. And finally, loved the sense of humor! Memorable quotes from popular works of arts kept me laughing and makes this a page-turner from the start.

On the downside, by the time I got to the end, I was more than a little tiresome of the repeated references to 'lizard-brain'. That point is made pretty well early on. And while Terry makes a convincing case that the bull market run in U.S. Real Estate, Bonds and Stocks is short on breath - this does not (IMHO) come close to justifying his 10% stock allocation advice. In this respect - not incorporating international stocks into a recommended financial strategy seems particularly glaring. Like never before, investors today have the ability to invest in overseas markets. By Terry's own theories, Japan (and perhaps emerging markets) would seem to be primed for a long bull market (coming off a long period of low growth and adverse investor sentiment). Keeping savings in declining US dollars while overseas currencies and markets appreciate seems ostrich like (if not lizard brained). Material, perhaps, for a second edition ?

I think why I like Terry Burnham's thought process so much is because, although he has every right, qualification and academic degree to do otherwise, he can set academic pretention aside and still manage to make an intellectual point that is not
only valid, but relevant.

While this may not be the most dense, heavily technical analysis of modern everyday economic problems, Burnham integrates social and economic principals in a way that makes them not only comprehensible to a reader of any background, but relatable to a reader of any background.

As someone who gingerly sifts through endless pages of research (financial or otherwise), it seems as though most of what I've come across is pundit after pundit, each latter trying to one-up a former with their newest (and typically, tragicomically irrelevant) revelations - so a thank you to Terry Burnham for writing.

He's added some 'good' to the 'common', and on a personal note, I just wanted to throw some appreciation his way.

Looking forward to the next one!

Do you ever invest with your heart instead of your head? Have you ever lost money on an investment decision due to less than rational thinking? Here are a few traps I've seen and felt myself.

- "I don't want to admit I made a mistake buying this equity, so I'll hang on until it goes back up."
- "Everybody else is making money in that market. It must be a great place to invest."
- "That stock has gone down a lot. It must be a bargain now."

If you can relate to any of these, this is a great book for learning how to check your emotions at the door and think objectively about your investment decisions. Terry Burnham dissects many different emotional responses and explains how to systematically avoid them. Its a great way to get a lot smarter about your approach to investing.

The decision point to like a book or not is somewhat dependent on what you were looking for in the first place. For me, I love the books that provide counter intuitive ideas or perspectives about human nature. This book breaks down into four (4) parts. The 1st & 4th parts are a treat to read on decision making and how we sometimes unknowingly do things that are against our own best interests. This is what the author calls the Lizard Brain in reference to what our ancestor's genes were best suited for or adapted to.

For first time readers on this subject of counter intuitive insights, sections (1) and (4) are an entertaining quick read and for more detailed discussions on the subject there are several excellent books like Psychology of Judgment by Scott Plous or How We Know What Isn't So by Thomas Gilovich and not forget Heuristics & Biases by Kahneman, Slovic, and Tversky.

For Parts 2 & 3 are some of your more basic marco economics and probability discussions on markets, bonds, and real estate but in a very entertaining way. If you like movies, many anecdotal references to keep you interested as you breeze thru the pages.

One could argue with some of Mr. Burnham's conclusions, but statistics and probability are most likely on his side which is the point he is making. One point about bonds though is that even though bonds are currently low interest rate wise, statistically, they could still go lower for a statistically great increase if you were a bond owner (i.e. reference PIMCO).

I would have rated this material higher if not for the fact I have read the above referenced books. All in though, a good book which comes highly recommened.