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To Optimize Your Wealth, First Optimize Your Mind
on September 4, 2007
The above is the premise of Jason Zweig's Your Money & Your Brain. As the research continues to mount that we are indeed more hardwired like our animal ancestors than we care to admit, it helps to know these hardwired systems in ourselves to more understand our response mechanisms that can and do trigger our emotions and ultimately our actions. To assist in this effort, the book highlights and goes into some detail of the more recognized emotions like Greed, Fear, Regret, and Confidence of which all play on our performance in life, as well, and even more so in optimizing our wealth in the investing process. Since the investment world and markets themselves are full of triggers that fool our brains into taking actions that in the end are not good for wealth optimization, this book will help you understand some of these triggers and hopefully avoid some of the actions they promote.
It was a treat to read this very well written (read as not too technical) on the pitfalls of our decision making and how we sometimes unknowingly do things that are against our own best interests. To illustrate with one of the topics of Confidence, we are hardwired to be confident because if we weren't we would more often then not be paralyzed to never be able to make a decision. However; when it comes to investments, we are mostly too confident in our own abilities which itself leads to overconfidence. For example, we believe that our own selected lottery ticket has a better chance of winning than someone else's selected ticket even though all of us know that the odds are the same for everyone. But when asked to give your ticket up for someone else's, the response is usually -- no way. This fact has been tested over and over with the same conclusion that we believe our own cognitive skills or luck is better than someone other than ourselves. In the investment world, the path to ruin is full of disasters where investors were overconfident. Let us just be reminded of the ".com" boom or Long Term Capital Management episode.
Or let's take another look and topic in the book of Risk. What is your Risk tolerance? This may entirely depend on what your mood was when the question was asked, or what was the last color you saw prior to being asked, or more importantly of how the question was asked. For example, if you were asked that a said portfolio has a 78% chance of meeting your financial goals does this meet your risk tolerance? You may answer in the affirmative, yes, that this is a good risk profile for me. However, if you were told that said portfolio has a 22 out of 100 chance of not meeting your financial goals and you may be eating beans for the next 10 years, your risk profile may have changed drastically though these are exactly the same. Its all in the framing.
As you move on and educate yourself on the other hardwired triggers like Fear, Regret, Greed, plus others, you should be in better shape to improve your investment results, or at a minimum to at least recognize some of the pitfalls. All in, required reading if you're a serious investor or have not read some other excellent books on the subject, such as, Mean Markets and Lizard Brains by Terry Burnham, Psychology of Judgment by Scott Plous, or How We Know What Isn't So by Thomas Gilovich.
Side note: The footnotes and background information are very well documented in the back. However, some of the figures referenced are in the middle of the book. For example, when I read (See Figure 3.1) and could not find it, I thought that they had left it out though it was between Chapters 6 & 7 in a separate section. This did not distract from the book too much as it was probably a technical issue to place all color pictures in one section, but thought it odd of not telling the reader up front.
Though not to leave with a negative feeling, with praise from the likes of Daniel Kahneman, Bill Miller, and David Dreman -- it is hard to go too wrong and I believe Jason Zweig has indeed succeeded. So enjoy an educating and fun read :)