Customer Reviews

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

5 star:		(17)
4 star:		(13)
3 star:		(1)
2 star:		(2)
1 star:		(3)

 

 

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 :)

The last 5 years I have read many research papers on behavioral finance, so I have a fair amount of knowledge about its findings.

I first read Pompian's book Behavioral Finance and Wealth Management, and then a few weeks later read Jason Zweig's Your Money and Your Brain.

Pompian's book wins hands down from a practical viewpoint......how you can use behavioral finance findings as an investor or investment advisor. Pompian lists all 20 common biases, and then gives examples of how to deal with them. I also enjoyed his section on using Briggs Myers test results coupled with behavioral finance principles.....to develop better financial plans which fit people better.

Zweig's book is a fascinating read.......but when I got done......my question was.....How do I apply these behavioral finance findings to my investments or my client's financial plans? I would have to re-read Zweig's book......and develop the practical uses myself from his book. Pompian has already put this together for you in his book.

If you have never been exposed to behavioral finance, then maybe reading both books is a good idea. You can get a general over-view by reading Zweig's book first......then get practical advice on how to apply the findings from Pompian's book.

It is interesting that Zweig's book at $17 has an Amazon sales rank of 2,075......and Pompian's book at $38 is only ranked 38,940. I have always enjoyed reading Zweig's columns in Money magazine. It is interesting to see where future research in behavioral finance is headed in Zweig's book.......but in my opinion; you get more practical advice (or value) for the dollar from Pompian's book than Zweig's book.

To compliment this book.....I would suggest a couple good books on index fund investing and asset allocation.


The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing

In my professional life I advise high net worth individuals on making smart decisions with their money. I've read a number of the behavioral finance books but this one is different. It was fascinating to read how our brains work and it explains a lot of what I've observed in my clients and in myself. I plan to buy several copies as gifts for my clients.

I would have given the book 5 out of 5 except that it seemed like a number of the studies and stories in the book were mentioned more than once or they were just similiar. Either way, some of it got a bit tedious.

As the title reveals, this book is about the inner workings of the investing brain. It not only explains the mistakes we all make, it takes the next step by telling us what we can do to become better investors.

First of all, this book will dispel any notion that our brains are predisposed to act only in ways that are about increasing wealth. As it happens, our financial decision-making is more about intangibles, such as avoiding regret and achieving pride. Never underestimate the value that comes with bragging about some brilliant investment to anybody who will listen.

Mr. Zweig explains that we really have two brains. Our reflexive brain gets the first crack at decision making, and is essentially based on intuition or how we feel. Our reflective brain, on the other hand, is more logical. The problem is that we usually don't know which part of the brain is at the switch when we make any decision. One key to maximizing wealth is to give the reflective brain some time to respond, and not to react immediately to our gut instinct.

Just when I thought the book couldn't get any better, I read the last chapter on "happiness." It explored the relationship between money and happiness. In spite of the lip service that is paid to believing that money doesn't buy happiness, we all seem to be on the treadmill of acquiring as much of it as we can. The disappointment sets in when we find that raise we got, or that windfall profit, doesn't actually make us happier for long periods.

In summary, content is fascinating but it is Mr. Zweig's writing style that kept me reading when I could barely keep my eyes open. It is a rare gem in its genre, a book that will change your way of investing and your life, and be fun to read.

Controlling one's emotions is a major key to successful money management. No one who has withered under the emotional pressure of making split second investment decision will argue that it is not.

Financial writer Jason Zweig combining concepts in neuroscience, economics and psychology to explain how our biology drives us toward good or bad investment decisions. He argues our brains lead us to self-deception. We are oath to admit our lack of financial knowledge. We overestimate our ability to perform. We believe we're smart enough to forecast the future even when we have been explicitly told that it is unpredictable. Our impetuousness leads to mistakes of action rather than inaction. In short, although we see ourselves as rational beings; we make irrational investment decisions.

His book blends tales from his visits to neuroscience labs with stories of investing mistakes. From them he pulls lessons and counsel on how investors can make more profitable investment decisions. They are:

1. Take a global view.
2. Hope for the best: expect the worst.
3. Investigate; then invest.
4. Never say always.
5. Know what you do not know.
6. Past is not prologue.
7. Weigh what they say.
8. If it sounds too good to be true, it probably is.
9. Costs are killer.
10. Eggs go splat.


Another that should be added to the list is The Paradox of Choice: Why More Is Less. More general in its approach, it cites many of the same studies. Schwartz, a Swarthmore College professor, cited research from psychologists, economists, market researchers and decision scientists to make five counter-intuitive arguments: We would be better off if we:
1. Voluntarily constrained our freedom of choice.
2. Sought "good enough" instead of "the best."
3. Lowered our expectations about decision's results.
4. Made nonreversible decisions.
5. Paid less attention to what others around us do.

Thoroughly researched, Your Money and Your Brain needs to be studied by anyone seeking to make wiser and more profitable investment decisions.

Jason Zweig tackles two daunting subjects - neural research and finance - and manages to make both of them accessible and interesting to a general audience. This long overdue book is not the first to apply the lessons of cognitive and behavioral research to personal investing, but it is certainly among the most comprehensive, credible and clearly written of such books. Much of the material will be familiar to students of cognitive science. If you have already read a lot about personal investing, you will find reminders, rather than new material, in Zweig's advice about investment decisions. Nevertheless, we find that he offers useful hands-on information and entertaining anecdotes as he explains why you should listen to your instincts and emotions when you invest.

It was very educational on the brain issues. As a stock market investor it shows good investment principals in the Appendix's. However I am a stock trader and there was no information about that aspect of the stock market. But the information on the brain and what stimulates it was great.

This book is just amazing.Besides helping you understand how to be a better investor,it opens up a whole new universe in learning how and why us humans think and act the way we do. To say that, most everything we think we know about investing and risk is wrong, is a "HUGE" understatement. The applications that can be put into practice from this book,reach much more farther than just the investing world.I already have been witness to the newly gain knowledge by aplying the principles to myself and unto others.To try and illustrate how powerful this book is,at this very moment I am writing this review, I have not reach the half of it.

Opinion

I thoroughly enjoyed reading this book. I am currently an undergraduate dual major student in business and biology who was looking for a book that could combine the science of the mind with the science of the business world. Jason Zweig's "Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich" was the perfect blend of psychology, neuroscience, and economics to show investors how to avoid basic money mistakes and gave me great insight into how much emotion affects the basis of our decision making. The title implies that the book can make people rich, but from my personal interpretation, the book was more geared towards avoiding many of the emotional decisions that have cost investors over time rather than actually creating wealth for them. The book is a gateway into how the brain reacts through a wide variety of emotion and provides many tests, puzzles, and interesting experiments to show how irrational the brain can actually be.

Structure of the Book

The book is divided into ten chapters each with their own specific message. The first chapter is an introductory chapter, the second chapter defines the difference between thinking and feeling, and the final eight chapters all involve emotions that can take their toll on an investor. These emotions include greed, prediction, confidence, risk, fear, surprise, regret, and happiness. Inside each chapter are subdivisions of personal stories, behavioral studies, and experimental data to show various aspects of each emotion and how it can affect investors.

Section Synopsis

The first chapter is an introductory chapter with the sole purpose of explaining the theory of neuroeconomics and the general situations where advancements in the field will potentially be beneficial for future investors. The first chapter provides investors with the basic lessons that have emerged from neuroeconomics with insights that include comparing the neural activity of someone making money equivalently to that of someone who is high on cocaine. The findings are laid out in this chapter and then supported case by case as the book progresses through the major emotions that define investor behavior.

The second chapter defines the difference between thinking and feeling and shows how brain functions can either be reflexive or reflective. This chapter is largely the heart and soul of the book as it defines the greatest interplay of interpretation that each investor makes when making decisions. For each emotion, Zweig shows examples of when the brain responds reflexively and other scenarios when the brain responds reflectively. Zweig tells investors that both types of brain function are important to investors, but understanding the benefits of recognizing which pathway is responsible in making a final decision can be as important as the decision itself. Basically, knowing why the brain is responding is as important as how the brain is responding.

The final eight chapters deal with emotions and teach the investor how these emotions lead to financial decision making. Zweig takes an in depth look into how the brain interprets these emotions and using experimental data and true stories of behavioral studies shows investors how these emotions factor into financial decisions and why people act the way they do.

Interesting Elements

The book is full of pictures, puzzles, tests, behavioral studies, and experimental data that allows the reader to tangibly understand the scientific findings that neuroeconomics are providing investors. The information in the book is largely current and very relevant. I found these puzzles and tests so interesting that I have already shown many of the examples to friends and family who have also shown interest in the findings. Zweig makes a point in the book and allows the reader to prove to themselves through these puzzles and tests that what he says is actually true about the way people think. The section on fear was the most informative to me and the most intriguing chapter of the entire book. In the middle of the book, Zweig has inserted real brain scans from his own brain from the different experiments that he has participated in. These pictures show how the emotions present themselves in the brain and provides physical evidence to Zweigs claims of how each of these emotions defines investor decisions.

Interesting Quotes

"Since both systems have their strengths and weaknesses, the challenge for you as an investor is to make your reflective and reflexive sides work better together, so that you can strike the right balance between thinking and feeling."

"A monetary loss or gain is not just a financial or psychological outcome, but a biological change that has profound physical effects on the brain and body."

Recommendation

I feel this book is a must read for anyone who intends on investing or making any financial decisions on their own as it is a perfect guide to becoming a more thoughtful and intelligent investor. I would also recommend this book to people who find emotions interesting, and how emotions such as greed, fear, happiness, and others help guide our brains into making decisions and the motivation for the way we respond behaviorally in different scenarios. The book contains a depth of science, however, in no way is the book overbearing because Zweig quite successfully gives the reader the tangible evidence to prove to themselves that investing mishaps are often triggered by our own misconceptions of how we are thinking and feeling. The book reads almost as a compilation of interrelated stories that are topic specific and illustrate a wide range of scenarios a typical investor would face, both good and bad. The experiments and puzzles in the book will inspire the reader to share the results with others and test friends and family with how little we actually know about how we think. The book is written in an interesting and informal style that makes it approachable to anyone, even those with a limited background in neuroscience.

If even a blindfolded chimp can pick stocks successfully, how come you and I can't?

Part of the problem seems to be that the human brain was programmed by thousands of years of evolution to operate in a particular way; and while human brains are very, very good at tasks that are similar to the tasks our ancestors faced a couple of hundred thousand years ago, investing in financial markets requires us to perform new analytical tasks that just don't come that naturally to us. The habits learned over thousands of years of evolution just don't work that well in today's financial jungle.

But help is on the way!

Zweig's book presents some interesting information about studies in behavioral finance, evolutionary psychology, and neuroscience (e.g., MRI studies of the brain activity of people pondering "investment" decisions), and then uses that information to help explain how people make investment decisions and how they could do better.

The book is very well done. Each chapter covers a separate topic like Greed, Confidence, Risk, Fear, Surprise, Regret, and Happiness. Most chapters contain a brief "man in the street" discussion of how the chapter's subject emotion influences investing behavior, followed by a discussion of brain activity in subjects actually engaging in behaviors relevant to the chapter's topic. It was very interesting to see how "man in the street" views are supported or contradicted by controlled, scientific studies.

Most chapters contain anecdotes illustrating the chapter's topic. There are some pretty sad stories. Even people you'd think would know better frequently do some really dumb things. "Human nature" is hard to overcome, even for professionals.

For example, I think everyone knows that when Enron collapsed, its employees lost not only their jobs but also their nest eggs, because their 401(k)s contained so much Enron stock. Everyone knows that sad story, and certainly no professional would ever let the same thing happen to him/her, right? Well, during the recent Bear Stearns meltdown, I heard a news report about the 401(k) plans there. Do you think the Bear Stearns employees learned anything from the painful lesson that Enron taught? Sad, sad, sad.

The bottom line, as Zweig's book shows, is that investing generates very powerful emotions. Recent, scientific studies can help us understand why our emotions are so powerful and why they make us do some of the things we do, which in turn can help us control our emotions and make better investment decisions.

The book's actual investment advice is pretty standard: diversify, re-balance, pay attention to costs, don't chase performance, etc.; but knowing more about how our brains work helps show why that standard advice is so appropriate.

P.S. There is some technical language about brain anatomy, but it is pretty limited; about what you'd hear in an episode of "CSI: Las Vegas" or "Bones."