- Paperback: 352 pages
- Publisher: Simon & Schuster; Reprint edition (September 16, 2008)
- Language: English
- ISBN-10: 0743276698
- ISBN-13: 978-0743276696
- Product Dimensions: 6.1 x 1.1 x 9.2 inches
- Shipping Weight: 14.1 ounces (View shipping rates and policies)
- Average Customer Review: 86 customer reviews
- Amazon Best Sellers Rank: #47,327 in Books (See Top 100 in Books)
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Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich Reprint Edition
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From Publishers Weekly
Starred Review. It's tempting to blame your upbringing or your stingy boss, but the real culprit in your flawed relationship with money is your very own brain, argues finance writer Zweig. Combining concepts in neuroscience, economics and psychology, he explains how our biology drives us toward good or bad investment decision. Our brains are pretty self-deceptive, it turns out: we have difficulty admitting our lack of knowledge about finances; we overestimate our own wisdom and performance; and our preference for mistakes of action rather than inaction often leads us to irrational investment decisions. Most tellingly, humans believe we're smart enough to forecast the future even when we have been explicitly told that it is unpredictable. Among the book's fun facts: the MRI brain scan of a cocaine addict is virtually identical to that of someone who thinks he is about to make money. Backed by stellar research and written in an entertaining, informal style that makes a complex subject accessible to the layperson, Zweig makes clear how we can understand what our brains are doing and how to use that knowledge to get out of our own way and invest wisely. (Sept.)
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved. --This text refers to an out of print or unavailable edition of this title.
Do you fret over the value of your investments on a daily basis? Do you buy stocks based on a "hunch" or a gut feeling? According to Zweig, the latest scientific evidence shows that this common behavior usually results in financial loss and is caused by the way our brain reacts when we think about money. According to recent research in the emerging science of "neuroeconomics," the pleasure center in the brain that is stimulated in anticipation of "the big payout" is the same area that is affected during sex or drug use and is responsible for the addiction to gambling. Our brains, which evolved more than 200,000 years ago to react quickly to patterns and minute changes in our environment, are not equipped to handle the randomness of the stock market; but nevertheless we attempt to create meaningful patterns where there are none and base our investment decisions on erroneous assumptions. The good news is that awareness of this phenomenon can make us better investors, and Zweig offers some simple tips to avoid the pitfalls, such as taking the long view and avoiding overtrading. Siegfried, David --This text refers to an out of print or unavailable edition of this title.
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One particular example made me think that the author doesn't quite understand what he's writing about: He quotes some research at U of Chicago (Hogarth/Einhorn) in which participants are asked to select the minimum information that would support a hypothesis. We're told "... an expert claimed that the market always went up after he predicted that it would rise." Then we're asked what's the minimum information we need to verify this claim. Choice 1 is "what the market did after he predicted that it would rise"; choice 4 is "what he predicted before the market fell". Now Zweig crows that many people got it wrong by saying #1 was sufficient information, where #1 & #4 are both needed. Unfortunately, he's flat wrong -- #1 is indeed sufficient information. The expert hasn't claimed that he can predict drops correctly, or even that he can predict all increases. He simply is saying that all his "up" predictions are 100% correct, so all we need to do is to verify that prediction. Zweig then waxes on about falsification, but by now it's clear he doesn't quite get how to formulate the falsifiable hypothesis. (I'd surmise that he read the research paper wrong, because UChicago people would know better.)
The interesting thing is that the interplay between the emotional side of the brain and money (or the perceived value of something in relation to money, a stock for instance) is actually an old subject. The "Fool and His Money" has been widely commented on by an assortment of people diverse enough to include Penn & Teller, Harry Houdini and Anton Lavey as well as Warren Buffett, Ben Graham and the other financial types that you would expect to see at the table for this topic.
The difference is that now it has a name that gives it more credibility as a specialized field within both psychology and economics. The subject is old, but it's serious study is quite new. Most of what you will read and hear in Neuroeconomics represents recent work. This book is an excellent place to start. Interviews with this author and related videos on Neuroeconomics can be found on YouTube. This book and those vids will give a sound introduction to this subject.
The book, in a very non-technical language, touches on how the body reacts physically and mentally to the changing stock market. The author explains how the brain works when faced with pleasant events (stocks going up) and unpleasant events (stocks going down) and when faced with peer pressure or an important decision. After the explanation, the book tells you simple techniques to avoid or circumvent these issues as well as a great checklist to go through before gambling in the stock market.
I do have a "play account" and aside from my retirement account which I opened to learn about the stock market. This book has helped me focus on my actions instead of actions of others as well as make the stock market gambling a bit more interesting (using my play account only). Maybe in a year or so I'll be brave enough to stick a few more dollars, but meanwhile - a fake portfolio - here I come.
Jason Zweig does an excellent job at summarizing the research about what happens inside our heads when we think about our different relationships (feelings, greed, confidence, risk, fear, surprise, regret, and happiness - each with their own chapter) with money and investing. Our brains have spent more time evolving in hunter gatherer and agrarian settings than they have in the modern technological age. That hard wiring inside our heads affects our thinking and reactions - often without us even realizing it has happened.
Among the observations in the book: Our expectations are more intense that the experience. Most of us don't understand our own behavior. And much more.
The work may disappoint some in that there are few suggestions about how to use this kind of new found knowledge when designing an investment allocation. In my opinion, this is not a major weakness with his work. There has to be research with modern medical machinery on the phenomenon before application can follow. This is not to say that works applying this research are not out there, only to say that the purpose of Zweig's work was to review the research to date on the inner workings of the brain, period. The first step in recognizing what we do is to recognize how our brains actually think: when and where the thinking, or reacting, processes occur.
A companion book to this one would be Predictably Irrational by Dan Ariely which researches our behavior through experiments on people, how we act and react to different situations related to money, rather than the mechanics and chemistry of inside the brain when confronted with those situations.
Ariely's work also does not include how to design a portfolio allocation. Neither of these works intended to. They intended to describe our behaviors. Knowing how and why we behave the way we do is just as important, maybe more so, as portfolio design. In fact, my observation is that people are often in more of a hurry to design the perfect portfolio, as an end in itself, than understand the what-and-why of the portfolio and their relationship with it and investing.
A fascinating field of study, which is just beginning to be able to explore the inner workings of our minds through modern non-invasive methods, to tell us why we behave the way we do with money - we're only human.