Jason Zweig, author of Your Money and Your Brain, talked to us about how neuroscience and psychology intersect with investing. Before making an investment, consider these brain-related landmines:
Our noggins are big balls of emotion that can also figure out complex mathematical problems. The two components are reflexive and reflective. The reflexive brain is emotional and leaps to conclusions, and this can lead to bad investment decisions. The reflective brain is controlled and empirical and must be switched on.
The prediction addiction. Dopamine (a motivation and reward-related chemical) fires after we get what we want and prepares us for action if it ever happens again. In a similar situation, it’s the prediction of the reward that causes dopamine to fire, not actually getting the reward. This is like a positive earnings surprise. In a third scenario, we predict a reward, dopamine fires, and no reward comes, then we fall into a motivational vacuum, because this is like a negative earnings surprise.
Patterns form fast in the human brain. Expectations set up automatically, and they are much stronger than experience.
Three’s a trend. For example, mutual fund companies tend to advertise funds after their third year of operation. It’s mostly because the number three has a magic feel to it.
Fear responses fire 25 times faster than you can blink your eye. These responses keep us alive, but keep in mind that this reaction is dangerous when it comes to your investments because fear can’t do cost-benefit analysis.
People have trouble understanding two identical scenarios when one is framed as a loss and one is framed as a gain.
We all have unconscious biases--you may be feeling when you think you are thinking.
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