Your Money and Your Brain (eBook)

CHAPTER ONE

Neuroeconomics

BRAIN, n. An apparatus with which we think that we think.

-- Ambrose Bierce

'How could I have been such an idiot?' If you've never yelled that sentence at yourself in a fury, you're not an investor. There may be nothing across the entire spectrum of human endeavor that makes so many smart people feel so stupid as investing does. That's why I've set out to explain, in terms any investor can understand, what goes on inside your brain when you make decisions about money. To get the best use out of any tool or machine, it helps to know at least a little about how it works, you will never maximize your wealth unless you can optimize your mind. Fortunately, over the past few years, scientists have made stunning discoveries about the ways the human brain evaluates rewards, sizes up risks, and calculates probabilities. With the wonders of imaging technology, we can now observe the precise neural circuitry that switches on and off in your brain when you invest.

I've been a financial journalist since 1987, and nothing I've ever learned about investing has excited me more than the spectacular findings emerging from the study of 'neuroeconomics.' Thanks to this newborn field -- a hybrid of neuroscience, economics, and psychology -- we can begin to understand what drives investing behavior not only on the theoretical or practical level, but as a basic biological function. These flashes of fundamental insight will enable you to see as never before what makes you tick as an investor.

On this ultimate quest for financial self-knowledge, I'll take you inside laboratories run by some of the world's leading neuroeconomists and describe their fascinating experiments firsthand, since I've had my own brain studied again and again by these researchers. (The scientific consensus on my cranium is simple: It's a mess in there.)

The newest findings in neuroeconomics suggest that much of what we've been told about investing is wrong. In theory, the more we learn about our investments, and the harder we work at understanding them, the more money we will make. Economists have long insisted that investors know what they want, understand the tradeoff between risk and reward, and use information logically to pursue their goals.

You're not alone. Like dieters lurching from Pritikin to Atkins to South Beach and ending up at least as heavy as they started, investors habitually are their own worst enemies, even when they know better.