Thinking back to our high school or college economics classes, most of us probably learned that when it comes to making economic decisions, humans can be trusted to act rationally. We carefully weigh available information, think through the probabilities, and make our decisions based strictly on cold, hard logic.
The truth, as it turns out, is a bit more complicated. Our brains can be our own worst enemies, throwing up roadblocks to smart decision-making and clouding our ability to think clearly. Emotions do come into play when we’re thinking about money, and operating as if they don’t could you leave you poorer without really understanding why.
Luckily, we can arm ourselves with knowledge about how our brains sometime trick us into making bad decisions, and hopefully use that information to battle back against our own worst impulses. Jason Zweig’s book, Your Money and Your Brain, will help you do just that.
One of the earliest books published on the topic of neuroeconomics (which combines the fields of neuroscience, economics, and psychology), Zweig’s book reads like a road map to your brain’s dirty tricks. To quote him, “… you will never maximize your wealth unless you can optimize your mind.”
Zweig organizes his book around topics most investors are familiar with: greed, prediction, confidence, risk, fear, surprise, regret and happiness. He then takes us inside the neural pathways that are connected to these, and the different parts of the brain that are stimulated, and explains why. It’s eye opening, to say the least.
When you realize, for instance, that the pain from a loss is actually much greater than the pleasure you get from a gain, you can begin to take steps to limit your own reactions. You’ll never completely rid yourself of these emotions (and he argues that would be just as damaging to your returns), but knowing why you’re thinking and feeling the way you are will give you a real advantage. Zweig provides actionable steps at the end of each chapter for how to keep your brain in check.
Quoting him again, “When you win, los, or risk money, you stir up some of the most profound emotions a human being can ever feel.” Taking the steps necessary to learn how your emotions interact with and interfere with your decision-making will undoubtedly enlighten you, and may just enrich you, as well.
— LouAnn Lofton, firstname.lastname@example.org