Posts Tagged ‘jason zweig’

Your Money and Your Brain: Jason Zweig: Book Review

November 30, 2008

 

Your Money and Your Brain

Your Money and Your Brain

I have an interest in investing and psychology so this book was perfect! Jason Zweig’s Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich
is an excellent book if you are interested in why we behave in certain ways when it comes to money. Here are some of the sections I found interesting: 

 

  • We are human and the emotional parts of our brain cause us to do things that we even say we wouldn’t do. For example, you know you should buy low and sell high, so why do we bail out when the shares drop on a company we know is fundamentally good? why do we panic sell? why do we still think we can beat the market? The book focuses on educating us in the areas where our human brains focus on survival, reward and avoid risk. These are evolutional impulses we cannot just logically avoid. 
     
  • A monetary loss or gain actually has a physical effect on the body and brain. You are not just rational thought. 
     
  • The neural activity of someone whose investments are making money is indistinguishable from someone who is high on cocaine
     
  • After 2 repetitions of a stimulus e.g. a stock price rises twice, the human brain automatically expects a third repetition. 
     
  • Financial losses are processed in the same area of the brain that responds to mortal danger
     
  • Anticipating a gain and actually receiving it, are expressed in entirely different ways in the brain, helping to explain why money doesn’t buy happiness
     
  • Many investors fixate on the numbers that change the most i.e. daily fluctuations as opposed to the long term growth of their wealth which is where the significant gain may be
     
  • Zweig compares the market strategists, financial analysts and investment experts of today with the soothsayers of ancient history. They both claim to tell the future by “clear signs” – liver spots versus unemployment rates, new products, company launches. Randomness rules the markets and people cannot beat it consistently. 
     
  • So how do you react to this? Control the controllable i.e. your expectations, your exposure to risk, your readiness in the market, your expenses, your commissions, your behaviour…but don’t expect to control the market. Learn what works by tracking what doesn’t. Embrace your mistakes. Keep asking why and find out reasons why things are recommended. 
     
  • Positive thinking can be useful but over-optimism is dangerous. Don’t put too much trust in what is familiar e.g. putting all your super stocks into your own company. You might think it is safe, but so did the employees of Enron. We have an illusion of control if we are involved in something, but this is not true. Exposure makes something more attractive and easier to invest in, even if you have just heard the name and know nothing about the company. 
     
  • Risk tolerance is affected by  framing e.g. this stock has a 20% chance of falling will have less investment than one that has an 80% chance of rising. Beware of how investments are described and turn them on their heads before you make a decision. 
     
  • Keep an eye on your managed funds. You can move a percentage around to other asset classes. This may be your main future income so you should manage it actively. A study found 73% of people made zero changes in asset allocation over the life of a managed fund. 
     
  • Regression to the mean. Extreme growth carries the seed of its own destruction. Sooner or later, a stock or fund that performs much higher than average will crash or have a bad year. It will have to return to the mean.  
     
  • Top tips: Take the global view. Hope for the best, expect the worst. Investigate, then invest. Never say always. Know what you don’t know. The past is not prologue – don’t just buy because a stock has always gone up. Weigh what the experts say. If it sounds too good to be true, it probably is. Costs are killers – watch your fees/commissions. Eggs go splat so diversify. 

I recommend buying this book if only for the Appendixes which are packed with handy advice. This book could save you a LOT of money. You can buy it from Amazon Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich
and you can also find Jason at his website JasonZweig.com which has a huge resources page for investors, articles and information. Learn more and look after your money!
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