Even prior to reading ‘Your Money and Your Brain’, I had been an avid fan of Jason Zweig and his work. I found his commentaries in the revised version of Benjamin Graham’s investing classic – ‘The Intelligent Investor’ (Harper Collins, 2003) – highly educative and insightful. According to his website www.jasonzweig.com, Zweig is a senior writer for ‘Money’ magazine and a guest columnist for ‘Time’ magazine and cnn.com. In ‘Your Money and Your Brain’, Zweig explains how groundbreaking research in Neuroscience helps explain the vagaries of human behavior and our tendencies to mistake correlation for causality, two or three continuous events for a pattern and other such whims.
Unlike a slew of books on investing available in the market, Jason Zweig’s ‘Your Money and Your Brain’ turns out to be a breed apart. In Zweig’s own words – “Most books on investing are a cruel waste of good trees.” The truth of the matter is that a majority of authors in the market place desperately insist on making investors believe that everything they thought they knew about investing was wrong. Very few attempt to turn the radar on ‘investors’ per se; most are fixated on the techniques and the preaching part.
“Most books on investing are a cruel waste of good trees.” – Jason Zweig
This book, on the contrary, has a definite agenda – to help the readers understand their investing selves better than ever before. To accomplish that, Zweig takes the road less traveled: he leverages neuroeconomics – a blend of Neuroscience, Economics and Psychology – to explain why investors behave the way they do and why even the worst poundings fail to deter the investors from making same mistakes. You can easily make out while reading the book that the author has practically taken pains to understand the mind of an investor. Apparently, Zweig himself became a willing subject of numerous brain-imaging experiments. His observations about the activity in human brain sound mighty convincing and at times, axiomatic, too.
The book has two parts, though the author doesn’t make any ostensible indication as such. The first part comprises the first two chapters – ‘Neuroeconomics’ and ‘Thinking & Feeling’, while the second part has eight chapters. Where the first chapters lays the framework for the rest of the book; the second part dwells upon the emotions that frequently drive investors down the hill and thus has aptly named chapters such as ‘Greed’, ‘Prediction’, ‘Risk’, ‘Fear’, ‘Surprise’, ‘Prediction’, ‘Regret’ and ‘Happiness’. All the chapters are peppered with interesting and enlightening instances that offer rich insights into the prevalent absurdities in the stock-market. One particular example from the second chapter is worth pondering over. In 1999, stock of a company called Mannantech shot up by 368% in the first two days of public listing.
There was no method to this madness, however. It was just that a sea of investors mistook the company for a tech stock, whereas, in reality, it was a nutritional-supplement maker.
Zweig reflects that most financial decisions are a tug of war between the reflective system (analytical) and the reflexive system (emotional) and more times than not, it’s the reflexive system that gets the better of the majority of investors. Zweig not only reinforces Peter Lynch’s advice to own ‘what you know’ but also suggests readers to subscribe to Lynch’s words in totality i.e. Own what you know, only after you have rigorously studied its financial statements. Jason Zweig reiterates the viewpoints of Benjamin Graham and Warren Buffet throughout the book: Intelligent investors should not bank heavily on past success since past is a pale indicator of future success.
Zweig’s exposure to numerous experiments during the research for this book unveils the inconceivable yet prodigious functioning of human brain and the resultant manifestations for investors. For instance, he brings to light the reason behind an uncanny trait of investors – tendency to mistake two-three random events for a pattern. Zweig elaborates that humans are hard-wired to detect patterns and that the zeal to find patterns is so overwhelming that investors put loads of time and energy into it – only to end up with heaps of random variations. He imputes this frenzy to ‘The Interpreter’- an aptly named part of the human brain which, at times, incessantly drives us to search for patterns even when none exist.
I have long known that the market rewards stocks on the basis of future expectations. Little did I know, however, that the market can also punish stocks once the buzz that jacked them up turn into reality. Zweig cites the example of ‘Celera Genomics Group’ whose scrip shot up by nearly 150% on the news of the company working on cracking the human genetic code. But once the news became reality, instead of reaching into stratosphere as many analysts had predicted, the stock plummeted. And there were a host of investors to blame for this predicament of Celera’s stock. Or were they? According to Zweig, the investors were just reacting to myriads of neurons in the ‘nucleus accumbens’ of the brain. Apparently, these neurons fire much less intensely when you have received a reward than they do when you are just expecting it. Do you know what drives your behavior when you have just made a windfall and are now hankering for more? Well, it’s due to a brain chemical called dopamine, which triggers actions if rewards are in sight. Profound! ‘Your Money and Your Brain’ has a whole lot of such revelations. Better still, Zweig also uncovers several interesting, novel concepts such as ‘Narrow framing’, ‘Prediction Addiction’, ‘Jellybean Syndrome’, ‘Safety-Conditioning’, ‘Pascal’s wager’, ‘Ellsberg Paradox’, ‘Endowment effect’, ‘mere-exposure effect’, ‘Denominator blindness’, etc.
Let me reiterate what I did in the beginning of this review. This book is embedded with inestimable wisdom. Anyone who is interested in widening their horizons and developing a broad outlook on the stock markets should read this book. This is a book about investors and about why they do what they do.
Key Takeaways from ‘Your Money and Your Brain’
- The only rule that applies in stock markets is Murphy’s law – Everything that can go wrong will go wrong, but only when you least expect it to.
- Trust your gut but always follow it up with some analysis. Never act on impulse. Buffet waited for 25 years for Anheuser-Busch’s multiple to come down
- In stock-market, everybody knows nothing. The financial markets always humble those who think they can predict it.
- Be circumspect while buying into a company whose single greatest asset is the greed of people who trade its stock.
- Don’t make the mistake of basing your conclusion on small sample of data.
- To reap benefits in the stock market, do the following – control the controllable, trade less frequently, buy yourself low-cost index funds.
- Avoid overconfidence in money-matters. Phenomenal success in one stock can make you think yourself Warren Buffet.
- Zweig has reiterated this one with some emphasis – Always be discreet when it comes to investing into the stocks of the company you work with.
- The harder a task is and the closer the odds of success come to 50/50, the more overconfident we are about our chances.
- Zweig’s message is clear – Learn to say,” I don’t know.” Having confidence in one’s abilities is a good thing and required, too. But, one should also be alert to where the borders of one’s ignorance begin.
- There is no such thing as ‘Fixed Risk Tolerance’. Our emotions change and so does our risk appetite.
- The riskiest moment in stock market is when you’re right. That’s when you are in most trouble, because you tend to overstay the good decisions.
- If you want to make more money than other people, you can’t invest like others.
- Don’t buy/sell under the sway of temporary influences. Sleep over your financial decisions and see whether you view it the same way next morning.
- We are often most afraid of the least likely dangers and frequently, not worried enough about more likely dangers. E.g. people are more afraid of dying in air-crashes (least likely) than in car accidents (more likely).
- Believing that you are fearless is quite different from being fearless. If you haven’t yet tasted failure in the stock-market, don’t delude yourself into thinking that you are fearless.
- When emotions run high, individual brains converge to think almost as one. That’s why they say that stock-markets behave much the same way as investors do.
- Rather than focusing only on the fact that something has changed, concentrate on what has changed.
- Anyone who claims that history proves that young people should put all their money in stocks doesn’t know much about history.