Your Money and Brain: A Guide to Intelligent Investing

chillibreeze writer — Amitesh Jasrotia

Even before reading ‘Your Money and Your Brain’, I was an avid fan of Jason Zweig and his writings. Zweig is a senior writer for the 'Money' magazine and a guest columnist for the 'Time' magazine and cnn.com. I also found his commentaries in the revised version of Benjamin Graham's investing classic – 'The Intelligent Investor' (Harper Collins, 2003) – highly educative and insightful.

In ‘Your Money and Your Brain’, Zweig picks up where he left off in ‘The Intelligent Investor’. The lynchpin of Zweig’s latest book is a new-fangled domain called ‘Neuroeconomics’. He had touched upon Neuroeconomics in one of his commentaries in ‘The Intelligent Investor’ and his latest book appears to be an expansion of the same theme.

Unlike the slew of books on investing that are available in the market, ‘Your Money and Your Brain’ is 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 marketplace desperately insist on making investors believe that everything they thought they knew about investing was wrong. Very few try and attempt to turn the radar on ‘Investors’; most are fixated on the techniques and the preaching part.

This book, on the other hand, has a definite agenda – to help the readers understand their investing selves better than ever before. And 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 investors from making the same mistakes.

While reading the book, you realize that the author has taken great pains to understand the mind of an investor. Zweig himself became a subject to numerous brain-imaging experiments. He has corroborated every inference and observation about the human brain with minute empirical research and scientific data.

Though the author doesn’t make any ostensible indication as such, the book has roughly two parts. The first part comprises of the first two chapters – ‘Neuroeconomics’ and ‘Thinking and Feeling’; the second part has eight chapters.

While the first part lays the framework for the rest of the book; the second dwells upon the emotions that frequently drive investors down the hill. The chapters are thus aptly named as ‘Greed’, ‘Prediction’, ‘Risk’, ‘Fear’, ‘Surprise’, ‘Regret’ and ‘Happiness’.

All the chapters are peppered with interesting and enlightening instances that offer rich insights into the prevalent absurdities of the stock market. One particular example from the second chapter is worth mentioning. In 1999, the stock of a company called Manantech 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 most investors. Zweig reinforces Peter Lynch’s advice to ‘own what you know,’ but at the same time, he suggests that readers 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 several viewpoints of Benjamin Graham and Warren Buffet throughout the book. One that has been repeated many times over is— “Intelligent investors should not bank heavily on past successes, since the 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 the human brain and the resultant manifestations for investors. For instance, he brings to light the reason behind an uncanny trait of investors –the 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 that 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 could also punish your stock once the buzz that jacked it up turns to reality.

Zweig cites the example of the Celera Genomics Group, whose scrip shot up by nearly 150%, based on the news that the company was 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 there?

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 of the stock market should read this book.

This is a book about investors and about why they do what they do. Personally, this book has exceeded my expectations and I would certainly have no second thoughts placing the book right next to ‘The Intelligent Investor’ in my ‘Hall of Fame’ list.

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Out of 5 “chilies”, our editorial team gave this article...

—About our writer:

Amitesh is an avid reader and information-gatherer. His reading interests are confined only to the 'Business' arena. His goal is to read 50 books this year.

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