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Thursday, December 03, 2009

Review: Your Money and Your Brain

Bernstein's latest book spends a bit of time talking about how the emotional aspect of investing is an important one, one that many smart people fall down on. In particular, he mentioned Jason Zweig's book, Your Money and Your Brain as being worthwhile reading on this topic.

The book starts off by discussing the difference between your visceral gut reactions and your thinking, reflective system. This comes into play during the current market turmoil, where many people, despite having had the "buy low" mantra drilled into them, were paralyzed by fear instead, or sold in a panic. Zweig then goes on to discuss various foibles of the human brain.

He starts off with our tendency to remember when we were correct, and forget when we are wrong. Even worse, studies show that we have a tendency to revise our past predictions in retrospect, so our understanding of our own accuracy is suspect. He then goes on to describe how everyone lives in a world where he's better looking, and above average in intelligence. Furthermore, nearly everyone thinks he has a larger amount of risk tolerance than he says he has. He then discusses anchoring and framing, two common short cuts that people use to make decisions---including investment decisions, where they can be particularly dangerous.

This is followed up by chapters on Fear, Surprise, Regret, and finally, Happiness, where the common discussions of happiness are touted (e.g., having a bad commute is one of the worst thing you can do for your peace of mind, and the hedonistic treadmill keeps you from achieving happiness through buying more stuff). None of these will come as a surprise to anyone who's done any reading in recent years, but it's all packaged up very nicely and clearly for an investment audience. What's particularly good are the suggestions on what you can do to overcome your brain's natural tendency to do the wrong thing as far as investing is concerned. (One particularly striking section of the book interviews money managers who have trained themselves to buy whenever they feel like throwing up because of stock market gyrations)


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