I have read similar books, such as T. Harv Eker’s ‘Secrets of the Millionaire Mind
, Robert T. Kiyosaki’s ‘Rich Dad Poor Dad’
and I tend to like books about cognition. This is the third book, I’ve read on behavioral finance and it has opened up my mind on the biases I might have regarding to investing.
In “Your Money and Your Brain” author Jason Zweig sets out to explain the psychology and neuroscience behind how we think about money. Content wise, this book talks about the different emotions such as greed, prediction, confidence, risk, fear, surprise, regret and happiness and shows us how to curb some of these excessive emotions. Helpfully, each chapter ends with a list of actions you can take to counteract or take advantage of a particular emotion.
How many of us investors actually pay attention to what goes on in our brains when, during and after we invest in a company? “Your Money and Your Brain” delves deep into an investor’s psychology and explains why we feel what we feel at certain times.
According to Zweig, is an emerging field; a hybrid of neuroscience, economics and psychology that can help us understand what drives behavior. Not only on the theoretical or practical level, but as a basic biological function. Because money is so closely tied up with all our biological rewards (you can buy any of them), investing decisions light up a number of primal areas in our brain. The obvious problem of our brains evolving to deal with short term threats like predators rather than long term threats like inflation plays into a number of the issues he discusses. The first point the author hammers home is that while intuition has a legitimate role to play in investing; it should be a subordinate, not dominant role.
The Man with Two Brains
The popular belief that emotional thoughts reside in the “right brain” and while logical reasoning is based in “left brain” isn’t entirely wrong. But the reality is more subtle. While the two kinds of thinking are largely carried out in different areas, right and left have less to do with it than above and below. Early on he introduces the concept of our reflexive and reflective brain dealing with emotions and complex problems respectively. Many of the ideas throughout the book discuss how draw on the duel strengths of our intuition (the reflexive brain) trips us up in investing decisions and Zweig’s advice is to let your analysis (reflective brain) take control by not rushing into any decisions, sleep on the issue and give your reflective system a chance to process it. Both feeling and thinking.
Getting a Grip on Your Greed
Greed, of course, plays a critical role in our financial and investment decisions and Zweig deftly puts greed in a biological context as well. Our brains, apparently, treat potential investment profits as a broad class of basic rewards including food, drink, shelter, safety, sex, drugs, music, pleasant aromas, beautiful faces and even social interactions like trusting someone or pleasing your mother. A financial gain is merely the most modern member of “feel good” experiences.
If greed is on one side of a coin fear would be on the other. And for some strange biological reason we are most often afraid of the least likely dangers and frequently not worried enough about the risks that have the greatest chances of coming back to bite us. Deep within our brain—level with the top of our ears—lies a small almond shaped kind of tissue called the amygdalae. When we confront a potential risk, this part of our reflexive brain acts as an alarm system; generating hot, fast emotions like fear and anger that it shoots up into the reflexive brain like warning flares.
So what does all this tell us about investing or financial planning
? A lot! Understand: as humans we are reflexively afraid of not just physical dangers, but social signals that transmit alarms.
Risk in Real time
If you burn your mouth with hot milk, next time you blow on your yoghurt. – Turkish proverb
My favorite parts are the fascinating experiments that illuminate some aspect of our behavior and the chapter on Risk. For investors and their financial advisors, no question is more obvious, yet also more troublesome, than “How much risk are you comfortable taking?” To get the answer, financial planners and stockbrokers often ask investors to take a so-called risk-tolerance questionnaire.
According to them, it can take as few as a half-dozen questions to figure out “how much risk is right for you”. Based on their answers, they will usually be thrown into one of three buckets: conservative (mostly cash and bonds), moderate (roughly half stocks, half cash and bonds), or aggressive (mostly stocks).
The author envisages the first problem with these questionnaires is that they assume investors already know how much risk they are comfortable with. If they knew that, why would they need to take a quiz? Secondly, they are inconsistent. To an astonishing degree, how much risk you can stand depends on what mood you happen to be in. Five minutes from now – perhaps only a few seconds from now – your emotions may change, and your willingness to take risk may change with it, the author shows as these examples.
Can Happiness Buy Money?
While it’s doubtful that money can buy happiness, happiness can buy money – meaning that many of us go through life getting it exactly backwards. The harder we work to earn more money, the less time we have for exercise and vacations, for our hobbies, for our charities or religion, and for creating memories with our friends and families. It is like activities these, rather than merely making more money, that create lasting happiness. Instead of laboring under the delusion that we would be happy, if we just had a little more money, we should recognize the reality that we might well end up with more money if we just took a little more time to be happy.
Extensively researched, studied and surveyed — Mr. Zweig took part in numerous experiments — this book will give you, new and profound insight into how you think about money. Every serious investor, advisor and planner should read this book, although few will because it offers no get-rich-quick scheme or concrete tips on how to beat the market.
But it’s very readable and funny in parts, and definitely one of the more entertaining investment books to come out in recent memory. Overall, while I found the book interesting.
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Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at firstname.lastname@example.org