Our Unconscious Investing Brains

By Dian Vujovich

Jason Zweig is an author, Wall Street Journal columnist and behavioral finance expert. His latest book is about neuroeconomics, i.e., how our brains respond to life situations—like playing the market. Its title, “Your Money and Your Brain”, says it all.

Morningstar’s Christine Benz interviewed Zweig recently. Because all of us need as much help as we can get when it comes to making money via our stock or bond investments what follows are bits and pieces from that interview:

• According to Zweig, in neuroeconomics it’s our brain functions that are looked at and from that vantage point pros are then able to see how different activities impact various parts of our brains and relate that info to circumstances and our behavior.

For example, neuroeconomic experiments can see parts of our brain that are associated with pain or disgust as well as show us which parts light up when we lose money.

• In The Journal of Finance, a survey taken a few years ago studied how the professionals who pick money managers for pension funds went about choosing them. What was discovered was that the pickers tended to invest in managers who had the best performance for the past three years and fire those with the worst three-year performance records.

Makes sense but the study showed if that decision were flipped the performance results would have been better. “Performance-chasing, despite all the propaganda you hear in the financial industry, is not purely the province of retail investors. It’s not the so-called “dumb money” on Main Street that buys high and sells low. Everyone does it,” says Zweig.

•During a “learning without awareness” experiment at Emory University, Zweig learned that functions in our brains allow us to recognize patters when we’re not even aware of doing so. “Most of us don’t realize how automatic it is, and at what an involuntary level it occurs. So a lot of the trading behavior and what we might call “Cramer-like” behavior, where people see something happen two or three times in a row and just assume it’s going to happen again, that sort of thing goes on in your brain whether you want it to or not..,” he adds.

” That sort of thing goes on all the time in the financial markets. And individual investors do it, and financial advisors too do it, without realizing it. You may end up investing more in a particular stock because you saw the CEO on TV and his necktie was your favorite color. It sounds absurd to think that people would make financial decisions based on irrelevant factors like that but they do. And the reason they do is that things like colors and sounds and smells and tastes and associations with our past and with ourselves increase our comfort and familiarity with a frightening world….”

Read the full interview at http://tinyurl.com/yjg2vkv . You’ll be smarter for it. Then pick up his book. It’s a fascinating read.