Investors' choices often make no logical sense but perfect emotional sense, argues financial journalist Jason Zweig in his new book, Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich. He recently spoke with U.S. News about how to overcome your brain's natural urges and become a better investor.
Why do our brains respond so powerfully to money?
Money taps into the most ancient and powerful emotions that the human brain can experience, and because of that I think a lot of people, when they are making financial decisions, really feel they are thinking and deliberating. What they don't realize a lot of the time is they are really deciding with their emotion.
How can you prevent being knocked off track by your emotions?
Have policies and procedures in place in advance so you don't jump from decision to decision. You shouldn't make your choices based on what the stock market is telling you and based on what other people are doing but rather on the basis of rules you are putting in place in advance. In general, if you buy when most of the news is about how everyone else is selling, you'll probably do much better. A rule that forces you to go against what your emotional brain is telling you is almost a certain way to get better results.
Why are many people convinced they can predict the stock market's moves?
The excitement you feel from thinking you are going to make money is very intense. If you've made some successful bets in the immediate past that have paid off more than once, you will really come to believe that you've got it all figured out. This sensation that I'm hot or I'm on a roll can lead to incredible euphoria. It also can be basically indistinguishable from a form of addiction. If you look at the brain of someone who has gotten a few stocks picks right in a row, it is almost indistinguishable from that of a cocaine addict because the sensation is processed in the brain in almost the same way.
Could there ever be performance-enhancing drugs for investing?
There's no doubt in my mind that perhaps in the next five to 10 years drugs will be developed that could help people be less euphoric when the market is at record highs and less miserable when the market is down in the dumps. The question is whether it would actually be good for people. If you're a professional trader with an investment bank on Wall Street, it might be good for you, and it could conceivably be good for the firm. But for the typical investor, I think you'd be better off going for a walk around the block.