From the September 01, 2008 issue of Futures Magazine • Subscribe!

Your Money and Your Brain: How The New Science Of Neuroeconomics Can Help Make You Rich

By Jason Zweig

Published by Simon & Schuster

340 pages, $26.00

Among the conclusions: we humans impose order on random events; we get more fixated on the size of a reward, such as a lottery, than on the improbable odds of hitting it. The anticipation of a score gets our heart racing more than the actual realization of it. Dopamine, our internal feel-good drug, pumps through us when we collect a risky payoff, but there’s no corresponding rush when prizes are expected, however huge. We also overestimate our abilities. Such are not the best ingredients for market success.

In ancient times, snap decisions drawn from scant visual evidence might have given the hunter a jump on his prey. Fast-forward to modern times, however, and the same skill sabotages an investor perceiving a market “code” he’s derived from a mere single recurrence. This distortion of earlier survival techniques is something that makes us even dumber than lab animals in some respects. Subjects are informed that a red and green light will randomly alternate flashes, but overall the green will hit an average of four out of five times. The rats know to keep striking the green lever ensuring an 80% reward ratio, but humans like to get fancy by guessing when the red will hit. Such desire for play, or an assertion of control, reduces the odds to 67%.

If you’ve ever been interested in the old college psych experiments and the surprising things they revealed, you’ll get a charge out of this. Having illuminated our investment-related glitches, Zwieg then offers a myriad of ways to counter them. Perhaps not everything he outlines is earth-shatteringly original, but even the well-worn axioms seem to acquire a fresh significance when placed in a scientific context.

This book is 180 degrees afield from the unsubstantiated armchair philosophy you find in too many similar works. Zwieg offers problems, solutions, and even photos of his own brain centers lighting up during his speculative activity. You can’t put yourself much more on the line than that!

Art Collins is the author of “Beating the Financial Futures Market: Combining Small Biases Into Powerful Money Making Strategies.”

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