Neuroeconomics

I’m reading Your Money and Your Brain (How the new science of neuroeconomics can help make you rich) by Jason Zweig.

I’ve been a financial journalist since 1987, and nothing I’ve ever learned about investing has excited me more than the spectacular findings emerging from the study of “neuroeconomics”. Thanks to this newborn field “a hybrid of neuroscience, economics, and psychology” we can begin to understand what drives investing behavior not only on the theoretical or practical level, but as a basic biological function. These flashes of fundamental insight will enable you to see as never before what makes you tick as an investor. – Jason Zweig

In the very first chapter, Mr. Zweig writes about Harry M. Markowitz, winner of Nobel Prize in economics. He won the prize largely for the mathematical breakthrough that he had been incapable of applying to his own investing portfolio. Really, it’s by far easier to teach, than to do. No offense to teachers.

A few other interesting observations:

  • People who keep up with the news about their stocks earn lower returns than those who pay almost no attention.
  • “Professional” investors, on average, do not outperform “amateurs”.
  • The neural activity of someone whose investments are making money is indistinguishable from that of someone who is high on cocaine or morphine.
  • After two repititions of a stimulus – like, say, a stock price that goes up one penny twice in a row – the human brain automatically, unconsciously, and uncontrollably expects a third repetions.
  • Expecting both good and bad events is often more intense than experiencing them.

This is just the beginning, and I’m already starting to understand, that to actively trade stocks successfully, one has to fight a lot of subconscious responses deep in the brain. Essentially, the task is to fight our human nature.

That’s what a lot of people like about Technical Analysis (TA). It removes all or most of emotions out of making decisions. I’m finding TA extremely useful. I’m much less emotional in my trading, but still impatient.

I’m concentrating on learning more about myself and about TA. Both help control impulses in trading and investing.

Will return to posting my P&L numbers at the end of May. It’s been a bit over a year since I started trading and investing, so a summary might be interesting. Oh, the suspense! Am I winning or losing?

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