Your Brain On Money
We now know a lot about how decision-making occurs within the brain. For example, we know that the pleasure centres of the brain are stimulated when you engage in pleasurable activities. We also know that the same centres that are stimulated by cocaine are stimulated from financial gain.
It is the same circuitry. Dopamine gets released [with cocaine ingestion] … Neuroscientists have measured this exact same circuitry when people are given a monetary reward.
How does that affect investor decision making?
If you’ve made money for a very long time, it’s as if you’ve been on drugs. You become more relaxed, you become more optimistic, you become less risk-averse. In exactly the same way that drugs can lead you to decisions that are bad for your health, financial reward over an extended period of time can have the same kind of hallucinogenic effects.
So the deeper into the bubble we got, the more likely it was that people would not take the necessary precautions to safeguard capital?
Right. Very often when bubbles grow, toward the end they expand exponentially fast. It’s because it’s a reinforcing, vicious cycle. The more you make, the more risks you’re willing to take. Frankly, that’s one of the reasons why Bernie Madoff’s [alleged scheme] grew so fast. Once a Ponzi scheme gets going, it grows just by the weight of its own apparent profitability.
Given all this, what’s your forecast for the markets?
Probably, the turnaround will occur in the third or fourth quarter. That’s when we’ll see the first glimmer of investors returning to a new normal. The first half of this year, people are still going to be clinging to their [Treasury bills] and stuffing money into their mattresses. Until the new administration has a clear plan of action, we won’t be able to restore calm in the minds of investors. Once it becomes clear that it’s starting to work, then we will see capital markets unfreezing.