What Can We Learn from Neuroeconomics? How the Investing Brain Predicts the Future

In this webcast, Jason Zweig discusses the following:

• The prediction addiction: Why do you think they call it "dopamine?"
• What happens in your brain when your expectations are confirmed — or shattered by surprise

This webcast comprises a 51-minute presentation and an 11-minute question-and-answer session.

Webcast

Daniel Kahneman: Master of the imperfect mind

It isn't often that a psychologist helps explain personal finance, but Daniel Kahneman isn't an ordinary psychologist. In 2002 he won a Nobel Prize in economics for his research into how people confront uncertainty.

Raised in France and Israel and formerly a professor at the Hebrew University of Jerusalem, UC-Berkeley and Princeton, Kahneman has spent half a century studying how the human mind works - or fails to.

Just retired at age 73, Kahneman is now writing a book about decision-making in collaboration with Money Magazine's Jason Zweig. The two recently chatted on the record.

Q. Are people rational?

A. Economists argue that people are rational - that they use all available information to make decisions and that those decisions are consistent over time. Psychologists say that is totally unrealistic. Economists think about what people ought to do. Psychologists watch what they actually do.

Q. Such as?

A. How people respond to a risk depends partly on how it is described. An investment said to have an 80% chance of success sounds far more attractive than one with a 20% chance of failure. The mind can't easily recognize that they are the same.

Full Article

Jason Zweig: Your money and your brain

Fear: What are you afraid of?

Here are two questions that might, at first, seem silly.

1 Which is riskier: a nuclear reactor or sunlight?

2 Which animal is responsible for the greatest number of human deaths in the U.S.? a) Alligator b) Deer c) Snake d) Bear e) Shark

Now let's look at the answers. The worst nuclear accident in history occurred when the reactor at Chernobyl, Ukraine melted down in 1986. Early estimates were that tens of thousands of people might be killed by radiation poisoning. By 2006, however, fewer than 100 had died. Meanwhile, nearly 8,000 Americans are killed every year by skin cancer, commonly caused by overexposure to the sun.

In the typical year, deer are responsible for roughly 130 human fatalities - seven times more than alligators, bears, sharks and snakes combined. Deer, of course, don't attack. Instead, they step in front of cars, causing deadly collisions.

None of this means that nuclear radiation is good for you or that rattlesnakes are harmless. What it does mean is that we are often most afraid of the least likely dangers and frequently not worried enough about the risks that have the greatest chances of coming home to roost.

Full Article

Source: BRKNews

Jason Zweig: 8 ways to tame your brain

Most investors think too much and end up making the wrong moves. Follow these 8 guidelines and make the right ones.

Avoid the "sure thing"

Your "seeking system" is especially turned on by the prospect of a big score, and that in turn will hinder your ability to calculate realistic odds for the success of an investment.

Full Article

Consuelo Mack WealthTrack: September 7, 2007; Whitney Tilson, Jason Zweig, Hersh Cohen

JASON ZWEIG: I don't know that I'm fearful about the outlook for the markets, so much that I'm worried that investors don't really understand their own fears. I think that's the biggest issue here. The way the human brain works, it takes only 1200ths of a second, that's basically a third the length of the time it takes you to blink your eye, for people to register fear, consciously or unconsciously. The sight, the sound, the smell, red colors, arrows pointing downward, stock tickers, and charts going like this. People become fearful, and in the grip of fear, they cannot be rational. They cannot make a logical decision. And even unconscious fear can skew you're judgment and lead you to do something rash that you would never do in a calm moment.

WHITNEY TILSON: We haven't sold any Berkshire, and we continue to buy it and recommend it. It’s the only stock that’s been in their portfolio in almost nine years that we’ve been managing money professionally. So we are big fans, but recently, I'll echo exactly what Hersh said; generally speaking, stick with blue chip companies, strong balance sheets that can crank out growth even in a declining economy, that have a tail wind. Berkshire Hathaway qualifies, McDonald's, one of our top holdings, qualifies. And our largest position is now Target (TGT). It falls into the general category of very high quality, blue chip stocks, and every value guy owns some of them today, be it, Buffett has been buying Burlington Northern, and Johnson & Johnson, and Microsoft. So we think there are a lot of high quality 80-cent dollars out there. But we only own ones where we think there is a catalyst. As I mentioned before, I don't want to own 80-cent dollars --

CONSUELO MACK: And quickly the catalyst for Target is?

WHITNEY TILSON: Like Kraft, a very high quality activist involved, Pershing Square owns nearly 10% of the company. We're close to the situation, and we think there are some ways that Target can unlock some value, and Pershing Square has a great track record also.

Full Article