Zweig, Jason. Your Money and Your Braine
.pdfcomfortable losing at least that much money in a three-month period.
•Find out how fast the fund's total net assets have been growing. Funds tend to perform better when they have a few hundred million dollars to manage than when they have tens of billions of dollars.
•Ask whether the fund has ever "closed to new investors" to prevent a rapid inflow of new shareholders from making the fund grow too big too fast. You should favor funds that have closed in the past.
•Read the letter to shareholders from the manager. Good signs: The manager admits he has made a mistake, warns that future performance may not be as good, and urges investors to be patient. Bad signs: He brags about how fast the fund is growing, how high the recent returns have been, or how great the future looks.
•Realize that "average annual total return," even over a ten-year period, can be driven by a short stroke of good luck. Check the return over each calendar year as well, to see how consistently the fund has performed.
•Remember that you always can—and probably should—buy an index fund, a portfolio that owns every stock in a market benchmark like the Standard & Poor's 500-stock index. Because index funds operate at a fraction of the cost of other funds, they should be your default choice.
Don't:
•Buy a fund just because it's been hot lately.
•Invest just because you saw the manager on TV and he sounded smart.
•Consider any fund unless its annual expenses are lower than these thresholds: –government bond fund, 0.75%
–blue-chip U.S. stock fund, 1.00% –small-stock or high-yield bond fund, 1.25% –foreign stock fund, 1.50%.
•Think you need a "specialty" or "sector" fund that specializes in stocks of the industry you work in. Your career is already riding on that industry; your money should be elsewhere, to spread your risks.
•Purchase a fund unless you're willing to own it for at least five years.
Appendix 3
Investment Policy Statement for John and Jane Doe
PURPOSE OF PORTFOLIO
To provide steady growth of capital and at least $__________ in annual income after inflation and taxes, enabling us to provide for our needs now and after retirement.
EXPECTATIONS
The average annual return on stocks is roughly 7 percent after inflation. After tax, it is about 5 percent; after trading and management fees, it is less than 4 percent. Long-term returns much higher than that are not sustainable. If we want to have more, we will have to save more.
TIME HORIZON
We understand that short-term drops in the price of individual investments can be sudden, severe, and upsetting. But we are committed to focusing on the permanent growth of our entire portfolio, rather than fixating on temporary declines of isolated investments. Since we intend this portfolio to last the rest of our lives, and we then intend to bequeath it to our children, our investment horizon is 50 to 100 years. How our investments behave in the days to come matters much less than how we behave as investors in the decades to come.
DIVERSIFICATION STRATEGY
Our portfolio will consist of cash, individual stocks or bonds, and mutual funds. We will diversify broadly across the following asset classes: cash (bank accounts and money-market funds), bonds, U.S. stocks, foreign stocks, real estate securities (such as REITs), and hedges against inflation (such as Treasury Inflation-Protected Securities or TIPS).
REBALANCING
We will set "target allocations" for each of these asset classes (for example, 10% in cash, 10% in bonds, 40% in U.S. stocks, 30% in foreign stocks, 5% in real estate and 5% in TIPS). Every six months—on January 1 and July 1—we will rebalance back to those targets by selling whatever has gone up and buying whatever has gone down.
EVALUATION OF PERFORMANCE
We will compare the parts of our portfolio against appropriate performance benchmarks (for example, the Wilshire 5000 index for U.S. stocks, the Lehman Bros. U.S. bond aggregate index for bonds). We will look at the performance of individual investments only after calculating the total return of our entire portfolio and the return of each broad asset class.
FREQUENCY OF EVALUATION
We will evaluate investment performance every three months, comparing the total value of our portfolio against its value three months, one year, three years, five years, and ten years earlier. At least once a year, we will seek to cut our investing costs by preparing an itemized statement of our total expenses, including all brokerage charges, management fees, and taxes on dividends and capital gains. Short-term trading raises both our brokerage expenses and our tax bill; the less we trade, the more we will keep.
ADDING AND SUBTRACTING
We will add more money to our accounts, in proportion to our target allocations, whenever we have spare cash to invest. When we withdraw money, we will take it first from the cash account. If we have to take money out of stock or bond accounts, we will first make sure we have minimized the tax consequences of any withdrawal. In retirement, when this portfolio may be our primary means of support, we will not withdraw more than ________% of the account value annually.
WE WILL NEVER…
…put more than 10 percent of our total assets into a single stock, buy any investment solely because its price has gone up, sell any investment solely because its price has gone down, trade futures or options, trade with borrowed money ("margin"), trade on "tips" or "hunches," or respond to unsolicited investing
e-mails.
This IPS is a simplified sample for illustration purposes only. Each investor should customize an IPS based on his or her goals and needs.
Notes
Abbreviations
AER American Economic Review
ANYAS Annals of the New York Academy of Sciences AP American Psychologist
APMR Archives of Physical Medicine and Rehabilitation
BHJDM Derek J. Koehler and Nigel Harvey, Blackwell Handbook of Judgment and Decision Making
(Oxford, U.K.: Blackwell Publishing, 2004)
BP Biological Psychiatry CB Current Biology
CC Cerebral Cortex
CDPS Current Directions in Psychological Science C&E Cognition and Emotion
CNE Richard D. Lane and Lynn Nadel, eds., Cognitive Neuroscience of Emotion (Oxford: Oxford University Press, 2000)
COIN Current Opinion in Neurobiology
EJN European Journal of Neuroscience FAJ Financial Analysts Journal
HAB Thomas Gilovich et al., Heuristics and Biases (Cambridge, U.K.: Cambridge University Press, 2002)
IJF International Journal of Forecasting JAP Journal of Applied Psychology
JASP Journal of Applied Social Psychology JB Journal of Business
JBDM Journal of Behavioral Decision Making
JBF Journal of Behavioral Finance (formerly Journal of Psychology and Financial Markets) JCN Journal of Cognitive Neuroscience
JCR Journal of Consumer Research
JEAB Journal of the Experimental Analysis of Behavior
JEBO Journal of Economic Behavior and Organization JESP Journal of Experimental Social Psychology
JEP Journal of Experimental Psychology (General)
JEPHLM Journal of Experimental Psychology: Human Learning and Memory JEPHPP Journal of Experimental Psychology: Human Perception & Performance JF Journal of Finance
JFE Journal of Financial Economics JN Journal of Neuroscience
JOHS Journal of Happiness Studies
JPE Journal of Political Economy JPM Journal of Portfolio Management
JPSP Journal of Personality and Social Psychology JRU Journal of Risk and Uncertainty
JUU Daniel Kahneman et al., eds., Judgment under Uncertainty (Cambridge, U.K.: Cambridge University Press, 1982)
JZ Jason Zweig
MM Money (articles by Jason Zweig are archived and freely available at www.jasonzweig.com)
MS Management Science
NBER National Bureau of Economic Research
NNS Nature Neuroscience
NRN Nature Reviews Neuroscience NYT New York Times
OBHDP Organizational Behavior and Human Decision Processes (formerly Organizational Behavior and Human Performance)
PB Psychological Bulletin
PNAS Proceedings of the National Academy of the Sciences PR Psychological Review
PRSLB Proceedings of the Royal Society of London B: Biological Sciences PS Psychological Science
PSPB Personality and Social Psychology Bulletin
PTRSLB Philosophical Transactions of the Royal Society of London B: Biological Sciences QJE Quarterly Journal of Economics
RA Risk Analysis
RFS Review of Financial Studies SA Scientific American
SIR Social Indicators Research
TAD George Loewenstein et al., eds., Time and Decision (New York: Russell Sage Foundation, 2003)
TICS Trends in Cognitive Sciences
T II Benjamin Graham with Jason Zweig, The Intelligent Investor (New York: HarperBusiness, 2003) W-B Daniel Kahneman et al., eds., Well-Being (New York: Russell Sage Foundation, 1999)
WSJ Wall Street Journal
1. NEUROECONOMICS
BRAIN, n.: Ambrose Bierce, The Devil's Dictionary (New York: Hill & Wang, 1957), p. 19.
An investor I'll call: JZ interview with "Ed," Nov. 13, 2004.
In the 1950s: JZ, "How the Big Brains Invest at TIAA-CREF," MM, Jan. 1998, p. 118.
Jack and Anna Hurst: JZ interview with Hurst, Nov. 12, 2004; JZ, "The Soul of an Investor," MM, March 2005, pp. 66–71.
Financial" decision-making": Remarks by Daniel Kahneman, panel discussion moderated by JZ, Oxford Programme on Investment Decision-Making, Saпd Business School, Oxford University, U.K. Oct. 22, 2004.
Most of all: "Adam Smith," The Money Game (New York: Random House, 1968), p. 41.
2. "THINKING" AND "FEELING"
It" is necessary to know": Benedict de Spinoza, On the Improvement of the Understanding, The Ethics, and Correspondence (New York: Dover, 1955), p. 200 (The Ethics, Part IV, Proposition 17).
Not long ago: To protect his identity, I have changed the doctor's name; but the story is true. In related research, psychologists have shown that people are much more likely to buy consumer products whose brands contain the same letters as their own names. Even more remarkably, people are more inclined to marry someone whose initials are the same as their own. See John T. Jones et al., "How Do I Love Thee? Let Me Count the Js…," JPSP, vol. 87, no. 5 (Nov. 2004), pp. 665–83; Michael J. Cooper, Orlin Dimitrov, and P. Raghavendra Rau, "A Rose.com by Any Other Name," JF, vol. 56, no. 6 (Dec. 2001), pp. 2371–88; Gregory W. Brown and Jay C. Hartzell, "Market Reaction to Public Information," JFE, vol.
60, nos. 2–3 (May/June 2001), pp. 333–70; JZ e-mail interview with Gregory Brown, Nov. 15, 2001; Yahoo! Finance message board for KKD, Oct. 2, 2002 (message number 59863), and July 15, 2003 (message number 69986).
Nor is this kind: Robert A. Olsen, "Professional Investors as Naturalistic Decision Makers: Evidence and Market Implications," JBF, vol. 3, no. 3 (2002), pp. 161–67; Malcolm Gladwell, "Blowing Up," The New Yorker, April 22–29, 2002, p. 162; Malcolm Gladwell, Blink (New York: Little, Brown, 2005), p. 14.
Psychologists call this process: For more on anchoring, see Gary Belsky and Thomas Gilovich, Why Smart People Make Big Money Mistakes and How to Correct Them (New York: Fireside, 1999), pp. 129–49; Gretchen B. Chapman and Eric J. Johnson, "Incorporating the Irrelevant," in HAB, pp. 120–38; Nicholas Epley and Thomas Gilovich, "Putting Adjustment Back in the Anchoring and Adjustment Heuristic," in HAB, pp. 139–49.
But your intuition: Amos Tversky and Daniel Kahneman, "Judgment Under Uncertainty," in JUU, pp. 3–20; J. Edward Russo and Paul J. H. Schoemaker, Decision Traps (New York: Simon & Schuster, 1989), pp. 90–91. Tversky died in 1996 and would have shared Kahneman's 2002 Nobel Prize in Economics. At the time of the original experiment, approximately 30% of U.N. members were African countries.
A candy bar: Adapted from Daniel Kahneman and Shane Frederick, "Representativeness Revisited," in HAB, pp. 49–81.
You can correctly solve: Lieberman credits Jean-Paul Sartre with coining the terms "reflexive" and "reflective" in the existentialist essay The Transcendence of the Ego (1936–37). Matthew Lieberman, "Reflective and Reflexive Judgment Processes," in Joseph P. Forgas et al., Social Judgments (New York: Cambridge University Press, 2003), pp. 44–67; Matthew Lieberman et al., "Reflection and Reflexion,"
Advances in Experimental Social Psychology, vol. 34 (2002), pp. 199–249; remarks by Daniel Kahneman, panel discussion moderated by JZ, Oxford Programme on Investment Decision-Making, Saпd Business School, Oxford University, U.K., Oct. 22, 2004. Not all neuroscientists agree that the brain uses discrete systems to process reason and emotion; for a compelling statement of the dissenting view, see Paul W. Glimcher et al., "Physiological Utility Theory and the Neuroeconomics of Choice," Games and Economic Behavior, vol. 52 (2005), pp. 213–56.
All mammals: The term limbic comes from the Latin limbus, which means "edge" or "border" or "transitional state" (as in limbo, the no-man's-land between heaven and hell in Catholic theology); Raymond J. Dolan, "Emotion, Cognition, and Behavior," Science, vol. 298 (Nov. 8, 2002), pp. 1191–94.
That enables us: JZ e-mail interview with Dukas, March 24, 2005; Reuven Dukas, "Behavioural and Ecological Consequences of Limited Attention," PTRSLB, vol. 357 (2002), pp. 1539–47; Reuven Dukas, "Causes and Consequences of Limited Attention," Brain, Behavior and Evolution, vol. 63 (2004), pp. 197–210; Reuven Dukas and Alan C. Kamil, "Limited Attention," Behavioral Ecology, vol. 12, no. 2 (2001), pp. 192–99; Marcus E. Raichle and Debra A. Gusnard, "Appraising the Brain's Energy Budget," PNAS, vol. 99, no. 16 (Aug. 6, 2002), pp. 10237–39; JZ interview with Matthew Lieberman, March 29, 2005.
But the moment anything: Arne Цhman et al., "Unconscious Emotion," in CNE, pp. 296–327; JZ telephone interview with Paul Slovic, Feb. 3, 2005. 16 Economist Colin Camerer: JZ telephone interview with Colin Camerer, April 6, 2005.
But there's more: JZ, "Are You Wired for Wealth?" MM, Oct. 2002, p. 79; JZ interview with Matthew Lieberman, March 29, 2005; Stanislas Dehaene, "Arithmetic and the Brain," COIN, vol. 14 (2004), pp. 218–24; Mark Jung-Beeman et al., "Neural Activity When People Solve Verbal Problems with Insight," PLoS Biology, vol. 2, no. 4 (April 2004), pp. 500–10.
Jordan Grafman has shown: Marian Gomez-Beldarrain et al., "Patients with Right Frontal Lesions Are Unable to Assess and Use Advice to Make Predictive Judgments," JCN, vol. 16, no. 1 (Jan. 2004), pp. 74–89; JZ e-mail interview with Grafman, March 24, 2005; Baba Shiv and Alexander Fedorikhin, "Heart and Mind in Conflict," JCR, vol. 26, no. 3 (Dec. 1999), pp. 278–92.
But the reflective brain: Robin M. Hogarth, "Deciding Analytically or Trusting Your Intuition?" (Oct. 2002), www.econ.upf.edu/eng/research/onepaper. php?id=654.
Computational neuroscientists: JZ e-mail interview with Nathaniel Daw, March 25, 2005.
When a problem is hard: Hillel J. Einhorn and Robin M. Hogarth, "Confidence in Judgment," PR, vol. 85 (1978), pp. 395–416.
And the human mind: Susan T. Fiske and Shelley E. Taylor, Social Cognition (Reading, Mass.: AddisonWesley, 1984).
The conflict between: Veronika Denes-Raj and Seymour Epstein, "Conflict Between Intuitive and Rational Processing," JPSP, vol. 66, no. 5 (1994), pp. 819–29.
In the late 1980s: Paul B. Andreassen, "On the Social Psychology of the Stock Market," JPSP, vol. 53, no. 3 (1987), pp. 490–96; "Explaining the Price-Volume Relationship," OBHDP, vol. 41 (1988), pp. 371–89; and "Judgmental Extrapolation and Market Overreaction," JBDM, vol. 3 (1990), pp. 153–74.
Investment professionals: Noel Capon et al., "An Individual Level Analysis of the Mutual Fund Investment Decision," Journal of Financial Services Research, vol. 10 (1996), pp. 59–82; Investment Company Institute, Understanding Shareholders' Use of Information and Advisers (Washington, D.C. 1997), p. 21; Ronald T. Wilcox, "Bargain Hunting or Star Gazing?" JB, vol. 76, no. 4 (Oct. 2003), pp. 645–63; Michael A. Jones, Vance P. Lesseig, and Thomas I. Smythe, "Financial Advisors and Mutual Fund Selection," JFP (March 2005), www.fpanet.org/journal/articles/2005_ Issues/jfp0305-art8.cfm.
When it comes to trust: JZ interview with Fred Kobrick, portfolio manager, MetLife State Street Capital Appreciation Fund, July 1, 1993; JZ telephone interview with Robin Hogarth, March 17, 2005.
Know when reflex will rule: JZ telephone interview with Paul Slovic, Feb. 3, 2005; JZ, "What Fund Investors Really Need to Know," MM, June 2002, pp. 110–15.
Ask another question: Daniel Kahneman, "Maps of Bounded Rationality," http://nobelprize.org /economics/laureates/2002/kahnemann-lecture.pdf; JZ telephone interview with Christopher K. H see, Oct. 22, 2001.
Motion imparts a power: J.Y. Lettvin et al., "What the Frog's Eye Tells the Frog's Brain," Proceedings of the Institute for Radio Engineers, vol. 47 (1959), pp. 1940–51, http://jerome.lettvin.info/lettvin/Jerome /WhatThe FrogsEyeTellsThe FrogsBrain.pdf; Michael W. Morris et al., "Metaphors and the Market," OBHDP, vol. 102, no. 2 (2007), pp. 174–92.
Only fools: Patricia Dreyfus, "Investment Analysis in Two Easy Lessons," MM, July 1976, p. 37. 28 Count to ten: Piotr Winkielman et al., "Unconscious Affective Reactions to Masked Happy Versus Angry Faces Influence Consumption Behavior and Judgments of Value," PSPB, vol. 31, no. 1 (Jan. 2005), pp. 121–35; JZ telephone interview with Winkielman, April 19, 2005; JZ telephone interview with Schwarz, April 20, 2005.
Nearly all of us: David Hirshleifer and Tyler Shumway, "Good Day Sunshine," JF, vol. 58, no. 3 (June 2003), pp. 1009–32; Ralf Runde, "Lunar Cycles and Capital Markets: An Empirical Analysis of the Moon and German Stock Returns," working paper, University of Dortmund, 2000; Ilia D. Dichev and Troy D.
Janes, "Lunar Cycle Effects in Stock Returns," http://ssrn.com/abstract=281665; Mark Kamstra et al., "Winter Blues: A SAD Stock Market Cycle," www.frbatlanta.org/filelegacydocs/wp0213.pdf; Alex Edmans, Diego Garcia, and Oyvind Norli, "Sports Sentiment and Stock Returns" (Nov. 2005), http://ssrn.com/abstract=677103.
Companies can exploit: Adam L. Alter and Daniel Oppenheimer, "Predicting Short-Term Stock Fluctuations by Using Processing Fluency," PNAS, vol. 103, no. 24 (June 13, 2006), pp. 8907–8; Alex Head et al., "Would a Stock by Any Other Ticker Smell as Sweet?" www.economics.pomona.edu/GarySmith/ frames/GaryFrameset.html.
So unless you guard: Ronald S. Friedman and Jens Fцrster, "The Effects of Approach and Avoidance Motor Actions on the Elements of Creative Insight," JPSP, vol. 79 (2000), pp. 477–92; John T. Cacioppo et al., "Rudimentary Determinants of Attitudes II," JPSP, vol. 65, no. 1 (1993), pp. 5–17; JZ telephone interview with Meir Statman, April 12, 2005.
When the market blinks": Adrienne Carter, "Investing with Style—Any Style," BusinessWeek, Feb. 7, 2005; Warren Buffett, remarks at Berkshire Hathaway Inc. annual meeting, April 30, 2005.
Stocks have prices: Michael S. Rashes, "Massively Confused Investors Making Conspicuously Ignorant Choices (MCI-MCIC)," JF, vol. 56, no. 5 (Oct. 2001), pp. 1911–27; "In Mannatech IPO, Tech Craze Formally Surpasses Tulips," Investment Dealers' Digest, Feb. 22, 1999, pp. 6–7; Warren Buffett, speech to University of Tennessee College of Business Administration (2003; videotape kindly provided to JZ by Al Auxier); Claudia Goldin and Cecilia Rouse, "Orchestrating Impartiality," (Jan. 1997), www.nber.org/ papers/w5903; Malcolm Gladwell, Blink (New York: Little, Brown, 2005), pp. 245–48; JZ telephone interview with Buffett, May 5, 2005.
Take account: Remarks by Daniel Kahneman, panel discussion moderated by JZ, Oxford Programme on Investment Decision-Making, Saпd Business School, Oxford University, U.K., Oct. 22, 2004.
3. GREED
He that loveth: Ecclesiastes 5: 10.
Laurie Zink: JZ interviews with Zink, Jan. 19 and Mar. 30, 2005; the odds of winning the grand prize in California's SuperLotto Plus game are posted at www.calottery.com/Games/SuperLottoPlus/HowtoPlay/. Data on Ohio winners: Charles T. Clotfelter and Philip J. Cook, Selling Hope (Cambridge, Mass.: Harvard University Press, 1991), p. 122.
Of course, you don't have: Hans C. Breiter et al., "Imaging the Neural Systems for Motivated Behavior and Their Dysfunction in Neuropsychiatric Illness," in Thomas S. Deisboeck and J. Yasha Kresh, eds., Complex Systems Science in Biomedicine (New York: Springer, 2006), pp. 763–810; JZ telephone interview with P. Read Montague, June 1, 2005; Brooks King-Casas et al., "Getting to Know You," Science, vol. 308 (April 1, 2005), pp. 78–83; JZ e-mail interview with Peter Kirsch, Feb. 4, 2005; Peter Kirsch et al., "Anticipation of Reward in a Nonaversive Differential Conditioning Paradigm and the Brain Reward System," NeuroImage, vol. 20 (2003), pp. 1086–95.
Long before neuroeconomists: Mark Twain, Roughing It (Berkeley, Calif.: University of California Press, 1993), pp. 258–70; Twain's "The $30,000 Bequest" can be read in a handsome online edition at www2.hn.psu.edu/ faculty/jmanis/twain/bequest.pdf. His financial fumbles are detailed in Justin Kaplan, Mr. Clemens and Mark Twain (New York: Touchstone, 1983).
I lived through the rush: JZ participated in Knutson's experiment in the cognitive neuroscience laboratory at Stanford University, May 26, 2004. See also Brian Knutson et al., "Distributed Neural Representation of Expected Value," JN, vol. 25, no. 19 (May 11, 2005), pp. 4806–12; Patricio O'Donnell et al., "Modulation of Cell Firing in the Nucleus Accumbens," ANYAS, vol. 877 (1999), pp. 157–75; Hans C.
Breiter and Bruce R. Rosen, "Functional Magnetic Resonance Imaging of Brain Reward Circuitry in the Human," ANYAS, vol. 877 (1999), pp. 523–47; Hugo D. Critchley et al., "Neural Activity in the Human Brain Relating to Uncertainty and Arousal During Anticipation," Neuron, vol. 29 (2001), pp. 537–45; Scott C. Matthews et al., "Selective Activation of the Nucleus Accumbens During Risk-Taking Decision Making," NeuroReport, vol. 15, no. 13 (Sept. 15, 2004), pp. 2123–27.
Reward" is experienced": JZ telephone interview with Breiter, June 22, 2005; John P. O'Doherty et al., "Neural Responses During Anticipation of a Primary Taste Reward," Neuron, vol. 33 (Feb. 28, 2002), pp. 815–26.
Why does the reflexive: Satoshi Ikemoto and Jaak Panksepp, "The Role of Nucleus Accumbens Dopamine in Motivated Behavior," Brain Research Reviews, vol. 31 (1999), pp. 6–41; JZ telephone interview with Paul Slovic, Feb. 3, 2005.
As the French essayist: Michel de Montaigne, "How Our Mind Hinders Itself," in The Complete Essays of Montaigne (Stanford, Calif.: Stanford University Press, 1965), p. 462 (this is an ancient literary device, used by Dante at the beginning of the fourth canto of Il Paradiso [ca. 1320] and by Aristotle in Book II, chapter 13 of his On the Heavens [ca. 360 B.C.]). John Barth, The Floating Opera and The End of the Road (New York: Doubleday, 1988), pp. 331–34.
We can learn more: JZ e-mail interview with Taketoshi Ono, Feb. 15, 2005; Yutaka Komura et al., "Retrospective and Prospective Coding for Predicted Reward in the Sensory Thalamus," Nature, vol. 412 (Aug. 2, 2001), pp. 546–49; Emily Dickinson, poem 995 ("This was in the White of the Year"), The Complete Poems of Emily Dickinson (New York: Little, Brown, 1960), pp. 462–463.
Lately, psychologists: JZ e-mail interviews with Rudolf Cardinal, Jan. 22, 2005, and Feb. 16, 2005; Rudolf N. Cardinal et al., "Impulsive Choice Induced in Rats by Lesions of the Nucleus Accumbens Core," Science, vol. 292 (June 29, 2001), pp. 2499–2501.
One of Wall Street's: Historical data on Celera's stock price from Yahoo! Finance; www.celera.com/celera /pr_1056647999; www.ornl.gov/sci/techre sources/Human_Genome/project/clinton2.shtml; http://archives.cnn.com/ 2000/HEALTH/06/26/human.genome.04/.
In a remarkable recent experiment: JZ e-mail interview with Emrah Dьzel, Feb. 8, 2005; Bianca C. Wittmann et al., "Reward-Related fMRI Activation of Dopaminergic Midbrain…," Neuron, vol. 45 (Feb. 3, 2005), pp. 459–67; Brian Knutson and R. Alison Adcock, "Remembrance of Rewards Past," Neuron, vol. 45 (Feb. 3, 2005), pp. 331–32; JZ telephone interview with Peter Shizgal, June 27, 2005.
Experiments in rats: Paul E. M. Phillips et al., "Subsecond Dopamine Release Promotes Cocaine Seeking," Nature, vol. 422 (April 10, 2003), pp. 614–18; John N. J. Reynolds et al., "A Cellular Mechanism of Reward-Related Learning," Nature, vol. 413 (Sept. 6, 2001), pp. 67–70; Fyodor Dostoyevsky, The Gambler (1866), chapter 17 (Constance Garnett translation).
When rewards are near: JZ e-mail interviews with Hiroyuki Nakahara, June 27 and 29, 2005; Michael L. Platt, "Caudate Clues to Rewarding Cues," Neuron, vol. 33 (Jan. 31, 2002), pp. 316–18; Johan Lauwereyns et al., "Feature-Based Anticipation of Cues that Predict Reward in Monkey Caudate Nucleus," Neuron, vol. 33 (Jan. 31, 2002), pp. 463–73; Johan Lauwereyns et al., "A Neural Correlate of Response Bias in Monkey Caudate Neurons," Nature, vol. 418 (July 25, 2002), pp. 413–17. Cisco stock performance: Bloomberg L.P. and Time Inc. Business Information Research Center.
Anticipation has another: Brian Knutson et al., "Distributed Neural Representation of Expected Value," JN, vol. 25, no. 19 (May 11, 2005), pp. 4806–12; George F. Loewenstein et al., "Risk as Feelings," PB, vol. 127, no. 2 (2001), pp. 267–86; JZ telephone interview with Loewenstein, Jan. 26, 2005.
There's another thing: JZ telephone interview with Mellers, Jan. 27, 2005; see also Barbara A. Mellers, "Choice and the Relative Pleasure of Consequences," PB, vol. 126, no. 6 (2000), pp. 910–24; Hans C. Breiter et al., "Functional Imaging of Neural Responses to Expectancy and Experience of Monetary Gains and Losses," Neuron, vol. 30 (May 2001), pp. 619–39.
Among stock promoters: Richard Dale, The First Crash (Princeton, N.J.: Princeton University Press, 2004), p. 101; data on stock returns for 2000 through 2002 kindly provided to JZ by Aronson + Johnson + Ortiz, L.P. 49 There's only one sure thing: For a fuller list of jackpot jargon, see T II, p. 275.
Control your cues: Howard Rachlin, The Science of Self-Control (Cambridge, Mass.: Harvard University Press, 2000), pp. 126–27; JZ telephone interview with Knutson, Feb. 2, 2005; www.berkshirehathaway.com/letters/ letters.html.
4. PREDICTION
Pecuniary motives: Coleridge, letter to William Sotheby, Nov. 9, 1828, in The Portable Coleridge (New York: Viking Penguin, 1950), p. 302. Coleridge, of course, knew a narcotic when he saw one, since he was an opium addict for much of his life.
In the Mesopotamian galleries: British Museum, ANE 92668. You can view an image of this artifact online by visiting www.thebritishmuseum.ac.uk/ compass/ and entering "liver" in the search window.
Just like an ancient baru: BusinessWeek 's annual "Where to Invest" forecast issue, 1996 through 2005, inclusive; WSJ, Aug. 13, 1982, p. 33; NYT, Aug. 13, 1982, pp. D1, D6; WSJ, April 17, 2000, pp. A20, C1, C4; USA Today, April 17, 2000, p. 6B; Peter L. Bernstein, The Power of Gold (New York: John Wiley, 2000), pp. 357–58; data on accuracy of analysts' earnings forecasts kindly updated by David Dreman, e-mail to JZ, May 6, 2005; Peter L. Bernstein, "The King of Siam and the Gentle Art of Postcasting,"
Economics & Portfolio Strategy, Aug. 1, 2005.
It took two psychologists: Daniel Kahneman and Amos Tversky, "Subjective Probability," in JUU, pp. 32–47. Note: The probability of any given sequence of heads and tails is 1/2 n, where n is the number of coin flips. Flip a coin six times and the odds of each possible sequence are 1/2 6 or 1/64.
The pursuit: I am grateful to my colleague, the formidable classics scholar Michael Sivy, for helping me settle on the appropriate Latin for "man the pattern-seeker." Pareidolia is discussed in Sagan's brilliant essay "The Man in the Moon and the Face on Mars," in his The Demon-Haunted World (New York:
Ballantine, 1996), pp. 41–59.
Others sift through mountains: Cheol-Ho Park and Scott H. Irwin, "The Profitability of Technical Analysis" (Nov. 2004), http://ssrn.com/ abstract=603481; Wei Jiang, "A Nonparametric Test of Market (Mis-) Timing (Aug. 2001), http://papers.ssm.com/sol3/papers.cfm?abstract_ id=287102; WSJ, Jan. 17, 2003, p. C4, and Jan. 30, 2004, p. C4; Fortune, Dec. 24, 2001, p. 156; Edward A. Dyl, "Did Joe Montana Save the Stock Market?" FAJ, Sept.–Oct., 1989, pp. 4–5. The "Super Bowl Predictor" was first presented in Leonard Koppett, "If the Bulls and the Bears Have You Buffaloed, Try Our Foxy Formulas," Sports Illustrated, April 23, 1979, p. 8. Koppett, who intended his article as a spoof on the confusion between correlation and causation, was amazed that anyone ever took the Super Bowl Predictor seriously. Late in his life he called it "an embarrassment to rational thought" and "too stupid to believe" (JZ telephone interview with Koppett, Dec. 13, 2001).
What drives this behavior?: JZ telephone interviews with John Staddon, Duke University, Sept. 1, 2000, and George Wolford, Dartmouth College, Sept. 6, 2000; George Wolford et al., "The Left Hemisphere's Role in Hypothesis Formation," JN, vol. 20 (2000), RC64, pp. 1–4; Michael S. Gazzaniga, "The Split Brain Revisited," SA, July 1998, pp. 50–55; JZ, "The Trouble with Humans," MM, Nov. 2000, pp. 67–71; John I. Yellott Jr., "Probability Learning with Noncontingent Success," Journal of Mathematical
Psychology, vol. 6 (1969), pp. 541–75; R. J. Herrnstein, "On the Law of Effect," JEAB, vol. 13, no. 2 (1970), pp. 243–66; Richard J. Herrnstein, The Matching Law (Cambridge, Mass.: Harvard University Press, 1997); David R. Shanks et al., "A Re-examination of Probability Matching and Rational Choice," JBDM, vol. 15, no. 3 (2002), pp. 233–50; Leo P. Sugrue et al., "Matching Behavior and the Representation of Value in the Parietal Cortex," Science, vol. 304 (June 18, 2004), pp. 1782–87.
Meanwhile, the rest of us: Matthew Rabin, "Inference by Believers in the Law of Small Numbers," QJE, vol. 117, no. 3 (Aug. 2002), pp. 775–816; http://emlab.berkeley.edu/users/rabin/.
Why are we cursed: JZ interview with Paul Glimcher, Feb. 19, 2002.
The" main difference": JZ telephone interview with Preuss, Dec. 29, 2004; Jean de Heinzelin et al., "Environment and Behavior of 2.5-Million-Year-Old Bouri Hominids," Science, vol. 284 (April 23, 1999), pp. 625–29; Tim D. White et al., "Pleistocene Homo sapiens from Middle Awash, Ethiopia," Nature, vol. 423 (June 12, 2003), pp. 742–47; William H. Calvin, A Brief History of the Mind (Oxford, U.K.: Oxford University Press, 2004). More recent, fossil remains of anatomically modern humans unearthed near Kibish, Ethiopia, have been dated to about 195,000 years ago, but no intact skull from this deposit has yet been found.
It's easy to visualize: Peter B. deMenocal, "African Climate Change and Faunal Evolution During the Pliocene-Pleistocene," Earth and Planetary Science Letters, vol. 220 (2004), pp. 3–24; Todd M. Preuss, "What Is It Like to Be a Human?" in Michael S. Gazzaniga (ed.), The Cognitive Neurosciences III (Cambridge, Mass.: MIT Press, 2004), pp. 5–22; Jay Quade et al., "Paleoenvironments of the Earliest Stone Toolmakers, Gona, Ethiopia," Geological Society of America Bulletin, vol. 116, no. 11/12 (Nov./Dec. 2004), pp. 1529–44; Simon M. Reader and Kevin N. Laland, "Social Intelligence, Innovation, and Enhanced Brain Size in Primates," PNAS, vol. 99, no. 7 (April 2, 2002), pp. 4436–41.
We like to imagine: Jared Diamond, "Evolution, Consequences and Future of Plant and Animal Domestication," Nature, vol. 418 (Aug. 8, 2002), pp. 700–7; Alice Louise Slotsky, The Bourse of Babylon (Bethesda, Md.: CDL Press, 1997); Karl Moore and David Lewis, Birth of the Multinational (Copenhagen: Copenhagen Business School Press, 1999); Edward J. Swan, Building the Global Market (New York: Kluwer Law International, 2000); JZ interview with P. Read Montague, Feb. 28, 2002.
Wolfram Schultz: JZ interview with Schultz, March 13, 2002; Wolfram Schultz, "Getting Formal with Dopamine and Reward," Neuron, vol. 36 (Oct. 10, 2002), pp. 241–63.
as neuroscientist Antoine Bechara: JZ telephone interview with Bechara, June 20, 2005; JZ e-mail interview with Paul Glimcher, June 9, 2005; Wolfram Schultz, "Predictive Reward Signal of Dopamine Neurons," Journal of Neurophysiology, vol. 80 (1998), pp. 1–27; Irene A. Yun et al., "The Ventral Tegmental Area Is Required for the Behavioral and Nucleus Accumbens Neuronal Firing Responses to Incentive Cues," JN, vol. 24, no. 12 (March 24, 2004), pp. 2923–33; JZ telephone interview with Kent Berridge, May 12, 2005. Dopamine signals actually travel below the usual speed limits of the brain, but they spread quickly because these neurons are so massively interconnected to other areas.
Researchers Montague and Schultz: JZ interview with Montague, Feb. 28, 2002; JZ interview with Schultz, March 13, 2002; Wolfram Schultz et al., "A Neural Substrate of Prediction and Reward," Science, vol. 275 (March 14, 1997), pp. 1593–99.
That's more than a metaphor: M. Leann Dodd et al., "Pathological Gambling Caused by Drugs Used to Treat Parkinson Disease," Archives of Neurology, vol. 62 (Sept. 2005), pp. 1–5; John C. Morgan et al., "Impulse Control Disorders and Dopaminergic Drugs," Archives of Neurology, vol. 63 (Feb. 2006), pp. 298–99; Gaetano Di Chiara and Assunta Imperato, "Drugs Abused by Humans Preferentially Increase Synaptic Dopamine Concentrations in the Mesolimbic System of Freely Moving Rats," PNAS, vol. 85 (July 1988), pp. 5274–78; Amanda J. Roberts and George F. Koob, "The Neurobiology of Addiction,"