Zweig, Jason. Your Money and Your Braine
.pdfAlcohol Health and Research World, vol. 21, no. 2 (1997), pp. 101–6; Hans C. Breiter et al., "Acute Effects of Cocaine on Human Brain Activity and Emotion," Neuron, vol. 19 (Sept. 1997), pp. 591–611; Roy A. Wise, "Drug-Activation of Brain Reward Pathways," Drug and Alcohol Dependence, vol. 41 (1998), pp. 13–22; Garret D. Stuber et al., "Extinction of Cocaine Self-Administration Reveals Functionally and Temporally Distinct Dopaminergic Signals…," Neuron, vol. 46 (May 19, 2005), pp. 661–69.
If laboratory rats: James Olds and Peter Milner, "Positive Reinforcement Produced by Electrical Stimulation of Septal Area and Other Regions of Rat Brain," Journal of Comparative and Physiological Psychology, vol. 47 (1954), pp. 419–27; M. E. Olds and J. L. Fobes, "The Central Basis of Motivation: Intracranial Self-Stimulation Studies," Annual Review of Psychology, vol. 32 (1981), pp. 523–74; Antonio P. Strafella et al., "Repetitive Transcranial Magnetic Stimulation of the Human Prefrontal Cortex Induces Dopamine Release in the Caudate Nucleus," JN, vol. 21 (2001), RC 157, pp. 1–4; Bart J. Nuttin et al., "Long-Term Electrical Capsular Stimulation in Patients with Obsessive-Compulsive Disorder," Neurosurgery, vol. 52, no. 6 (June 2003), pp. 1263–74.
Neuroscientists do not yet know: It is not yet clear whether dopamine is directly involved in the sensation of pleasure, or whether it is just the precursor of a pleasure signal conducted by one or more of the brain's other chemical messengers, like glutamate, orexin, norepinephrine, or acetylcholine. Edwin C. Clayton et al., "Phasic Activation of Monkey Locus Ceruleus Neurons…" JN, vol. 24, no. 44 (Nov. 3, 2004), pp.
9914–20; Angela J. Yu and Peter Dayan, "Uncertainty, Neuromodulation, and Attention," Neuron, vol. 46 (May 19, 2005), pp. 681–92; Glenda C. Harris et al., "A Role for Lateral Hypothalamic Orexin Neurons in Reward Seeking," Nature, vol. 437 (Sept. 22, 2005), pp. 556–59; JZ telephone interviews with P. Read Montague, June 1, 2005, and Peter Shizgal, June 27, 2005; JZ e-mail interviews with Gregory Berns, Paul Glimcher, and Brian Knutson, June 3, 2005, and Wayne Drevets and Wolfram Schultz, July 18, 2005; Wayne C. Drevets et al., "Amphetamine-Induced Dopamine Release in Human Ventral Striatum Correlates with Euphoria," BP, vol. 49 (2001), pp. 81–96.
At Harvard Medical School: JZ telephone interview with Breiter, June 22, 2005.
What is the underlying force: Pavlov's classic experiments are summarized at http://nobelprize.org /medicine/laureates/1904/pavlov-bio.html and http://en.wikipedia.org/wiki/Ivan_Pavlov. For more detail, see "Experimental Psychology and Psychopathology in Animals" and "The Conditioned Reflex," in I. P. Pavlov, Selected Works (Moscow: Foreign Languages Publishing House, 1955), pp. 151–68, 245–70.
And if the reward is big enough: JZ telephone interviews with P. Read Montague, June 1, 2005, and Peter Shizgal, June 27, 2005; see also P. Read Montague et al., "Computational Roles for Dopamine in Behavioural Control," Nature, vol. 431 (Oct. 14, 2004), pp. 760–67; Wolfram Schultz, "Neural Coding of Basic Reward Terms…," COIN, vol. 14 (2004), pp. 139–47; P. Read Montague and Gregory S. Berns, "Neural Economics and the Biological Substrates of Valuation," Neuron, vol. 36 (Oct. 10, 2002); Wolfram Schultz et al., "A Neural Substrate of Prediction and Reward," Science, vol. 275 (March 14, 1997), pp. 1593–99; Udi E. Ghitza et al., "Persistent Cue-Evoked Activity of Accumbens Neurons after Prolonged Abstinence from Self-Administered Cocaine," JN, vol. 23, no. 19, pp. 7239–45.
I learned how automatically: JZ participated in the Montague-Berns experiment, administered by Sam McClure, on July 1, 2002; JZ telephone interview with P. Read Montague, June 1, 2005; JZ interview with Gregory Berns, July 1, 2002; Gregory S. Berns et al., "Brain Regions Responsive to Novelty in the Absence of Awareness," Science, vol. 276 (May 23, 1997), pp. 1272–75.
It's remarkable: Scott A. Huettel et al., "Perceiving Patterns in Random Series: Dynamic Processing of Sequence in Prefrontal Cortex," NNS, vol. 5, no. 5 (May 2002), pp. 485–90; Charles T. Clotfelter and Philip J. Cook, Selling Hope (Cambridge, Mass.: Harvard University Press, 1991), p. 54; T II, pp. 436–37 (Graham originally wrote this passage in 1971); JZ e-mail interviews with Huettel, May 20 and May 24, 2005.
Huettel's findings: Burton G. Malkiel, A Random Walk Down Wall Street (New York: W. W. Norton, 2003), p. 17 (50% odds in each year over three years amounts to 50% x 50% x 50% = 12.5% for the entire period); Morningstar Mutual Funds; Gregory Bresiger, "Pit Stop for a Pit Bull," Financial Planning, Sept. 2000; performance data for Grand Prix Fund Class A and price and volume data for Taser International are from http://quicktake. morningstar.com and http://finance.yahoo.com; Amit Goyal and Sunil Wahal, "The Selection and Termination of Investment Managers by Plan Sponsors" (Sept. 2005), http://ssrn.com/abstract=675970.
There's more to investing: JZ telephone interview with Glimcher, May 31, 2005; Hannah M. Bayer and Paul W. Glimcher, "Midbrain Dopamine Neurons Encode a Quantitative Reward Prediction Error Signal," Neuron, vol. 47 (July 7, 2005), pp. 129–41; Paul W. Glimcher, Decisions, Uncertainty, and the Brain (Cambridge, Mass.: MIT Press, 2003), pp. 330–34.
You might wonder: JZ telephone interview with Odean, July 12, 2005; Brad M. Barber and Terrance Odean, "All That Glitters" (March 2006), http://ssrn.com/abstract=460660; Terrance Odean, "Do Investors Trade Too Much?" AER, vol. 89 (Dec. 1999), pp. 1279–98, www.odean.us; Kenneth L. Fisher and Meir Statman, "Bubble Expectations," Journal of Wealth Management (Fall 2002), pp. 17–22; David Dreman et al., "A Report on the Mar. 2001 Investor Sentiment Survey," JBF, vol. 2, no. 3 (2001), pp. 126–34; Patricia Fraser, "How Do U.S. and Japanese Investors Process Information and How Do They Form Their Expectations of the Future?" (Sept. 2000), http://ssrn.com/abstract=257440. Stock returns: Ibbotson Associates, Chicago. Survey of individual investors: Werner De Bondt, "Betting on Trends," IJF, vol. 9 (1993), pp. 355–71.
Similarly, investors chase: Firsthand: JZ, "What Fund Investors Really Need to Know," MM, June 2002, pp. 110–15. Energy funds: data courtesy of Avi Nachmany, Strategic Insight, New York. Roger G. Clarke and Meir Statman, "Bullish or Bearish?" FAJ, May/June 1998, pp. 63–72; "Total net assets, cash position, sales and redemptions of own shares," 1954 to present, monthly data set provided to JZ by Investment Company Institute. See also Erik R. Sirri and Peter Tufano, "Costly Search and Mutual Fund Flows," JF, vol. 53, no. 5 (Oct. 1998), pp. 1589–1622; Jason Karceski, "Returns-Chasing Behavior, Mutual Funds, and Beta's Death," Journal of Financial and Quantitative Analysis, vol. 37, no. 4 (Dec. 2002), pp. 559–94; and Anthony W. Lynch and David K. Musto, "How Investors Interpret Past Fund Returns," JF, vol. 58, no. 5 (Oct. 2003), pp. 2033–58.
The first step: JZ interview with Eric Johnson, July 29, 2005. For more on the prefrontal cortex in predicting reward, see Masataka Watanabe, "Reward Expectancy in Primate Prefrontal Neurons," Nature, vol. 382 (Aug. 15, 1996), pp. 629–32; Edmund T. Rolls, "The Orbitofrontal Cortex and Reward," CC, vol. 10 (March 2000), pp. 284–94; Jay A. Gottfried et al., "Encoding Predictive Reward Value in Human Amygdala and Orbitofrontal Cortex," Science, vol. 301 (Aug. 22, 2003), pp. 1104–7; Scott A. Huettel et al., "Decisions under Uncertainty," JN, vol. 25, no. 3 (March 30, 2005), pp. 3304–11; Hiroyuki Oya et al., "Electrophysiological Correlates of Reward Prediction Error Recorded in the Human Prefrontal Cortex," PNAS, vol. 102, no. 23 (June 7, 2005), pp. 8351–56.
Stop predicting: For more on dollar-cost averaging, see JZ, "Tie Me Down and Make Me Rich," MM, May 2004, p. 118.
Ask for the evidence: Michel de Montaigne, "Of Cannibals," in The Complete Essays of Montaigne
(Stanford, Calif.: Stanford University Press, 1965), p. 155; Deuteronomy 18:10–12; J. Scott Armstrong, "Review of Ravi Batra, The Great Depression of 1990,"IJF, vol. 4 (1988), p. 493; JZ telephone and e-mail interviews with Bob Billett, March 7, 2005; JZ e-mail interviews with Sherwood Vine, July 7, Aug. 16, and Sept. 26, 2005; Einstein letter to Jost Winteler, July 8, 1901, in Alice Calaprice, The New Quotable Einstein (Princeton, N.J.: Princeton University Press, 2005), p. 253.
Practice, practice, practice: Remarks by Richard Zeckhauser, panel discussion moderated by JZ, Oxford
Programme on Investment Decision-Making, Saпd Business School, Oxford University, U.K., Oct. 22, 2004; Patricia Dreyfus, "Investment Analysis in Two Easy Lessons," MM, July 1976, p. 37.
Face up to base rates: Howard Rachlin, The Science of Self-Control (Cambridge, Mass.: Harvard University Press, 2000), pp. 155–56; Michael Lewis, Moneyball (New York: W. W. Norton, 2003), p. 274; Kahneman: JZ, "Do You Sabotage Yourself?" MM, May 2001, pp. 75–78.
Correlation is not causation: Pat Regnier, "How High Is Up?" MM, Dec. 1999, pp. 108–14; David Leinweber and David Krider, "Stupid Data Miner Tricks," research monograph, First Quadrant Corp., Pasadena, Calif., 1997. Dent fund performance: e-mail to JZ from Annette Larson, senior research analyst, Morningstar Inc., Aug. 16, 2005. Foolish Four performance: T II, pp. 44–46.
Take a break: JZ e-mail interview with Wolford, Sept. 9, 2000. See also Richard Ivry and Robert T. Knight, "Making Order from Chaos," NNS, vol. 5, no. 5 (May 2002), pp. 394–96.
One of our oddest mental quirks: http://news.bbc.co.uk/1/hi/world/europe/ 4256595.stm; www.mccombs.utexas.edu/faculty/jonathan.koehler/docs/ sta309h/Gambler's_Fallacy_in_Italy.htm.
There's a simple way: Eric Gold and Gordon Hester, "The Gambler's Fallacy and the Coin's Memory," working paper, Carnegie Mellon University (Nov. 1987); copy kindly provided to JZ by Robyn Dawes.
By using technology: M. J. Koepp et al., "Evidence for Striatal Dopamine Release during a Video Game," Nature, vol. 393 (May 21, 1998), pp. 266–68; T II, p. 38.
If" owning stocks": JZ, "Do You Sabotage Yourself?" MM, May 2001, pp. 75–78; Richard H. Thaler et al., "The Effect of Myopia and Loss Aversion on Risk Taking," QJE, May 1997, pp. 647–61; Uri Gneezy and Jan Potters, "An Experiment on Risk Taking and Evaluation Periods," QJE, May 1997, pp. 631–45; JZ e-mail interview with Uri Gneezy, Nov. 2, 1997; Shlomo Benartzi and Richard H. Thaler, "Risk Aversion or Myopia?" MS, vol. 45, no. 3 (March 1999), pp. 364–81; Uri Gneezy et al., "Evaluation Periods and Asset Prices in a Market Experiment," JF, vol. 58, no. 2 (April 2003), pp. 821–37; Seinfeld, "The Stock Tip," originally broadcast June 21, 1990, www.seinfeld scripts.com/TheStockTip.htm; tracking study of MM subscribers, 2002, data courtesy of Douglas King, Time Inc. Consumer Marketing.
5. CONFIDENCE
Before" I was Pope": Cited in Paul A. Samuelson, "Is There Life After Nobel Coronation?," at http://nobelprize.org/economics/articles/samuelson/index.html.
In 1965: Caroline E. Preston and Stanley Harris, "Psychology of Drivers in Traffic Accidents," JAP, vol. 49, no. 4 (1965), pp. 284–88; Ola Svenson, "Are We All Less Risky and More Skillful than Our Fellow Drivers?" Acta Psychologica, vol. 47 (1981), pp. 143–48.
When I give speeches: JZ first ran this little test, inspired by Richard Thaler of the University of Chicago, around 1998. The lowest ratio between "my savings" and "average savings" seems to be around 1.5; people often think they will save at least twice as much as the typical person in the room.
Of course, being overconfident: JZ, "Did You Beat the Market?" MM, Jan. 2000, p. 56; Arnold C. Cooper et al., "Entrepreneurs' Perceived Chances for Success," Journal of Business Venturing, vol. 3 (1988), pp. 97–108; Daniel Kahneman, remarks at the Institute of Certified Financial Planners' Wealth Management Symposium, New York, April 30, 1999.
Every month: Kenneth L. Fisher and Meir Statman, "Bubble Expectations," Journal of Wealth Management, fall 2002, pp. 17–22; press release, Montgomery Asset Management, Jan. 12, 1998; survey conducted by Inter-search Corp., Nov. 17–Dec. 9, 1997; Robert F. Bruner, "Does M&A Pay?" http://faculty.darden.edu/brunerb/Bruner_PDF/Does%20M&A%20Pay.pdf; JZ email interview with
Bruner, Nov. 7, 2005; Neil D. Weinstein, "Unrealistic Optimism about Future Life Events, JPSP, vol. 39, no. 5 (1980), pp. 806–20 (this experiment was conducted with 120 students at Rutgers's Cook College, all of them women); Barna Research Group nationwide telephone survey of more than 1,000 adult Americans, released Oct. 21, 2003, www.barna.org.
In short, to evaluate: Justin Kruger and David Dunning, "Unskilled and Unaware of It," JPSP, vol. 77, no. 6 (1999), pp. 1121–34; Shelley E. Taylor and Jonathon D. Brown, "Illusion and Well-Being," PB, vol. 103, no. 2 (1988), pp. 193–210. The term "con man," of course, is short for "confidence man," someone who earns trust by projecting a suave sense of ability, power, and knowledge (see David W. Maurer, The Big Con [New York: Anchor, 1999].)
That's surprisingly hard: JZ, "Did You Beat the Market?" MM, Jan. 2000, pp. 55–57; Don A. Moore et al., "Positive Illusions and Forecasting Errors in Mutual Fund Investment Decisions," OBHDP, vol. 79, no. 2 (Aug. 1999), pp. 95–114; JZ telephone interviews with Max Bazerman and Don A. Moore, Nov. 16, 1999.
In March 2002: JZ spoke at the Boston Globe Personal Finance Conference, Mar. 23, 2002; Bethany McLean and Peter Elkind, The Smartest Guys in the Room (New York: Portfolio, 2003), pp. 242, 314, 401.
Around the world: Gur Huberman, "Familiarity Breeds Investment," RFS, vol. 14, no. 3 (Fall 2001), pp. 659–80; Joshua D. Coval and Tobias J. Moskowitz, "Home Bias at Home," JF, vol. 54, no. 6 (Dec. 1999), pp. 2045–73; Kalok Chan et al., "What Determines the Domestic Bias and Foreign Bias?," JF, vol. 60, no. 3 (June 2005), pp. 1495–1534; Kenneth R. French and James M. Poterba, "Investor Diversification and International Equity Markets" (Jan. 1991), www.nber.org/papers/w3609; Yesim Tokat, "International Equity Investing: Long-Term Expectations and Short-Term Departures," Vanguard Investment Counseling & Research, May 2004, p. 11; Morgan Stanley Capital International Blue Book, Dec. 2005, p. 4; Michael Kilka and Martin Weber, "Home Bias in International Stock Return Expectations," JBF, vol. 1, no. 3–4 (2000), pp. 176–92; Shlomo Benartzi, "Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock," JF, vol. 56, no. 5 (Oct. 2001), pp. 1747–64.
The frontier between: I am indebted to Professor Zeev Mankowitz of Hebrew University for this metaphor.
Almost forty years ago: R. B. Zajonc, "Attitudinal Effects of Mere Exposure," JPSP, Monograph Supplement, vol. 9 (1968), pp. 1–27; JZ telephone interview with Robert Zajonc, Oct. 12, 2005; William Raft Kunst-Wilson and R. B. Zajonc, "Affective Discrimination of Stimuli That Cannot Be Recognized," Science, vol. 207 (Feb. 1, 1980), pp. 557–58; Jennifer L. Monahan et al., "Subliminal Mere Exposure: Specific, General, and Diffuse Effects," PS, vol. 11, no. 6 (Nov. 2000), pp. 462–66; R. B. Zajonc, "Mere Exposure: A Gateway to the Subliminal," CDPS, vol. 10, no. 6 (Dec. 2001), pp. 228. Although the duration of a "blink of an eye" is highly variable, it averages roughly one-third of a second (Frans VanderWerf et al., "Eyelid Movements: Behavioral Studies of Blinking in Humans under Different Stimulus Conditions," Journal of Neurophysiology, vol. 89 (2003), pp. 2784–96).
What's going on: Rebecca Elliott and Raymond J. Dolan, "Neural Response During Preference and Memory Judgments for Subliminally Presented Stimuli: A Functional Neuroimaging Study," JN, vol. 18, no. 12 (June 15, 1998), pp. 4697–4704; Samuel M. McClure et al., "Neural Correlates of Behavioral Preference for Culturally Familiar Drinks," Neuron, vol. 44 (Oct. 14, 2004), pp. 379–87.
There are tantalizing hints: The theory of place cells was first proposed in John O'Keefe and Lynn Nadel's masterpiece, The Hippocampus as a Cognitive Map (Oxford, U.K.: Oxford University Press, 1978), www.cognitivemap. net. See also Eleanor A. Maguire et al., "Recalling Routes Around London: Activation of the Right Hippocampus in Taxi Drivers," JN, vol. 17, no. 18 (Sept. 15, 1997), pp. 7103–10; Eleanor A. Maguire et al., "Navigation-Related Structural Change in the Hippocampi of Taxi Drivers,"
PNAS, vol. 97, no. 8 (April 11, 2000), pp. 4398–4403; Gabriel Kreiman et al., "Category-Specific Visual Responses of Single Neurons in the Human Medial Temporal Lobe," NNS, vol. 3, no. 9 (Sept. 2000), pp. 946–53; Arne D. Ekstrom et al., "Cellular Networks Underlying Human Spatial Navigation," Nature, vol. 425 (Sept. 11, 2003), pp. 184–87; R. Quian Quiroga et al., "Invariant Visual Representation by Single Neurons in the Human Brain," Nature, vol. 435 (June 23, 2005), pp. 1102–7.
Brain scans in Peter Kenning's: JZ interview with Kenning, Society for Neuroeconomics annual meeting, Sept. 10, 2006; Peter Kenning et al., "The Role of Fear in Home-Biased Decision Making," University of Mьnster, working paper (January 2007).
Once you understand: Nicholas Epley et al., "What Every Skeptic Should Know about Subliminal Persuasion," Skeptical Inquirer, Sept./Oct. 1999, pp. 40–45; JZ interview with Piotr Winkielman, April 19, 2005; JZ interview with Zajonc, Oct. 12, 2005; Shlomo Benartzi et al., "Company Stock, Market Rationality, and Legal Reform," University of Chicago Law School working paper (July 2004), pp. 2, 8, 28; www.ici.org/stats/res/per12-01_ appendix.pdf, p. 26; Merrill Lynch & Co. Inc., Form 11-K, June 26, 2006, www.sec.gov/Archives/edgar/data/65100/000095012306008132/y22548e11vk.htm.
The mere-exposure effect underlies: Yoav Ganzach, "Judging Risk and Return of Financial Assets," OBHDP, vol. 83, no. 2 (Nov. 2000), pp. 353–70; Michael J. Brennan et al., "Alternative Factor Specifications, Security Characteristics, and the Cross-Section of Expected Stock Returns," JFE, vol. 49, no. 3 (Sept. 1998), pp. 345–73; Charles M. C. Lee and Bhaskaran Swaminathan, "Price Momentum and Trading Volume," JF, vol. 55, no. 5 (Oct. 2000), pp. 2017–69; Brad M. Barber and Terrance Odean, "All That Glitters" (March 2006), http://ssrn.com/abstract=460660; JZ interview with Zajonc, Oct. 12, 2005.
Unfortunately, history shows: David Hirshleifer et al., "Fear of the Unknown" (May 2004), http://public.kenan-flagler.unc.edu/faculty/zhangha/ familiarity-5-30-2004-v2.pdf.
Juanita Edwards: This is not her real name, but the story is true.
Long ago, the psychologist: B. F. Skinner, "'Superstition' in the Pigeon," JEP, vol. 38 (1948), pp. 168–72, http://psychclassics.yorku.ca/Skinner/Pigeon/; John Staddon, The New Behaviorism (Philadelphia: Psychology Press, 2001), pp. 54–68. While later research refuted some of Skinner's observations, the basic finding still holds: that the pigeons behave "as if" their behavior causes them to be fed.
To see how sensitive: The bet on the stock tables is adapted from Chip Heath and Amos Tversky, "Preference and Belief," JRU, vol. 4 (1991), pp. 5–28. The dice experiment is Lloyd H. Strickland et al., "Temporal Orientation and Perceived Control as Determinants of Risk-Taking," JESP, vol. 2, no. 2 (1966), pp. 143–51; copy kindly provided to JZ by Roy Lewicki.
Psychologist Ellen Langer: Ellen J. Langer, "The Illusion of Control," JPSP, vol. 32, no. 2 (Aug. 1975), pp. 311–28; Rosa Bersabй and Rosario Martнnez Arias, "Superstition in Gambling," Psychology in Spain, vol. 4, no. 1 (2000), www.psychologyinspain.com/content/reprints/2000/3.pdf; see also Deborah Davis et al., "Illusory Personal Control as a Determinant of Bet Size and Type in Casino Craps Games," Journal of Applied Social Psychology, vol. 30, no. 6 (2000), pp. 1224–42. Retirement investors: William N. Goetzmann and Nadav Peles, "Cognitive Dissonance and Mutual Fund Investors," Journal of Financial Research, vol. 20, no. 2 (1997), pp. 145–58.
Study after study: Robert E. Knox and James A. Inkster, "Postdecision Dissonance at Post Time," JPSP, vol. 8, no. 4 (April 1968), pp. 319–23; Jonathan C. Younger et al., "Postdecision Dissonance at the Fair," PSPB, vol. 3, no. 2 (1977), pp. 284–87; Robert B. Cialdini, Influence (New York: William Morrow, 1993), pp. 57–59; Paul Rosenfeld et al., "Decision Making," Journal of Social Psychology, vol. 126, no. 5 (2001), pp. 663–65.
The illusion of control is stronger: Ellen J. Langer, "The Illusion of Control," JPSP, vol. 32, no. 2 (Aug.
1975), pp. 311–28; Ellen J. Langer, "The Psychology of Chance," Journal for the Theory of Social Behaviour, vol. 7, no. 2 (Oct. 1977), pp. 185–207.
From small-timers: Meghan Collins, "Traders Ward off Evil Spirits," cnn.com, Oct. 29, 2003, http://money.cnn.com/2003/10/28/markets/trader_ superstition /index.htm; William M. O'Barr and John M. Conley, Fortune and Folly (Homewood, Ill.: Business One Irwin, 1992), p. 155; Mark Fenton- O'Creevy et al., Traders (Oxford, U.K.: Oxford University Press, 2005), p. 87; BusinessWeek, Sept. 3, 2001, p. 70; NYT, Oct. 15, 2001, p. C1; www.globalcrossing.com/xml/news/2002/january/28.xml.
Neuroeconomists are now exploring: Elizabeth M. Tricomi et al., "Modulation of Caudate Activity by Action Contingency," Neuron, vol. 41 (Jan. 22, 2004), pp. 281–92; JZ e-mail interviews with Delgado, Oct. 31 and Dec. 12, 2005; Arthur Aron et al. "Reward, Motivation, and Emotion Systems Associated with Early-Stage Intense Romantic Love," Journal of Neurophysiology, vol. 94 (2005), pp. 327–37; Caroline F. Zink et al., "Human Striatal Responses to Monetary Reward Depend on Saliency," Neuron, vol. 42 (May 13, 2004), pp. 509–17; JZ telephone interview with Caroline Zink, Jan. 18, 2005. Caroline is the sister of Laurie Zink (see "I Know How Good It Would Feel," Chapter Three, p. 34).
Researchers at the University of Wisconsin: Tim V. Salomons et al., "Perceived Controllability Modulates the Neural Response to Pain," JN, vol. 24, no. 32 (Aug. 11, 2004), pp. 7199–7203.
That seems to be a basic part: Michael T. Rogan et al., "Distinct Neural Signatures for Safety and Danger in the Amygdala and Striatum of the Mouse," Neuron, vol. 46 (Apr. 21, 2005), pp. 309–20; JZ e-mail interview with Kandel and Rogan, Dec. 14, 2005.
In late 1999 and early 2000: JZ e-mail interviews with Brad Russell, Jan. 10, 2005; Richard H. Thaler and Eric J. Johnson, "Gambling with the House Money and Trying to Break Even," MS, vol. 36, no. 6 (June 1990), pp. 643–60.
Secondly, a streak: Amanda Bischoff-Grethe et al., "The Context of Uncertainty Modulates the Subcortical Response to Predictability," JCN, vol. 13, no. 7 (2001), pp. 986–93.
Next, a hot streak: Ellen J. Langer and Jane Roth, "Heads I Win, Tails It's Chance," JPSP, vol. 32, no. 6 (Dec. 1975), pp. 951–55; Willem A. Wagenaar and Gideon B. Keren, "Chance and Luck Are Not the Same," JBDM, vol. 1, no. 2 (1988), pp. 65–75; Nehemia Friedland, "On Luck and Chance," JBDM, vol. 5, no. 4 (1992), pp. 267–82.
It's not just small investors: www.ge.com/annual94/iba3a18.htm; http:// pages.stern.nyu.edu/ lcabral /teaching/ge.pdf; Robert L. Conn et al., "Why Must All Good Things Come to an End?" (Feb. 2004), http://ssrn.com/ abstract=499310; Matthew T. Billett and Yiming Qian, "Are Overconfident Managers Born or Made?" (May 2006), http://ssrn.com/abstract=696301; Richard Roll, "The Hubris Hypothesis of Corporate Takeovers," JB, vol. 59, no. 2 (Apr. 1986), pp. 197–216; Gilles Hilary and Lior Menzly, "Does Past Success Lead Analysts to Become Overconfident?" MS, vol. 52, no. 4 (April 2006), pp. 489–500; Vernon L. Smith et al., "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, vol. 56, no. 5 (Sept. 1988), pp. 1119–51; David P. Porter and Vernon L. Smith, "Stock Market Bubbles in the Laboratory," Applied Mathematical Finance, vol. 1 (1994), pp. 111–27.
People may also be: JZ telephone interview with John Allman, Dec. 28, 2004; Stephanie Kovalchik and John Allman, "Measuring Reversal Learning," C&E, vol. 20, no. 5 (2005), pp. 714–28.
People who have suffered: J. Hornak et al., "Reward-Related Reversal Learning after Surgical Excisions in Orbito-frontal or Dorsolateral Prefrontal Cortex in Humans," JCN, vol. 16, no. 3 (2004), pp. 463–78. Most of these patients had suffered minor brain damage as a result of corrective surgery for stroke, epilepsy, brain tumors, or head trauma.
Once you understand: Alanna Nash, The Colonel (New York: Simon & Schuster, 2003), p. 322; Carolyn Abraham, "Diapers Keep Gamblers at Slots," Ottawa Citizen, May 3, 1997, p. A1.
What does a financial hot streak: Wayne C. Drevets et al., "Subgenual Prefrontal Cortex Abnormalities in Mood Disorders," Nature, vol. 386 (Apr. 24, 1997), pp. 824–27; Rita Carter, Mapping the Mind (Berkeley: University of California Press, 1999), p. 197; Rebecca Elliott et al., "Dissociable Neural Responses in Human Reward Systems," JN, vol. 20, no. 16 (Aug. 15, 2000), pp. 6159–65; Edmund T. Rolls et al., "Activity of Primate Subgenual Cingulate Cortex Neurons Is Related to Sleep," Journal of Neurophysiology, vol. 90 (2003), pp. 134–42.
In the waning days: Ravi Dhar and William N. Goetzmann, "Bubble Investors" (Aug. 2006), http://ssrn.com/abstract=683366; JZ e-mail interview with Will Goetzmann, Nov. 9, 2005.
This quirk of human behavior: Baruch Fischhoff and Ruth Beyth, "'I Knew It Would Happen,'" OBHDP, vol. 13 (1975), pp. 1–16; Baruch Fischhoff, "Hindsight Does Not Equal Foresight…" JEPHPP, vol. 1, no. 3 (1975), pp. 288–99; JZ telephone interview with Baruch Fischhoff, Sept. 21, 2005; 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.
Pundits have the same problem: Gary Rivlin, "The Madness of King George," Wired (July 2002), www.wired.com/wired/archive/10.07/gilder. html; Jeanne Lee, "Crash Test," MM, June 2000, p. 39; Pablo Galarza and Jeanne Lee, "The Sensible Internet Portfolio," MM, Dec. 1999, p. 129. (Disclosure: In May 1999, JZ wrote a column for Money entitled "Baloney.com," warning investors not to buy Internet stocks. But he did not stop his friend Pablo Galarza from recommending Ariba.)
Hindsight bias also skews: This example is inspired by Meir Statman and Jonathan Scheid, "Buffett in Foresight and Hindsight," FAJ, vol. 58, no. 4 (July/Aug. 2002), pp. 11–18. The number of funds in existence at year-end 1996 is from www.icifactbook.org/pdf/06_fb_table06.pdf. The odds of flipping
heads ten times in a row are 1/ 210, or 1/ 1024, or 0.001. Thus the probability against a given manager getting ten heads in a row is 99.9%. The probability that none of the 1,325 managers will flip ten heads in a row is .999 1325, or 27.4%. Thus, the odds that at least one manager will get ten straight heads are 1-.274, or 72.6%.
Here are three: www.cea.fn and Science, vol. 309 (Aug. 19, 2005), pp. 1170–71. The percentages of people's certainty about the answers to these three questions are based on audience responses at speeches JZ has given over the past ten years. "The Inner Tube of Life," Science, vol. 307 (Mar. 25, 2005), p. 1914.
Years ago: Baruch Fischhoff et al., "Knowing with Certainty," JEPHPP, vol. 3, no. 4 (1977), pp. 552–64. A $1 bet in 1977, adjusted for inflation, is equivalent to roughly $3 today.
The same ignorance: 2006 EBRI Retirement Confidence Survey, www.ebri.org/surveys/rcs/2006/.
That's why the old proverb: This message applies to all the people who confidently attribute this proverb to Will Rogers. According to Steven Gragert, archival historian at the Will Rogers Memorial Museums in Claymore, Okla., there is no evidence that Rogers ever said it. Bartlett's Familiar Quotations suggests that it is probably based on an aphorism by the 19th-century American humorist Josh Billings: "It is better to know nothing than to know what ain't so."
That's as true: Carl-Axel S. Staлl von Holstein, "Probabilistic Forecasting," OBHDP, vol. 8 (1972), pp. 139–58; J. Frank Yates et al., "Probabilistic Forecasts of Stock Prices and Earnings," OBHDP, vol. 49 (1991), pp. 60–79; Gustaf Tцrngren and Henry Montgomery, "Worse than Chance?" JBF, vol. 5, no. 3 (2004), pp. 148–53; Brad M. Barber and Terrance Odean, "The Courage of Misguided Convictions," FAJ, vol. 55, no. 6 (Nov./Dec. 1999); "Trading Is Hazardous to Your Wealth," JF, vol. 55, no. 2 (Apr., 2000); "Individual Investors," in Richard H. Thaler, ed., Advances in Behavioral Finance, vol. 2 (Princeton, N.J.:
Princeton University Press, 2005), pp. 543–69, www.odean.us; Richard Deaves et al., "The Dynamics of Overconfidence" (Nov. 2005), http://ssrn.com/abstract=868970.
Our confidence has another quirk: Sarah Lichtenstein and Baruch Fischhoff, "Do Those Who Know More Also Know More about How Much They Know?" OBHDP, vol. 20, no. 2 (Dec. 1977), pp. 159–83; Dale Griffin and Amos Tversky, "The Weighing of Evidence and the Determinants of Confidence," in HAB, pp. 230–49.
Experiments with monkeys: Christopher D. Fiorillo et al., "Discrete Coding of Reward Probability and Uncertainty by Dopamine Neurons," Science, vol. 299 (March 21, 2003), pp. 1898–1902; Peter Shizgal and Andreas Arvanitogiannis, "Gambling on Dopamine," Science, vol. 299 (March 21, 2003), pp. 1856–58; Hugo D. Critchley et al., "Neural Activity in the Human Brain Relating to Uncertainty and Arousal during Anticipation," Neuron, vol. 29 (Feb. 2001), pp. 537–45.
Some psychologists contend: Gerd Gigerenzer, Adaptive Thinking (Oxford, U.K.: Oxford University Press, 2000), and "Fast and Frugal Heuristics," in BHJDM, pp. 62–88; WSJ, Jan. 18, 1995, p. A1; U.S. Securities and Exchange Commission, Office of Municipal Securities, Cases and Materials (1999), www.sec.gov/pdf/mbondcs.pdf, pp. 59–100; Pensions & Investments, March 6, 2006, p. 28; WSJ, Sept. 20, 2006, p. C1; www.sdcera.org/ pdf/SDCERAInvestmentPerformanceAward.pdf.
Probably the main reason: Hart Blanton et al., "Overconfidence as Dissonance Reduction," JESP, vol. 37 (2001), pp. 373–85; Robert H. Thouless, "The Tendency to Certainty in Religious Belief," British Journal of Psychology, vol. 26 (1935), pp. 16–31, http://psychclassics.yorku.ca/Thouless/ certainty.pdf.
Warren Buffett: "Chairman's Letter," 1992 Berkshire Hathaway Inc. annual report, www.berkshirehathaway.com/letters/1992.html.
Many investors act: Nicholas Dawidoff, The Fly Swatter (New York: Pantheon, 2002), pp. 212–13.
I" don't know, and I don't care": JZ, "I Don't Know, I Don't Care," cnn.com, Aug. 29, 2001, http://money.cnn.com/2001/08/29/investing/Zweig/.
Create a too" hard"pile: JZ telephone interview with Buffett, May 5, 2005; see also Peter D. Kaufman, ed., Poor Charlie's Almanack (Virginia Beach, Va.: Donning Publishers, 2005), pp. 43, 95.
Measure twice, cut once: Gary Belsky and Thomas Gilovich, Why Smart People Make Big Money Mistakes and How to Correct Them (New York: Fireside, 1999), pp. 172–73.
Write it down, right away: JZ telephone interview with Baruch Fischhoff, Sept. 21, 2005; Baruch Fischhoff, "For Those Condemned to Study the Past: Heuristics and Biases in Hindsight," JUU, pp. 335–51; Elizabeth Loftus, "Our Changeable Memories: Legal and Practical Implications," NNS, vol. 4 (March 2003), pp. 231–34, www.seweb.uci.edu/faculty/loftus/.
Learn what works: JZ telephone interview with Robin Hogarth, March 17, 2005; Robin Hogarth, Educating Intuition (Chicago: University of Chicago Press, 2001), pp. 81–91.
Handcuff your inner con man: S&P 500 return from Stocks, Bonds, Bills, and Inflation 2005 Yearbook
(Chicago: Ibbotson Associates, 2005). Return adjusted for cash added and withdrawn is from Ilia D. Dichev, "What Are Stock Investors' Actual Historical Returns?" (Jan. 2006), http://ssrn.com/ abstract=544142. These three questions are inspired by Daniel Kahneman and Amos Tversky, "Intuitive Prediction," in JUU, pp. 414–21.
Embrace the mistake: JZ interview with Christopher Davis, Dec. 8, 2005.
Don't just buy" what you know": Peter Lynch with John Rothchild, One up on Wall Street (New York: Penguin, 1990), pp. 18–19; Peter Lynch with John Rothchild, Beating the Street (New York: Simon & Schuster, 1993), pp. 152–59.
Don't get stuck: Merck & Co. press release, Sept. 30, 2004, at www.merck.com; Merck & Co. Form 11-K, July 8, 2005, www.sec/gov/ Archives/edgar/data/64978/000095014405007240/g96187e11vk.htm; N.Y. State Attorney General press release, Oct. 14, 2004, www.oag.state.ny.us/ press/2004 /oct/oct14a_04.html; Marsh & McLennan press releases, Nov. 9, 2004, and March 1, 2005, at www.marsh.com; Marsh and McLennan Cos., Inc., Form 11-K, June 29, 2005, www.sec.gov/Archives /edgar/data/62709/ 000006270905000183/000006 2709-05-000183-index.htm; Lisa Meulbroek, "Company Stock in Pension Plans: How Costly Is It?" Journal of Law and Economics, vol. 48, no. 2 (Oct. 2005), pp. 443–74; JZ e-mail interview with Meulbroek, Nov. 1, 2005; JZ e-mail interview with David Laibson, Oct. 8, 2005. See also JZ, "Don't Try This with Your 401(k)," cnn.com, Nov. 4, 1999, http://money.cnn.com/1999/11/04/mailbag/mailbag/. Meulbroek's calculation assumes that you have no savings outside of your 401(k). But even if your 401(k) is just half of your total net worth, a 25% allocation of your 401(k) to company stock for ten years would have an effective value of only 84 cents on the dollar.
Diversification is the best: Rodger W. Bridwell, High-Tech Investing (New York: New York Times Book Co., 1983), pp. 12–13; Robert Metz, Future Stocks (New York: Harper & Row, 1982), pp. 31–32.
6. RISK
If" you burn your mouth": As quoted by Turkish Prime Minister Turgut Ozal, WSJ, July 25, 1984.
If ever there was: JZ telephone interview with Bobbi Bensman, Dec. 13, 2005; Meir Statman, "Lottery Players/Stock Traders," FAJ, Jan.–Feb. 2002, pp. 14–21, and "What Do Investors Want?" JPM, 30th Anniversary Issue(2004), pp. 153–61.
For investors and their financial advisors: www.ifa.com/SurveyNET/ index.aspx (accessed March 28, 2006); www.firstambank.com/464.html (accessed March 28, 2006); www.myscudder.com, Planning and Retirement Worksheet (accessed Nov. 8, 2004); Ken C. Yook and Robert Everett, "Assessing Risk Tolerance," JFP, vol. 16, no. 8 (Aug. 2003), pp. 48–55.
To an astonishing degree: Margo Wilson and Martin Daly, "Do Pretty Women Inspire Men to Discount the Future?" PRSLB (Suppl.), vol. 271(2004), pp. S177–S179; Roy F. Baumeister, "The Psychology of Irrationality," in Isabelle Brocas and Juan D. Carrillo, The Psychology of Economic Decisions, vol. 1 (Oxford, U.K.: Oxford University Press, 2003), pp. 3–16; Karen Pezza Leith and Roy F. Baumeister, "Why Do Bad Moods Increase Self-Defeating Behavior?" JPSP, vol. 71, no. 6 (1996), pp. 1250–67; Rajagopal Raghunathan and Michel Tuan Pham, "All Negative Moods Are Not Equal," OBHDP, vol. 79, no. 1 (1999), pp. 56–77; Michel Tuan Pham, "The Logic of Feeling," Journal of Consumer Psychology, vol. 14, no. 4(2004), pp. 360–69; Jennifer S. Lerner et al., "Heart Strings and Purse Strings," PS, vol. 15, no. 5 (2004), pp. 337–41; Denise Chen et al., "Chemosignals of Fear Enhance Cognitive Performance in Humans," Chemical Senses, vol. 31, no. 4 (2006), pp. 415–23; JZ e-mail interview with Chen, April 8, 2006; Norbert Schwarz, "Metacognitive Experiences in Consumer Judgment and Decision Making," Journal of Consumer Psychology, vol. 14, no. 4 (2004), pp. 332–48; Alexander J. Rothman and Norbert Schwarz, "Constructing Perceptions of Vulnerability," PSPB, vol. 24, no. 10 (Oct. 1998), pp. 1053–64; Norbert Schwarz, "Situated Cognition and the Wisdom of Feelings," in Lisa Feldman Barrett and Peter Salovey, The Wisdom in Feeling (New York: Guilford Press, 2002), pp. 144–66; JZ telephone interview with Schwarz, April 20, 2005; Matthew C. Keller et al., "A Warm Heart and a Clear Head," PS, vol. 16, no. 9 (2005), pp. 724–31.
Imagine yourself transported: Amos Tversky, "The Psychology of Decision Making," in Arnold S. Wood, ed., Behavioral Finance and Decision Theory in Investment Management (Charlottesville, Va.: AIMR Publications, 1995),p. 6; Alex Kacelnik and Melissa Bateson, "Risky Theories," American Zoologist, vol.
36, no. 4 (Sept., 1996), pp. 402–34; Sharoni Shafir, "Risk-Sensitive Foraging," Oikos, vol. 88, no. 3 (2000), pp. 663–69.
Ecologist Leslie Real: Leslie A. Real, "Animal Choice Behavior and the Evolution of Cognitive Architecture," Science, vol. 253 (Aug. 30, 1991), pp. 980–86; JZ interview with Real, Jan. 26, 1999; Joseph M. Wunderle, Jr. and Zoraida Cotto-Navarro, "Constant vs. Variable Risk-Aversion in Foraging Bananaquits," Ecology, vol. 69, no. 5 (1988), pp. 1434–38; letter to JZ from Wunderle, Oct. 17, 1997.
It's not just the birds: Elke U. Weber et al., "Predicting Risk Sensitivity in Humans and Lower Animals," PR, vol. 111, no. 2 (2004), pp. 430–45; Ralph Hertwig et al., "Decisions from Experience and the Effect of Rare Events in Risky Choice," PS, vol. 15, no. 8 (2004), pp. 534–39; JZ telephone and e-mail interviews with Elke Weber, March 6 and June 10, 2006; Sarah Holden and Jack VanDerhei, "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2005," www.ici.org.
Are there other reasons: Craig R. M. McKenzie and Jonathan D. Nelson, "What a Speaker's Choice of Frame Reveals," Psychonomic Bulletin & Review, vol. 10, no. 3 (2003), pp. 596–602; JZ interview with Slovic, June 29, 2005; Irwin P. Levin and Gary J. Gaeth, "How Consumers Are Affected by the Framing of Attribute Information before and after Consuming the Product," JCR, vol. 15 (Dec. 1988), pp. 374–78; Philip Sedgwick and Angela Hall, "Teaching Medical Students and Doctors How to Communicate Risk," British Medical Journal, vol. 327 (Sept. 27, 2003), pp. 694–95; Barbara J. McNeil et al., "On the Elicitation of Preferences for Alternative Therapies," New England Journal of Medicine, vol. 306, no. 21 (May 27,1982), pp. 1259–62.
The classic example of framing: Amos Tversky and Daniel Kahneman, "The Framing of Decisions and the Psychology of Choice," Science, vol. 211 (Jan. 30, 1981), pp. 453–58; see also Kahneman and Tversky, "Choices, Values, and Frames," in CVF, pp. 1–16.
Framing can lead: This example is adapted from Kahneman and Tversky's "Prospect Theory," Econometrica, vol. 47, no. 2 (1979), pp. 263–91; Richard H. Thaler and Eric J. Johnson, "Gambling with the House Money and Trying to Break Even," MS, vol. 36, no. 6 (June 1990), pp. 643–60; John S. Hammond et al., "The Hidden Traps in Decision Making," Harvard Business Review, Jan. 2006, pp. 118–26.
In the financial world: JZ interview with Nicholas Epley, Sept. 12, 2003; Nicholas Epley et al., "Bonus or Rebate?" JBDM, vol. 19, no. 3 (2006), pp. 213–27; Yahoo! Inc. press release, April 7, 2004; stock performance from http://finance.yahoo.com/; JZ, "Splitsville," MM, March 2001, pp. 55–56; JZ interview with Daniel Kahneman, Sept. 18, 1996; Daniel Kahneman and Dan Lovallo, "Timid Choices and Bold Forecasts," in CVF, pp. 393–413; JZ interview with Paul Slovic, June 29, 2005; Paul Slovic et al., "Rational Actors or Rational Fools?" www.decisionresearch.org/pdf/dr498v2.pdf; Eldar Shafir et al., "Money Illusion," in CVF, pp. 335–55.
What creates the frames: JZ e-mail interview with Cleotilde Gonzalez and Jason Dana, Jan. 25, 2006; Cleotilde Gonzalez et al., "The Framing Effect and Risky Decisions," Journal of Economic Psychology, vol. 26 (2005), pp. 1–20; see also Kip Smith et al., "Neuronal Substrates for Choice under Ambiguity, Risk, Gains, and Losses," MS, vol. 48, no. 6 (June 2002), pp. 711–18; Alumit Ishai et al., "Distributed Neural Systems for the Generation of Visual Images," Neuron, vol. 28 (Dec. 2000), pp. 979–90; Elia Formisano et al., "Tracking the Mind's Image in the Brain," Neuron, vol. 35 (July 3, 2002), pp. 185–204; Scott A. Huettel et al., "Decisions under Uncertainty," JN, vol. 25, no. 13 (March 30, 2005), pp. 3304–11; Antonia F. de C. Hamilton and Scott T. Grafton, "Goal Representation in Human Anterior Intraparietal Sulcus," JN, vol. 26, no. 4 (Jan. 25, 2006), pp. 1133–37.
Now imagine two scenarios: Benedetto De Martino et al., "Frames, Biases, and Rational Decision-Making in the Human Brain," Science, vol. 313 (Aug. 4, 2006), pp. 684–87.