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The SweetSpot Investment Letter
October 5, 2007
Subject: Your Money and Your
Brain
Greetings,
Some time ago I wrote of my discovery that the field of behavioral finance offers insights
into the investor insanity that SweetSpot exploits. It was pretty scary stuff: We are all at the mercy of our caveman brains.
People react predictably (and irrationally) to the same events. Most of us can't help ourselves; it's human nature at work.
(It turns out that our rational brain can overrule our caveman brain if it only knows why it should.)
Many have dismissed
the findings of behavioral finance as so much psychobabble. One investment "professional" even said, "So what? Even if it's
all true, there's no way to profit from it." Reading that, I immediately thought of the words of the U.S. Director of Patents
around the year 1900. He feared his job was obsolete: "Everything that can be invented has been invented," he said. Yeah,
right...
It's hard to argue with hard science, however. Now comes a book by Jason Zweig, reviewed in last Saturday's
NY Times: Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich. Mr. Zweig describes study
after study showing how scientists have been able to map the human brain and monitor its functioning in real time. They can
actually show us how tasks involving money and investments cause our caveman brain to fire on all cylinders, allowing our
rational brain to function just enough to carry out directives and think it's in charge...
The other day I heard a
radio interview of Mr. Zweig, who has been promoting his book. The interviewer asked him whether the findings of neuroeconomics
have affected the way he invests his own money. He replied something like, "Absolutely. I have completely removed emotion
from the equation. I have a fixed amount automatically withdrawn from my bank account every month and invested in several
low-cost stock-and-bond index funds." I imagine this is what he would advise all investors to do.
Mr. Zweig's strategy
is a recipe for mediocrity. It seems as if the best advice the "experts" can offer when asked what to do about the obstacles
we place in front of ourselves is, "Don't do that!"
Instead, Mr. Zweig should ask:
1) Can we isolate the circumstances
where everyone is acting irrationally?
2) When we find these circumstances, can we exploit them?
How lucky
were we to have stumbled upon the answers when we weren't even asking the questions? And no one is asking them now, either....
Cheers,
Neil
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