Jason Zweig Quotes

The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The Intelligent Investor is a realist who sells to optimists and buys from pessimists.

The alluring, long-shot chance of a huge gain is the grease that lubricates the machine of innovation.

WHEN YOU INVEST, your mind has a mind of its own. At the very moment when you are most convinced of your own rationality, you may be feeling rather than thinking your way toward a decision.

What history does prove is that how risky stocks seem, and how risky they actually are, are inversely correlated.

Being right is the enemy of staying right because it leads you to forget the way the world works

Good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.

You don’t need to fall off a ten-story building in order to be afraid of falling off it,” says neuroscientist Antoine Bechara of the University of Southern California. “Your brain doesn’t need actual experience.

That’s why one of my favorite investing rules is “If the market is open, your wallet should be closed.” You should never act on an investing idea the same day you get it; the next day, your mood and situation will have changed, and the facts may look different to you. Sleeping on it is one of the simplest and best ways to make sure your decision is not just a momentary whim.

The risk you are likely to be rewarded for taking is the risk of owning all stocks. In effect, rather than betting on one roll of the dice, one spin at the roulette wheel, or a single hand at the blackjack table, you can own the whole casino. You can do this effortlessly, cheaply, and reliably by buying a total stock-market index fund, a low-cost portfolio of all the stocks worth owning.

Jason Zweig, senior writer and columnist at Money magazine and coauthor of the revised edition of Benjamin Graham's classic, The Intelligent Investor: "If you buy-and then hold-a total stock market index fund, it is mathematically certain that you will outperform the vast majority of all other investors in the long run. Graham praised index funds as the best choice for individual investors, as does Warren Buffett.

Stocks Here are some activities in the

Learn about the subject of behavioral finance. Jason Zweig’s book, Your Money and Your Brain (Simon & Schuster, 2007), will teach you to be a better investor. The logical side of your brain may recognize the street signs of simplicity, but the emotional side will surely steer you off course, or off a cliff. Unfortunately, it’s hard to know which side of your brain is in the driver’s seat when you are making a decision.

we often find out that what we thought we wanted before we got it is no longer what we really want once we have it.

The intelligent investor, however, gets interested in big growth stocks not when they are at their most popular—but when something goes wrong. In July 2002, Johnson & Johnson announced that Federal regulators were investigating accusations of false record keeping at one of its drug factories, and the stock lost 16% in a single day. That took J & J’s share price down from 24 times the previous 12 months’ earnings to just 20 times. At that lower level, Johnson & Johnson might once again have become a growth stock with room to grow—making it an example of what Graham calls “the relatively unpopular large company.

Putting up to a third of your stock money in mutual funds that hold foreign stocks (including those in emerging markets) helps insure against the risk that our own backyard may not always be the best place in the world to invest.

Graham’s criterion of financial strength still works: If you build a diversified basket of stocks whose current assets are at least double their current liabilities, and whose long-term debt does not exceed working capital, you should end up with a group of conservatively financed companies with plenty of staying power.

The Art of Subtraction If there is one habit that all of the investors in this chapter have in common, it’s this: They focus almost exclusively on what they’re best at and what matters most to them. Their success derives from this fierce insistence on concentrating deeply in a relatively narrow area while disregarding countless distractions that could interfere with their pursuit of excellence. Jason Zweig, an old friend who is a personal finance columnist at the Wall Street Journal and the editor of a revised edition of The Intelligent Investor, once wrote to me, “Think of Munger and Miller and Buffett: guys who just won’t spend a minute of time or an iota of mental energy doing or thinking about anything that doesn’t make them better. . . . Their skill is self-honesty. They don’t lie to themselves about what they are and aren’t good at. Being honest with yourself like that has to be part of the secret. It’s so hard and so painful to do, but so important.

YouTube also contains a treasure trove of lectures by nearly all of finance’s leading lights, strewn throughout its vast wasteland of misinformation. Tread carefully. A few wrong clicks and you’ll wind up with a QAnon conspiracist or a crypto bro. Of the names I’ve mentioned in this book, I’d search for John Bogle, Eugene Fama, Kenneth French, Jonathan Clements, Zvi Bodie, William Sharpe, Burton Malkiel, Charles Ellis, and Jason Zweig. Worthwhile finance podcasts abound. Start with the Economist’s weekly “Money Talks” and NPR’s Planet Money, although most of the latter’s superb coverage revolves around economics and relatively little around investing. Rick Ferri’s Boglehead podcast interviews cover mainly passive investing. Another financial podcast I highly recommend is Barry Ritholtz’s Masters in Business from Bloomberg. Podcasts are a rapidly evolving area. Lest you wear your ears out, you’ll need discretion to curate the burgeoning amount of high-quality audio. Research mutual funds. All the fund companies discussed in this book have sophisticated websites from which basic fund facts, such as fees and expenses, can be obtained, as well as annual and semiannual reports that list and tabulate holdings. If you’re researching a large number of funds, this gets cumbersome. The best way is to visit Morningstar.com. Use the site’s search function to locate the main page for the fund you’re interested in and click the “Expense” and “Portfolio” tabs to find the fund expense ratio and detailed data on the fund holdings. Click the “Performance” tab to see the fund’s return over periods ranging from a single day up to 15 years, and the “Chart” tab to compare the returns of multiple funds over a given interval. ***

Never dig so deep into the numbers that you check your common sense at the door, and always read the proxy statement before (and after) you buy a stock.

You should welcome a bear market, since it puts stocks back on sale.

Interviewed in 1999 by Jason Zweig, Aronson said, “Small-caps don’t outperform over time . . . Sure, the long-run numbers show small stocks returning roughly 1.2 percentage points more than large stocks . . . [But] the extra trading costs easily eat up the entire extra return—and then some!

Every profession is a conspiracy against the laity, and every profession’s jargon is meant to confuse and exclude those who aren’t part of the guild.

A stock is not cheap or expensive merely because its price is below or above a particular number. It is cheap or expensive only in relation to the fundamental value of the underlying business, which has nothing to do with whether the share price is near an anchor. If you find yourself getting excited over any investment based purely on its price, you’re anchoring.

As market expert Jason Zweig puts it, “If we shopped for stocks the way we shop for socks, we’d be better off.” We are wrong when we feel good about stocks having gone up, and we are wrong when we feel bad about stocks having gone down.

As neuroscientist Arne Öhman puts it, evolution has designed our emotions “to make us want to do what our ancestors had to do.

In truth, the reflexive brain is not a single integrated system, but a jumble of structures and processes that tackle different problems in varying ways, everything from the “startle reflex” and pattern recognition to the perception of risk or reward and the character judgments about the people we meet. What these processes have in common, however, is that they tend to run rapidly, automatically, and below the level of consciousness.

Faced, for example, with a difficult problem to solve—“Will this stock keep going up?”—many investors consult a chart of recent price performance. If the trend line slopes upward, then they immediately answer “Yes,” without realizing that their reflexive system has tricked them into answering an entirely different question. All the chart really shows is the answer to a much easier problem: “Has this stock been going up?” People in this kind of situation “are not confused about the question they are trying to answer,” says Kahneman. “They simply fail to notice that they are answering a different one.

DON’T JUST PROVE; TRY TO DISPROVE. As we’ve seen, the reflexive brain believes that the best way to prove an assertion is to keep looking for more proof that it is true. But the only way to be more certain it’s true is to search harder for proof that it is false.

rapid movement fire up our minds to expect that the market must be “trying to do something.

But that kind of critical thinking is anathema to your intuition, which is most comfortable when dealing with the concrete reality of “what is.” To handle a conceptual abstraction like “what is not,” you need your reflective system to kick in with the hard mental effort of comparing alternatives and evaluating evidence. That requires asking tough questions like “under what conditions would this no longer be true or fail to work?” And the human mind, which functions as what psychologists Susan Fiske of Princeton and Shelley Taylor of UCLA have called a “cognitive miser,” tends to shy away from that kind of effort. If the reflective system can’t readily find a solution, the reflexive brain will resume control, using sensory and emotional cues as shortcuts. That’s why even professional statisticians failed to solve Hogarth and Einhorn’s task correctly: Why go through the trouble of trying to test the logic of all four answers when answer No. 1 feels and sounds so right at first blush?

But it’s the denominator that matters; that’s where the real money is. After all, the sum total of your wealth is a much more important number than the amount by which it rose or fell on any given day. Even so, many investors fixate on the numbers that change the most, overlooking the much larger amounts of money that are at stake overall.

To get the best use out of any tool or machine, it helps to know at least a little about how it works; you will never maximize your wealth unless you can optimize your mind. Fortunately, over the past few years, scientists have made stunning discoveries about the ways the human brain evaluates rewards, sizes up risks, and calculates probabilities. With the wonders of imaging technology, we can now observe the precise neural circuitry that switches on and off in your brain when you invest.

The newest findings in neuroeconomics suggest that much of what we’ve been told about investing is wrong. In theory, the more we learn about our investments, and the harder we work at understanding them, the more money we will make. Economists have long insisted that investors know what they want, understand the tradeoff between risk and reward, and use information logically to pursue their goals. In practice, however, those assumptions often turn out to be dead wrong.

Among the most painful of the stock market’s many ironies is this: One of the clearest signals that you are wrong about an investment is having a hunch that you’re right about it. Often, the more convinced you are that your hunch will pay off big, the more money you are likely to lose.

Neuroeconomics shows that you will get the best results when you harness your emotions, not when you strangle them.

financial losses are processed in the same areas of the brain that respond to mortal danger;

control what you can and let go of everything else.

During 1998 and 1999, one group of stocks outperformed the rest of the technology industry by a scorching 63 percentage points—merely by changing their official corporate names to include .com, .net, or Internet.

A control group of people with undamaged brains readily learned to favor the forecaster whose predictions turned out to be most accurate. The prefrontal patients, however, made their judgments perceptually instead of conceptually, relying on what Grafman calls “cues that typically had nothing to do with a good choice.” One patient, for example, preferred the advisor whose image was displayed on a green background, “since it is springtime.” It seems that if the prefrontal cortex is impaired, the brain’s internal checks-and-balances system breaks down—and the reflexive areas may take over unopposed.

At the University of Iowa, students were briefly shown numbers that they had to memorize. Then they were offered the choice of either a fruit salad or a chocolate cake. When the number the students memorized was seven digits long, 63% of them chose the cake. When the number they were asked to remember had just two digits, however, 59% opted for the fruit salad. Our reflective brains know that the fruit salad is better for our health, but our reflexive brains crave that gooey, fattening chocolate cake. If the reflective brain is busy figuring something else out—like trying to remember a seven-digit number—then impulse can easily prevail. On the other hand, if we’re not thinking too hard about something else (with only a minor distraction like memorizing two digits), then the reflective system can overrule the emotional impulse of the reflexive side.

Economist Colin Camerer of the California Institute of Technology sums up the reflexive system this way: “It’s kind of like a guard dog. It makes rapid but sort of sloppy decisions. It will always attack the burglar, but sometimes it might attack the postman, too.” That’s why “blink” thinking can get investors into trouble.

All this research, says Buffett, really points you back to one central issue: “My first question, and the last question, would be, ‘Do I understand the business?’ And by understand it, I mean have a reasonably good idea of what it will look like in five or ten years from an economic standpoint.” If you aren’t comfortable answering that basic question, you shouldn’t buy the stock.

Likewise, in early 1999, the stock of Mannatech Inc. shot up 368% in its first two days of trading when Internet-crazed traders mistakenly thought Mannatech was a technology stock; in fact, it is a marketer of laxatives and nutritional supplements.

All this motion can be so distracting that Warren Buffett has said, “I always like to look at investments without knowing the price—because if you see the price, it automatically has some influence on you.

Benjamin Graham was asked what it takes to be a successful investor, he replied: “People don’t need extraordinary insight or intelligence. What they need most is the character to adopt simple rules and stick to them.

Stocks are like weather, altering almost continuously and without warning; businesses are like climate, changing much more gradually and predictably.

In the long run a stock has no life of its own; it is only an exchangeable piece of an underlying business. If that business becomes more profitable over the long term, it will become more valuable, and the price of its stock will go up in turn. It’s not uncommon for a stock’s price to change as often as a thousand times in a single trading day, but in the world of real commerce, the value of a business hardly changes at all on any given day. Business value changes over time, not all the time. Stocks are like weather, altering almost continuously and without warning; businesses are like climate, changing much more gradually and predictably.

When Norbert Schwarz warns, “Never make an important decision before you’ve slept on it,” he is not repeating a cliché. He is stating fundamental wisdom freshly confirmed by the latest scientific research. You will almost always make a better investing decision if you sleep on it rather than acting on your first impulse.

In coming back to the lottery like a moth to the flame, Laurie Zink is typical: A survey of people who had won at least $1 million in the Ohio state lottery found that 82% kept buying lottery tickets on a regular basis after their windfall.

Making money feels good, all right; it just doesn’t feel as good as expecting to make money. In a cruel irony that has enormous implications for financial behavior, your investing brain comes equipped with a biological mechanism that is more aroused when you anticipate a profit than when you actually get one.

According to money manager David Dreman, over the past thirty years the analysts’ estimate of what companies would earn in the next quarter has been wrong by an average of 41%. Imagine that the TV weatherman said it would be 60 degrees yesterday, and it turned out to be 35 degrees instead—also a 41% error (on the Fahrenheit scale). Now imagine that’s about as accurate as he ever gets. Would you keep listening to his forecasts?

It’s important to realize,” says Stanford’s Knutson, “that the magnitude of a long-shot reward is going to drive your behavior far more than the probabilities, which are minuscule. If you can recognize that, then you should be able to say to yourself, ‘I should walk away and play with my kids for an hour and then think about it.’” Making a financial decision while you’re inflamed by the prospects of a big gain is a terrible idea. Calm yourself down—if you don’t have kids to distract you, take a walk around the block or go to the gym—and reconsider when the heat of the moment has passed and your anticipation circuits have cooled off. So don’t just blink; think.

Celera had achieved nothing short of a scientific miracle. So why did the stock crash? The likeliest explanation is simply that the fires of anticipation are so easily quenched by the cold water of reality. Once the good news that investors have awaited for so long is out, the thrill is gone. The resulting emotional vacuum almost instantly fills up with a painful awareness that the future will not be nearly as exciting as the past. (As Yogi Berra famously said, “The future ain’t what it used to be.”) Getting exactly what they wished for leaves investors with nothing to look forward to, so they get out and the stock crashes.

Getting exactly what they wished for leaves investors with nothing to look forward to, so they get out and the stock crashes.

In the movie Dumb and Dumber, Jim Carrey’s character, Lloyd, asks the love of his life what his chances are of making her love him, too. “Not good,” replies Mary Swanson. “Not good like one out of a hundred?” asks Lloyd haltingly. Mary answers, “I’d say more like one out of a million.” Exclaims Lloyd: “So you’re telling me there’s a chance? Yeah!” It’s no different when you buy a stock or a mutual fund: Your expectation of scoring a big gain will typically elbow aside your ability to evaluate how likely you are to earn it. That means your brain will tend to get you into trouble whenever you’re confronted with an opportunity to buy an investment with a hot—but probably unsustainable—return.

Brian Knutson has found that while your reflexive brain is highly responsive to variations in the amount of reward at stake, it is much less sensitive to changes in the probability of receiving a reward. In effect, your investing brain is better at asking “How big is it?” than “How likely is it?” Thus, the bigger the potential gain, the greedier you will feel—regardless of how poor the odds of earning that gain might be.

Thus, as Taketoshi Ono’s experiments with rats suggested, anticipation appears to be a two-stage process. The first stage looks backward with memory, the second looks forward with hope. That would explain why Laurie Zink, who never bought a lottery ticket before she won on a reality show, now loves playing lotto—and why Mark Twain, despite all his wealth, kept trying to strike it rich anyway.

Our anticipation circuitry forces us to pay close attention to the possibility of coming rewards, but it also leads us to expect that the future will feel better than it actually does once it arrives. That’s why it’s so hard for most of us to learn that the old saying is true: Money doesn’t buy happiness. After all, it forever feels as if it should.

Hiroyuki Nakahara of the RIKEN Brain Science Institute in Wako, Japan, calls this early-warning flare “the anticipation of anticipation of reward.” It’s as if Pavlov’s dogs salivated not when the bell rang, but as soon as they saw Pavlov start walking toward the bell.

So the possibility of loss makes the hope of gain even more tantalizing. If you think about it, this makes perfect sense. Evolution has naturally designed us to pay closer attention to rewards when they come surrounded by risks—just as we all know we need to be more careful when picking a rose than when picking a daisy.

Psychologist Howard Rachlin of the State University of New York at Stony Brook has shown that one of the best first steps toward quitting tobacco is to try smoking the same number of cigarettes each day—and that offers a hint for us. Fewer opportunities for greed, plus less variability in the amount of satisfaction you can look forward to, will equal more self-control.

Fewer opportunities for greed, plus less variability in the amount of satisfaction you can look forward to, will equal more self-control.

Wall Street’s cynical investment bankers systematically underpriced initial public offerings of stock, or IPOs, enabling the shares to soar by as much as 697% on their first day of trading. That, in turn, made investors desperate to get in on the ground floor of the next IPO. It’s no coincidence that the official disclosure document of an IPO is called a “prospectus,” from the Latin term for “looking forward.

So how can you keep your seeking system from landing you in financial trouble? The first thing to realize is that your anticipation circuitry will get carried away. That’s its job. So, if the rest of your brain doesn’t impose checks and balances, you’ll end up chasing every hot return that flares up in front of you—and capturing nothing, in the long run, but risk and loss.

The pursuit of patterns in random data is a fundamental function in our brains—so basic to human nature that our species should not be known only as Homo sapiens, or “man the wise.” We might better be named Homo formapetens, or “man the pattern-seeker.

the Motley Fool’s goofy ratio couldn’t possibly be causing stock prices to rise, the only sensible conclusion was that its predictive power was an illusion. The Foolish Four portfolio made investors feel like idiots when it lost 14% in the year 2000 alone. Meanwhile, after six years of underperforming the market by nearly two percentage points annually, the Harry Dent–inspired mutual fund shut down in mid-2005 with the Dow mired about 31,000 points below his forecast.

These steps will help you remember that correlation is not causation, and that most market prophecies are based on coincidental patterns. That was the problem in the late 1990s at the Motley Fool website. Its Foolish Four portfolios were based on research claiming that factors like the ratio of a company’s dividend yield to the square root of its stock price could predict future outperformance. In the long run, however, a company’s stock can rise only if its underlying business earns more money.

When a process seems obviously random—like, say, coin flips or spins of a roulette wheel—then the gambler’s fallacy takes hold of our minds. That leads us to believe that a streak of luck is likely to reverse. (It’s when human skill appears to play a major role, as in sports, for example, that we tend to believe a hot streak will persist.)

There’s a simple way to free yourself from the grip of the gambler’s fallacy. Twenty years ago, researchers at Carnegie Mellon University showed that people will intuitively tend to bet on tails if a coin comes up heads several times in a row—unless you let the coin “rest” for a while before flipping it again. Then people will bet on heads, as if the passage of time somehow makes them feel that the chance of getting heads again has reverted to its true ratio of 50?50. This experiment, along with Wolford’s findings, suggests that one of the best ways to prevent your investing brain from fooling you into perceiving patterns that aren’t there is simply to take a break from studying a stock or the market. Diverting yourself with another activity for twenty minutes or so should do the trick.

The similarity to Nintendo or PlayStation has a chilling implication: Researchers have found that when players do well at a video game, the amount of dopamine released in their brains roughly doubles, and that this surge can linger for at least a half-hour afterward. So the more “price points” you can see, the more your brain will fool itself into thinking it has detected a predictable pattern in the numbers—and the more powerfully your dopamine system will kick in. As we’ve seen, it can take as few as three price changes to make you think you’ve spotted a trend; in years past, when investors got their stock prices out of the newspaper, it could take three days to gather that much data, while today a market website will get you there in less than sixty seconds. No wonder, by the late 1990s, the typical “investor” in popular tech stocks like Qualcomm, VeriSign, and Puma Technology owned them for an average of less than eight days at a time.

The financial markets are almost—though not quite—as random as those flashing lights, and they vary in incredibly complex ways. Although no one has yet identified exactly where in the brain the interpreter is located, its existence helps explain why the “experts” keep trying to predict the unpredictable. Facing a constant, chaotic storm of data, these pundits refuse to admit that they can’t understand it. Instead, their interpreters drive them to believe they’ve identified patterns from which they can project the future.

The brain forms expectations about patterns,” explains Huettel, “because events in nature often do follow regular patterns: When lightning flashes, thunder follows. By rapidly identifying these regularities, the brain makes efficient use of its limited resources. The brain can expect a reward even before it is delivered.” But, he adds, “the downside to this process is that in our modern world, many events don’t follow the natural physical laws that our brains evolved to interpret. The patterns our modern brains identify are often illusory, as when a gambler bets on ‘hot’ dice or an investor bets on a ‘hot stock.

The main difference between us and apes,” explains anthropologist Todd Preuss of Emory University, “seems to be less a matter of adding new areas [in the brain], and more a matter of enlarging existing areas and modifying their internal machinery to do new and different things. The ‘what if’ questions, the ‘what will happen when’ questions, the short-term and long-term consequences of doing X or Y—we have lots more of the brain where that kind of processing goes on.

Better yet, an online portfolio tracker won’t let your memory play tricks on you or selectively “bury” your mistakes, so it will provide a complete and accurate record of your decisions.

We like to think that we’re ‘thinking’ when we estimate probabilities,” says Eric Johnson, a psychology professor at Columbia Business School, “but a surprisingly large portion of the process appears to occur automatically, below the level of consciousness.

So, instead of driving yourself crazy by constantly monitoring your stocks or funds, you should cut back gradually until you look at their value only four times a year—either at the end of each calendar quarter or on four easily memorable and roughly equidistant dates. After all, time is money—but money is also time. If you’re compulsively checking up on the prices of your investments, you’re not only hurting your financial returns, you’re unnecessarily taking precious time away from the rest of your life.

Remember, anybody can look like a genius when most investments are going up. As psychologist Daniel Kahneman quips, “In a rising market, enough of your bad ideas will pay off so that you’ll never learn that you should have fewer ideas.

The real miracle would be if someone couldn’t find a statistical variable that seemed to predict the financial future.

In 1997, money manager David Leinweber wondered which statistics would have best predicted the performance of the U.S. stock market from 1981 through 1993. He sifted through thousands of publicly available numbers until he found one that had forecast U.S. stock returns with 75% accuracy: the total volume of butter produced each year in Bangladesh. Leinweber was able to improve the accuracy of his forecasting “model” by adding a couple of other variables, including the number of sheep in the United States. Abracadabra! He could now predict past stock returns with 99% accuracy. Leinweber meant his exercise as satire, but his point was serious: Financial marketers have such an immense volume of data to slice and dice that they can “prove” anything.

The only way to achieve everything you’re capable of is to accept what you are not capable of.

The single biggest step you can take to improve your investing results is to stare long and honestly into a mirror to see whether you really are the investor you think you are. Are you truly above average? Are your own decisions the main force that shapes your returns? Is “buying what you know” the best investment approach? Did you really predict where the market was going? Do you know as much as you think you do? The bad news is that, for most of us, the answer to most of these questions is No. The good news is that neuroeconomics can help you bring your confidence into synch with reality, making you a better investor than you may ever have imagined.

As Kahneman puts it, “The combination of optimism and overconfidence is one of the main forces that keep capitalism alive.

Study after study has asked people how confident they are of winning both before and after they place a bet. The mere act of putting money down makes people more certain they will win—and it takes only a few seconds for that certainty to kick in. Wagering as little as 25 cents can make bettors up to three times more confident than people who have not yet risked their own money.

Brain scans in Peter Kenning’s neuroeconomics lab at the University of Münster in Germany show that when investors consider putting money in foreign markets, the amygdala—one of the brain’s fear centers—kicks in. These findings suggest that keeping our money close to home generates an automatic feeling of comfort, while investing in unfamiliar stocks is inherently frightening. Those responses originate in the biological bedrock of the reflexive brain.

You might think that your likes and dislikes are conscious choices, that your preferences are based on inferences you make from studying the evidence. Instead, Zajonc’s findings show, our preferences come out of our experiences—regardless of whether they ever were conscious. Whatever we experience most often, we are most likely to end up liking

Whatever we experience most often, we are most likely to end up liking

Being in the presence of familiar things (even when we are unaware of them) simply makes us feel better. “The repetition of an experience is intrinsically pleasurable,” says Zajonc. “It augments your mood, and that pleasure spills over anything which is in the vicinity.

In the stock market, the shares that are most popular and familiar to investors change hands more often, and that, in turn, attracts still more attention to these stocks as they turn up in the day’s list of “most active shares.” Because of all that extra exposure, the stocks with the highest trading volume have higher returns in the short run—but, in the long term, they tend to underperform by two to five percentage points per year. In the stock market, which is a game of inches, that’s a country mile.

And once hordes of people like a company, it becomes what finance professor David Hirshleifer calls a “celebrity stock.” At that point, just like Kathie Lee Gifford or Mr. T, it is almost sure to end up overpriced, overexposed, and overdue for a collapse in popularity. No matter how great a business may be, its stock can’t be an enduring moneymaker once an investor stampede drives the price up too high. Thus, over the long run, familiarity breeds failure.

Researchers at the University of Wisconsin have shown that imagining you are in control of a situation—even when it is entirely out of your hands—can reduce the neural activity in areas of your brain that process pain, anxiety, and conflict. By helping to dampen your brain’s distress network, the illusion of control can create actual comfort.

But Kandel’s safety-conditioned mice barge right out into the middle of open space when they hear those beeps that they’ve learned to associate with the absence of immediate danger. Boldly going where no mouse has gone before, they wander much farther afield in a bout of what Kandel calls “adventurous exploration.” What makes these mice turn lion-hearted? When safety-conditioned mice hear the series of beeps, neurons in the caudoputamen—a part of the mouse brain similar to our caudate area—go into overdrive, firing at nearly three times their normal intensity. At the same time, neurons in the amygdala—a fear center in the mouse brain, as it is in ours—quiet down. It’s as if the perception of safety leads to a feeling of mastery over the environment, numbing the brain’s ability to be afraid. No wonder investors take more risk when their own gains fool them into thinking the market has gotten safer.

Explains psychologist Mauricio Delgado: “Being in control—or at least believing that we are—makes us that much more invested in our actions and their consequences.

Online stock traders often check their portfolios ten or twenty times an hour—as if, by not letting their stocks out of their sight for more than a few minutes, they could somehow keep their prices from dropping.

Many 401(k) investors load up on their own company’s stock in the apparent belief that they can levitate it all by themselves. “When you own a significant number of shares, you want to work hard and make the company prosper so you can prosper,” said an employee of Global Crossing, the fiber-optic phone network, in 2001. (His hard work, unfortunately, did not keep Global Crossing from going bust and wiping out his retirement savings.)

The upshot: An early run of success makes people feel they suddenly have power over a purely random process. Instead of attributing the results to an abstract force like “chance,” they now believe in “luck,” a personal force that watches over them (at least temporarily) like a guardian angel. So long as luck seems to be lingering in the air, people feel compelled to make the most of it—and that can lead investors to take reckless amounts of risk.

Hindsight bias makes surprises vanish,” says psychologist Daniel Kahneman. “People distort and misremember what they formerly believed. Our sense of how uncertain the world really is never fully develops, because after something happens, we greatly increase our judgments of how likely it was to happen.

Halfway through, however, the experiments secretly reversed the payoffs, so the deck that had originally been hot now was cold, and vice versa. Strikingly, the players that had tasted a hot streak could not recognize that the rules of the game had changed. “They don’t get it,” says Cal-Tech neuroscientist John Allman. “The people who’ve had the biggest gain have the hardest time reversing their choice. It’s as if their ability to correct errors has been anesthetized, and they have become addicted to the favorable outcome.

Once you understand that monetary gains have this narcotic power, it no longer seems surprising that people can get so carried away financially.

This “I-told-you-so” rant from your inner con man makes it hard to remember that he never told you any such thing. And conning yourself about Google may well make you more eager to take the plunge the next time you have a chance to get in on the ground floor of a risky high-tech start-up. Of course, “the next Google” may turn out to be the next Enron instead.

That’s the power of hindsight bias—yet another way in which your inner con man works at trying to make you feel smarter than you really are. By preventing you from learning the truth about the investing past, hindsight bias keeps you from getting a firm grip on the financial future.