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.

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

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

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.

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.

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.

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.

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.

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.

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.

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. ***

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.

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?

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.

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.

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.

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.

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.

How much money you made or lost on your last investments can transform how risky you think the next one is. The same bet can feel either dangerous or safe, depending on whether you are on a hot streak or in a slump. That’s how your investing brain is designed. Animals that are running low on food, water, or warmth have what ecologists call a “negative energy budget.” Creatures that are hungry, thirsty, or cold can rarely afford to take the chance that small but steady gains will be enough to keep them alive. In effect, they need to try striking it rich. So animals in a state of deprivation tend to prefer more variable rewards: While that raises the risk of getting nothing, it’s also the only feasible way to get the big boost they need to restore their depleted energy.

If you find it hard to imagine stepping outside yourself, try an exercise anyone can relate to. Before concluding that an investment decision is right for you, ask whether you’d be comfortable advising your mother to do the same thing. If you would tell her not to do it, then why should you do it? I call this the WWMD question (What Would Mom Do?).

As BusinessWeek put it during the heart of a bear market long ago, “For investors…low stock prices remain a disincentive to buy.” But if the value of the business is solid, a declining stock price should be an incentive to buy, because it enables you to get more shares for less. And if the stock price drops below the business value, you have that rare opportunity that Graham called a “margin of safety”—the assurance that you can increase your stake for less than what it is actually worth.

When institutions own a hot stock in a trendy industry, they usually have heard of it by word of mouth rather than through original research—and they go on to talk it up with three times as many colleagues as the owners of less exciting stocks do. No wonder “everybody” often seems to be talking about the same stock.

Informational cascades are not necessarily irrational. If you really don’t know much about automobiles, you should try to figure out who does and take your cue from them, especially when you have to make a decision on the spot and have no time to learn more on your own. It’s a simple guideline for making simple choices when you know you don’t have all the information you need.

Animals seem more inclined to let others do some of their thinking for them when their own information is incomplete, outdated, or if they feel vulnerable.

Since no one really has a fixed tolerance for risk, says psychologist Paul Slovic, it’s more helpful to think in terms of “goals, objectives, and outcomes.” How much money will you need down the road? How will you get there? What kind of result do you want to attain—or want to avoid? To answer these questions, you need to know your budget, calculate your current assets, and plan your future income and expenses. While those numbers aren’t perfectly certain, either, they are a much more reliable basis for judgment than a squishy concept like “risk tolerance.

If we were strictly logical, we would judge the odds of a risk by asking how often something bad has actually happened under similar circumstances in the past. Instead, explains psychologist Daniel Kahneman, “we tend to judge the probability of an event by the ease with which we can call it to mind.” The more recently an event has occurred, or the more vivid our memory of something like it in the past, the more “available” an event will be in our minds—and the more probable it will seem to happen again. But that’s not the right way to assess risk. An event does not become more likely to recur merely because its last occurrence was recent or memorable.

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.

The same ignorance of our own ignorance haunts our financial judgments. Among American workers who say they are “very confident” that they will have enough money to live comfortably in retirement, 22% are currently saving nothing for that goal, and 39% have saved less than $50,000. Another 37% have never even estimated how much money they will need to retire comfortably.

Because they so often think they know what’s coming, overconfident investors are forever buying or selling something. And yet they know less than they think they do. The portfolios of those who trade the most underperform the holdings of those who trade the least by an amazing 7.1 percentage points per year.

Equivalent ways of describing something should lead to equivalent judgments and decisions,” says University of Oregon psychologist Paul Slovic. “But it’s not true. People’s judgments about risk are very moveable and subjective.” When you face a chance to make or lose money, your decision can be pulled one way or another like a lump of Silly Putty just by a minor change in context or description—what psychologists call framing.

study asked more than 400 doctors whether they would prefer radiation or surgery if they became cancer patients themselves. Among the physicians who were informed that 10 out of 100 patients would die from surgery, half said they would prefer to be treated with radiation. Among those who were told that 90 out of 100 patients would survive surgery, only 16% said they would choose radiation.

Because the alternative frames play so differently on our feelings, we don’t even notice that all four programs are equivalent.

When a choice is framed positively, as a potential gain, it’s as if the glass is partly full. And that seems like an improvement over the empty glass we started with, so our instinct is to preserve what we’ve gained.

Framing can lead to other freaky decisions. Imagine that you have $2,000 in the bank. I offer you a choice: Do nothing, or take a 50/50 chance of either losing $300 or winning $500. Would you stand pat or take the gamble? Think about it for a second. Now imagine, again, that you have $2,000 in the bank. Now I offer you this choice: Do nothing, or take a 50/50 chance of ending up with either $1,700 or $2,500. Would you stand pat or take the gamble? Most people reject the first gamble but take the second one. That’s because the first is framed to stress the amount you will gain or lose relative to what you started out with, while the second is framed to emphasize the total amount you end up with. The change feels bigger—and potentially scarier—in the first frame, so most people turn it down. The two gambles are economically identical. Psychologically, they are worlds apart.

You will be far more inclined to take a risk if you’re told that the odds of success are 1 in 6 than if you’re told there’s a 16% chance of succeeding. If you’re told there’s an 84% chance of failing, you probably won’t touch it.

The idea of saving 200 people in Program A is literally a “no-brainer,” says Gonzales. Because Program A is framed as a sure gain, “it’s a simple alternative that can be evaluated at very low cognitive cost,” she explains. And this frame suggests no emotional cost, since it calls your attention to the lives saved rather than the lives lost. You can see how little effort the brain takes to evaluate this choice in the top left of Figure 6.1. On the other hand, when a risk is framed negatively—for instance, by stressing those 400 lost lives—then it incites images and ignites emotions. The thought of losing money, like losing lives, is so inherently alarming that it ends up triggering intense activation in an area of your brain called the intraparietal sulcus. This curving wrinkle of tissue, located toward the top of your head behind your ears, appears to function somewhat like a mental movie screen. It enables you to visualize and imagine the consequences of actions not yet taken. The more uncertain the consequences are, the more active the intraparietal sulcus becomes.

When we make decisions,” explains Gonzalez, “we balance how much we need to think about an alternative against how much we stand to lose.” When your brain has to work this hard, it’s the emotional stakes that tip the balance. Even a slight chance that no one will die feels better than the certainty that most people will die. That’s why we pick Program D: Emotionally, it’s the easy way out.

When psychiatrists were told that “patients similar to Mr. Jones are estimated to have a 20% chance of committing an act of violence” within six months, 79% were willing to release Mr. Jones from a mental hospital. But when they heard that “20 out of every 100 patients similar to Mr. Jones are estimated to commit an act of violence” in the same period, only 59% said they would let him out—even though the odds that he might hurt somebody were identical.

So a financial advisor can goad you into taking (or avoiding) an investment risk just by changing how he describes it. If he boots up some fancy software that says you have a 78% chance of meeting your retirement goals, that sounds great. But he can reframe the same result and strike fear into your heart by declaring that “22 out of 100 people with your strategy will end up eating cat food in the dark”—and the next thing you know, he has foisted a bunch of risky stocks onto you that you never wanted.

As the study of doctors considering cancer treatment showed, experts can fall prey to framing problems just as easily as amateurs can. Whether you are a retail investor or a professional money manager, your “risk tolerance” is supposed to be an integral part of your personality. But it can be transformed by an embarrassingly basic twist in wording. That’s why every investor must be eternally vigilant against the dangers of getting framed.

The German mathematician Karl Jacobi had useful advice: “Invert, always invert.” Explains the investor Charles Munger: “It is in the nature of things, as Jacobi knew, that many hard problems are best solved only when they are addressed backward.” If someone tells you that the odds of success are 90%, invert the frame like this: That means there’s a 10% chance of failure. Is that too high for you? Next, flip the percentage frame into a personal one: One out of every ten people who try this will fail. How do I know I won’t be the one?

Neither a man nor a crowd nor a nation can be trusted to act humanely or think sanely under the influence of a great fear…. To conquer fear is the beginning of wisdom. —Bertrand Russell

When an intangible feeling of risk fills the air, you can catch other people’s emotions as easily as you can catch a cold. Merely reading a brief newspaper story about crime or depression is enough to prompt people into more than doubling their estimates of the likelihood of unrelated risks like divorce, stroke, or exposure to toxic chemicals. Just as when you have a hangover the slightest sound can seem deafening, an upsetting bit of news can make you hypersensitive to anything else that reminds you of risk. As is so often the case with the reflexive brain, you may not realize that your decisions are driven by your feelings. Roughly 50% of people can recognize when they have been disturbed by a bit of negative news, but only 3% admit that being upset may influence how they react to other risks.

In short, overreacting to raw feelings—“blinking” in the face of risk—is often one of the riskiest things an investor can do.

The amygdala helps focus your attention, in a flash, on anything that’s new, out of place, changing fast, or just plain scary. That helps explain why we overreact to rare but vivid risks. After all, in the presence of danger, he who hesitates is lost; a fraction of a second can make the difference between life and death.

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.

Social signals can set off the hot button of your brain as easily as physical dangers can. When photographs of fearful faces are flashed for 33 one-thousandths of a second—and immediately followed by longer exposures of emotionally neutral faces—your reflective mind has no time to become aware that you saw anything scary. But your reflexive brain will “know” it with lightning speed. The exposure to a fearful face for just a thirtieth of a second is enough to spark intense activation in the amygdala, priming your body for action just in case this subliminal threat turns out to be real.

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

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.

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

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.

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

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.

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.

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.

Experiments with monkeys have shown that when the odds of earning a reward are around 50/50, neurons deep in their brains emit a surge of dopamine that steadily escalates for nearly two seconds. Rewards that are highly certain trigger a much shorter, flatter response. The extra excitement that an “even gamble” generates in the dopamine system may be nature’s way of getting us off the fence.

A little knowledge really is a dangerous thing: Learning even a tiny bit about something fills us with a sense of power, and that feeling would be intensely threatened if we admitted how much more we don’t know. That’s why it takes so much confidence to admit that you aren’t confident; three of the hardest words in the world to say are “I don’t

there are very few certainties in the financial markets, and your investing brain is designed to exaggerate your abilities, favor the familiar, and imagine far more mastery over the past and future than you may ever have.

It’s important to document your reasons for investing before you buy. Memory researcher Elizabeth Loftus has shown that your recall of how you felt earlier can be easily “contaminated” by what happens later. If you make your diary entry after the fact, your memory of your original motivation may be affected by any later changes in the price (“I bought it at $14 because I knew it would instantly go to $15”).

Let’s say, for example, that you figure you’re 25% better than average at picking stocks, and you think you can earn 15% a year on your portfolio. That sounds realistic enough—until you consider the third question. The long-term average annual return on the Standard & Poor’s 500 index of blue-chip stocks is 10.4%. If, however, you adjust that number for the cash that people added to and subtracted from their portfolios, the average return drops to just 8.6% annually since 1926. Factor in taxes, trading costs, and inflation, and the annual return of the typical investor drops below 4%. If you really are 25% better than average, you shouldn’t expect to earn much more than 5% annually after all your costs. You still might be able to earn 15% a year—if you are at least three times better than average. Only by asking all three questions can you tell just how crazy your inner con man is.

As Bobbi Bensman’s story shows, the conventional wisdom that every investor has a certain level of “risk tolerance” is little more than a lie. In reality, your perception of investment risk is in constant flux, depending on your memories of past experiences, whether you are alone or part of a group, how familiar and controllable the risk feels to you, how it is described, and what mood you happen to be in at the moment. The slightest change to any of these elements can turn you from a raging bull to a cowardly bear in a matter of seconds.

If you unquestioningly trust your intuitive perceptions of risk, you will chronically take gambles you should avoid and back away from bets you should embrace.

In a lab at the University of Puerto Rico, little birds called bananaquits were offered a choice between yellow flowers, which always held 10 milliliters of nectar, and red flowers containing amounts between zero and 90 milliliters. The wider the range of reward in the red flowers, the more the birds preferred the constant payoff in the yellow flowers.

Both actual and imagined losses can flip this switch. Using brain scans, one study found that the more frequently people were told they were losing money, the more active the amygdala became. Other scanning experiments have shown that even the expectation of financial losses can switch on this fear center.

A single drop in the stock market on one Monday in autumn disrupted the investing behavior of millions of people for at least the next three years.

The amygdala seems to act like a branding iron that burns the memory of financial loss into your brain. That may help explain why a market crash, which makes stocks cheaper, also makes investors less willing to buy them for a long time to come.

Afterward, I looked over the printout of my bodily responses with a profound sense of wonder. I could see that the paper was covered with jagged lines that traced my spiking heartbeat and panting breath as the red alert of risk swept through my body. But the reflective areas of my brain never had a clue that I was on edge. So far as I “knew,” I was doing nothing more than calmly trying to make a few bucks by picking cards.

once the reflexive brain is impaired, then the reflective areas say, “Hmm, maybe I should try that one.” Without the saving grace of fear, the analytical parts of the brain will keep trying to outsmart the odds, with disastrous results. “The process of deciding advantageously,” says Damasio, “is not just logical but also emotional.

The experience of a loss or a gain,” says Weber, “depends on what the loss or gain is relative to.” People, like animals, tend to evaluate how much the outcomes vary relative to the total amount of wealth that appears to be at stake. When that difference is high, people will gravitate away from the risky deck to the certain deck. (If the cards in one deck always pay $1, while in the other deck nine cards pay nothing and one pays $10, roughly 70% of people will prefer the “sure thing” of the first deck.)

We all know that the glass seems either half empty or half full depending on how we feel about ourselves. But it also depends on how we feel about the glass. Researchers have shown that when a four-ounce glass has two ounces of water poured out of it, 69% of people will say it is now “half empty.” If the same glass starts out empty and then has two ounces of water poured into it, 88% of people will now say it is “half full.” There’s no difference in the size of the glass or the amount of water, but a simple twist of context changes everything.

The lesson? It’s not that you could raise your investing returns by whacking yourself upside the head with a hammer. It’s that the fear of financial loss always lurks within the normal investing brain.

Don’t be satisfied with answers you don’t understand,” kept the Davis funds from buying Enron before it imploded. There’s no need to frame a stock certificate. Simply write the name of your investing mistake and the lesson you learned from it on a Post-It note. By embracing your mistakes instead of burying them, you can transform them from liabilities into assets. Studying your mistakes and keeping them in plain sight will help you avoid repeating them.

When people did take an independent view and guessed against the consensus of their peers, brain scans found intense firing in the amygdala. (There was no such pattern when they guessed independently of the computers, showing that it is human peer pressure that makes it so hard for us to think for ourselves.) Neuroeconomist Gregory Berns, who led the study, calls this flare-up in the amygdala a sign of “the emotional load associated with standing up for one’s belief.” Social isolation activates some of the same areas in the brain that are triggered by physical pain. In short, you go along with the herd not because you consciously choose to do so, but because it hurts not to.

One study looked at more than 94,000 estimates of quarterly earnings over roughly twenty years and found that they resulted in negative surprises more than 29,000 times. More than 1,250 times in 2005 alone, companies announced quarterly earnings that fell one penny per share short of what Wall Street expected. According to Numeric Investors L.P. of Cambridge, Massachusetts, the shares of these companies immediately fell by an average of 2%.

Neuroscientist Jonathan Cohen of Princeton University has shown that the more active your ACC is when you flub one step in the Stroop test, the faster you will succeed at the next one.

Scott Huettel, a neuroeconomist at Duke University, has shown that the ACC reacts roughly three times more vigorously if a pattern reverses after eight repetitions than it does after a three-in-a-row pattern is broken. The stock market provides uncanny real-world proof of Huettel’s laboratory findings: The more times in a row a company has exceeded Wall Street’s expectations, the worse its stock gets whacked when it finally misses the analysts’ forecasts. While a shortfall after a run of three good earnings reports trims just 3.4% off the price of the typical growth stock, a miss after a streak of eight positive quarters hacks off 7.9%. So

While vivid sights and sounds fire up the emotions in your reflexive brain, the more complex cues of language activate the prefrontal cortex and other areas of your reflective brain. By using words to counteract the stream of images the markets throw at you, you can put the hottest risks in cooler perspective.

As we’ve learned, if you view a photograph of a scary face your amygdala will flare up, setting your heart racing, your breath quickening, your palms sweating. But if you view the same photo of a scary face accompanied by words like angry or afraid, activation in the amygdala is stifled and your body’s alarm responses are reined in. As the prefrontal cortex goes to work trying to decide how accurately the word describes the situation, it overrides your original reflex of fear.

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.

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.

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.

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.)

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.

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.

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.

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.

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.

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.