Introduction
This introduction contains three vignettes about famous financial mishaps the late 1990s hedge fund Long-Term Capital, Sir Isaac Newton and the South Seas bubble, and Samuel Clemens a.k.a. Mark Twain and the 1860s silver fever. There is a lot to be learned from such financial failures both in the accounting facts and historical circumstances, but also in the psychology underlying the protagonists' faulty decision making. Reading the stories that follow, take note of the investment choices of...
Acknowledgments
1 wrote this book over several years. So many people influenced its production that I cannot possibly do justice to their contributions here. I am very appreciative of my family and friends, who provided their love and encouragement. Thanks especially to Sarah, my amazing wife, for her unflagging optimism and patience during the writing of the book. My gratitude is profound. I am extremely indebted to the efforts of hundreds of researchers and research assistants whose experiments form the...
Caffeine
Caffeine is unusual in its diversity of neurological effects. Caffeine itself promotes vigilance in some people, but a sizable minority of caffeine users experience nervousness and irritability. Caffeine is consumed in coffee, black tea, green tea, energy drinks, sodas, and other beverages. While caffeine increases alertness, improves mood, and facilitates faster task performance in the short term, its role in financial decision making appears unstudied. Two notable findings have emerged...
Seeing the World in Black and White
Selling companies that are doing well and purchasing ones that are faring poorly is like watering the weeds and cutting the flowers. JR. Simplot is an American eighth-grade dropout and a self-made multi-billionaire. He made his fortune through saavy investments in potato farming and french fry production. Currently, he owns the largest ranch in the United States, the ZX Ranch in southern Oregon. His ranch is larger than the state of Delaware. Despite his tremendous wealth, Simplot is a modest...
The Effects of Probability Ambiguity and Trust
Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we're trying to do. It's imperfect, but that's what it's all about. Warren Buffett, speech given at the Berkshire Hathaway Annual Meeting in 19891 In 2000, during the run-up to the June Mexican presidential elections, an outsider was poised to overturn the PRI political legacy that had ruled Mexico for more than 80 years. Vicente Fox, candidate of the PAN...
GABA Acetylcholine and Omega3 Fatty Acids
GABA is found virtually everywhere in the brain. The GABA chemical is a small protein fragment an amino acid derivative . GABA slows down electrical activity globally in the brain. Most anticonvulsant medications, used in epileptics for preventing seizures, increase the brain's saturation with GABA to reduce neural excitability and thus prevent seizures . Additionally, many anticonvulsants are used as mood stabilizers, because they decrease the excitability and mood swings of bipolar disorder...
Norepinephrine
Norepinephrine was historically called noradrenaline. Norepinephrine is released during sudden stress. Norepinephrine itself stimulates the release of the stress hormone cortisol, described below. Norepinephrine causes the rush of tension that people feel when precipitously surprised, and it prepares the body for the fight-or-flight response. During acute stress, people experience psychological symptoms of decreased attention span, hypervigilance, all-or-none black-and-white thinking, and...
Learning to Cut Losers Short
You can't be afraid to take a loss. The people who are successful in this business are the people who are willing to lose money. I'm not better than the next trader, just quicker at admitting my mistakes and moving on to the next opportunity. Some investors fall in love with a stock or a position. Maybe they love the stock because it has had a high return thus far, or they love the idea behind the company, or they work for the company and enjoy owning shares. In any case, when investors become...
Dopamine
Dopamine was originally thought to be the pleasure chemical of the brain. A more accurate, modern view is that dopamine is involved in numerous cognitive and motor functions, including being the substrate of desire, motivation, attention, and learning. Illegal drug use is perhaps the most common public association with dopamine. All known addictive drugs act, in part, through dopamine release in the brain. In fact, the word dope, used to describe illegal psychotropic drugs, was derived from the...
Conscientiousness versus Impulsiveness
Conscientiousness concerns the way in which people control, regulate, and direct their impulses. Conscientiousness describes a tendency to plan and organize towards achieving goals, to follow rules while pursuing those goals, and to control one's impulses along the way. Conscientious people typically agree with the statement Know how to get things done. Impulsiveness is on the other end of the conscientiousness pole. Impulsive people are likely to identify with the statement Often make...
What Are Great Investors Like
Investment philosophy is really about temperament, not raw intelligence. In fact, a proper temperament will beat highIQ all day. In the 1983 movie Trading Places, Eddie Murphy a wily street con artist and Dan Aykroyd an Ivy League heir and investor had their identities reversed by two wagering millionaires. Could Eddie Murphy, with no prior experience, succeed in the trading pits Could Dan Aykroyd pull himself out of poverty and homelessness with nothing but his own smarts The comedic pair...