Suddenly, stunning investment insights are coming from the frontiers of one of the least likely fields you could imagine: neuroscience. In university and hospital laboratories around the world, researchers are using the latest breakthroughs in technology to trace the exact circuitry your brain uses to make the kinds of decisions you rely on as an investor.
For the first time in any nonscientific publication, this article will take you deep inside your own brain to help you understand why you invest the way you do — and, more important, how to enhance the workings of your brain to get better results.
You’ll see that the neuroscience of investing helps explain one puzzle after another: why we chronically buy high and sell low, why “predictable” growth stocks sell at such high prices, why it’s so hard to understand our own risk tolerance until we lose money, why we keep buying IPOs and “hot funds” despite all the evidence that we shouldn’t, why stocks that miss earnings forecasts by a penny can lose billions of dollars of market value in seconds.
Fortunately, the latest discoveries also point the way toward cures for bad investing behavior. “Investors are human,” says Andrew Lo, a finance professor at the Massachusetts Institute of Technology. “Therefore, how the human brain works and why we react the way we do to various situations are critical for developing a better understanding of the common mistakes that typical investors make.”