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.”
]]>Unfortunately evolution left us with this deficiency in order to ensure our survival despite having very sophisticated decision making mechanisms . Later on I will focus on our buying tendencies and show you how every decision we make on a daily basis, is primarily controlled by our ancestor portion of the brain. This area is where good marketers come in play: they know exactly how to influence your most primitive portion of the brain.
Neuromarketing is a relatively new field of marketing research that studies people’s consumption habits by means of sensorimotor and cognitive techniques. Scientists often use methods such as electroencephalography (EEG) or functional magnetic resonance imaging (fMRI) to measure brain activity while performing decision making tasks such as deciding which shoes are better than others, or who to vote for. Neuromarketing is gaining popularity on the business as well as academic sectors. Some larger companies even have their own neuromarketing divisions with actual experimental laboratories to study consumer behavior.
Our brains can be divided into three sub-brains:
1- Rational Brain: This is the neocortex, the outermost layer of the brain and the latest one to develop in evolution (about 3 million years ago). This area of the brain is responsible for processing facts, language, logical skills, analytical skills and it is where your judgment comes from. It is slow acting but it is very smart. This area of the brain requires a lot of effort and it works with our conscious self.
2- Emotional Brain: This portion of the brain includes a milieu of structures such as the olfactory bulbs, the hippocampus and the amygdala. It supports a variety of functions including social interactions, emotions, behavior and memory. It is basically our “emotional house”.
3- Reptilian Brain: This sub brain includes our brain stem and the cerebellum, which are the oldest structures of our brain (500 million years old). These areas of the brain are responsible for motor balance, safety, avoidance, survival instincts and involuntary actions such as heart rate control and food digestion. The reptilian brain is very fast acting but it is limited due to its very instinctual nature. It only focuses on present situations at hand, it is always active and never goes dormant. It is primarily controlled by our subconscious, it requires very little effort to operate and it is uncontrollable.
Sales people can be divided into two categories: operational and relational.
Operational sales people are only focused on sales. This is an individual whose ultimate goal is to sell you something for his/her own personal benefit. Examples of people like this are your typical “sleazy” car dealer, a telemarketer over the phone or the guy selling CDs on the street. Relational sales people on the other hand, are those whom their main intentions are to build a bond with you at a more personal level by building trust. These people are genuine; they care about you and are empathetic. You are more important as an individual, not the sale. Of course selling is also part of their intention, it is what they need to survive in the world we live in, but their focus is not the sell. These people truly believe that good personal relationships with their clients will eventually offspring a sale. Whether a direct sale to them, or someone they recommended. Keep in mind that you can utilize relational sale methods not only to sell goods to people, but also to improve your personal relationships with your love partner, your kids and even as an educator.
Trust is an emotion that describes how you feel about someone’s ability to be genuine and honest towards others. We typically buy from people we trust. Who do we trust? The people we like. and who do we like? We like the people we connect to and build a positive relationship with. There is a difference between personal and professional trust. A friend is someone that we have personal trust with, someone we connect with who is humble, genuine, honest and empathetic. Professionally we connect with people that also share those characteristics but are also credible. To be credible one must be knowledgeable, skillful and capable which are all characteristics needed to obtain professional trust.
Our brains are flooded with a milieu of chemicals that interact with our brain cells to elicit many different responses such as emotions. There are a few key players that are primarily responsible for how we feel. On the March 2014 issue we talked about dopamine, a powerful but dangerous neurotransmitter that can lead us to become addicted to things. One of the reasons people like relational sales people is because they understand that we are reward-seeking individuals by nature. When someone genuinely cares about you, and makes you feel intelligent and creative, our brains release dopamine giving us a good feeling which in turn increases trust for that person.
Oxytocin is a chemical that is triggered to be released when we feel cared about, when someone is empathetic, and when we feel trust. This chemical also helps the increase of serotonin which is the happy chemical in our brains.
When we encounter an operational sales person, different chemicals are released. Epinephrine (adrenaline) can be triggered when you detect that someone is not being honest. When dishonesty is perceived, our adrenaline levels rise and in turn activate our stress pathways and their chemical players including cortisol. When too much cortisol is in our system due to high levels of stress, our rational brain shuts down and our thinking abilities are nearly gone. Reduced trust is correlated to fear. We subconsciously fear those who we do not trust. This triggers all the chemicals that increase anxiety which in turn increases stress. When you are feeling fear, anxiety and stress it is virtually impossible to feel a genuine connection and trust someone.
The following example is a summary of what happens in your brain when you encounter a sleazy car salesman: your brain senses that the car salesman is not genuine and is potentially trying to cheat you. Alerts are sent to your fear centers to initialize your defense mechanisms. Adrenaline and cortisol are released. Your neocortex or rational brain shuts down and your reptilian brain takes over, it acts fast and without much thought. Your stress levels keep rising as he keeps pushing the sale. The more pressure the more resistance the reptilian brain offers and feels less inclined to buy. In certain occasions the pressure is so great that you decide to buy the product just to give end to the uncomfortable situation. Eventually your brain relaxes and the rational brain regains function. At this point you will realize that you made a mistake and you will feel what is popularly known as buyer’s remorse. The end result: you will never buy from that sales person ever again.
The previous example is not the only way that a sales person can lose a client’s trust. Many times you can have the best of intentions and be one hundred percent honest and truthful but your own low self-esteem or the lack of confidence can have a similar result as the bad car salesman. Let me give you an example to make it clear. Imagine you are nervous because you have an important client coming to see you. You must impress him with your product, your work, and knowledge. This nervousness, most likely emerges from your fear of being rejected. Fear, is fear and as you saw on the previous example it activates the same chemical cascades that the bad car sales person activated on you when he was not being honest. This fear to perform, shuts down your rational brain leaving you with your primal instincts. Your client will perceive you as someone who is not ready, not knowledgeable and not genuine. This perception of you will in turn activate your clients fear centers resulting in a lack of trust. You must be careful not to initiate auto fear in your brain. You need to be in control.
Almost everything large corporations do when they are marketing to you is play with the different chemicals in your brain. Most headlines or sales pitches are arranged in the following format:
A – Intro or Headline (dopamine, anticipation rush)
B – Problem or concern (cortisol, fear and stress is triggered)
C – Solutions to those problems (endorphins to mask the concern and cortisol reduction with satisfying dopamine consumption)
D – Call to action for you to solve the problem (serotonin to make you feel happy and oxytocin to feel you are taken care)
As you can see, each step triggers a different chemical in your brain. These methodic steps help facilitate the injection of a good-bad-good chemical cycle. Big companies like major cigarette brands, McDonalds, movie producers and others know this better than anyone. Make sure you take in consideration these steps when you are trying to sell.
To avoid activating your own fear centers when you are the sales person, you must be proficient in 3 things:
1) Knowledge: you must know and understand what you are trying to sell. The more prepared you are the less likely someone will surprise you with a question or comment you won’t know the answer to.
2) Confidence: this one goes in hand with number 1. The more knowledge you have, the more confident you will feel. You must show your client that you are confident without stepping the boundaries of being overconfident which can end their ability to like you.
3) Communication: you must be able to communicate effectively. I don’t mean just talking to the client but also using effective communication tools such as visuals and positive emotional charged content. The more they understand you, the further away from fear they are and the closer to trust you they will be.
Communication can be dissected into 5 elements:
1- Emotions: the more positive emotions you can elicit, the closer that client will be to you. Emotions are stored in your memory centers together with the events that triggered those emotions. The more emotional events we experience in life, the more memories we form. Subconsciously our decisions are influenced by stored events and the emotions they elicited. Our brains love patterns. If we have a memory of an event that triggered a happy response, whenever we encounter a similar event our brain will subconsciously guide us to make a decision to that it can enjoy that happy feeling again.
2- Visual: we are very visual creatures. We process visual Inputs much faster than anything else hence a visual image can elicit a quicker decision. You can use storytelling to paint a picture of a present memory in their minds which will most likely trigger the resurgence of a similar memory they had or even create a new pleasant one.
3- Contrast: comparing and contrasting gives people a point of reference. It also allows people to compare with their own personal experiences. The more contrast you show the more obvious your point becomes.
4- Experiment: you might not be able to use this element in every occasion, but for the most part you will. There is nothing better than hands on experience. If you are selling a product let the client try it, use it, and test it. When we touch things and feel them our brain immediately assumes it is ours. Why do you think car sales people let you test drive the cars?
5- Egocentric: the human brain loves to hear about itself in particular the reptilian brain. We are all about us. Make sure you let your client know that it is all about him or her. What is in it for them? You must satisfy that egocentric brain. Never negate their feelings. You do not have to agree with them but you can’t deny, neglect or object what they feel.
The previous tools and skills bring us back to the operational vs relational sales people. Operational sales people tend to use tools such as pure facts and complex figures which are great for your rational brain. The trouble lies in that your clients might not understand your very logical facts and pie charts. Their reptilian brain will take over and will shut down their rational brain. Not understanding brings fear to people, it is an evolutionary response. When the operational sales person is showing you facts and figures, he is relying on your rational brain to make those decisions. They are unfortunately talking to the wrong part of the brain. On the other hand the relational salesperson uses emotional charged visual stories to tap into the client’s reptilian and emotional brain. These techniques can help open the path to their rational brain. These techniques also allow people to really understand what you say, to connect with you and to build trust.
Our neocortex or rational brain believes that it is the driving force for decisions we make. In actuality your decisions result from the reptilians brain influence: you need to connect to the basic instinctive part of your brain before you even try to rationalize with people. We all want to believe that we make rational and thoughtful decisions but reality shows that ALL decisions begin as an emotional instinctual decision using our reptilian and emotional brains. We then take a second step to rationalize it in our rational brain. This means that our core decision making relies on our primal instincts and emotions first!
Our brains are like the operating systems on a PC. We think Microsoft Windows is the one in charge, but if you are an old school computer geek like myself, you will know that Windows is just a mere façade. Our brain works the same way. Our neocortex is Microsoft Windows and the reptilian brain (stem and cerebellum) is DOS, the true operating system of a PC. Without DOS windows would be inoperable. I want you to remember this: If you can control the reptilian brain, you can control people’s decision making outcome: buy, buy, buy.
]]>In a new study, Longo and his colleagues show that cycles of a four-day low-calorie diet that mimics fasting (FMD) cut visceral belly fat and elevated the number of progenitor and stem cells in several organs of old mice — including the brain, where it boosted neural regeneration and improved learning and memory.
The mouse tests were part of a three-tiered study on periodic fasting’s effects — testing yeast, mice and humans — to be published by Cell Metabolism on June 18.
Mice, which have relatively short life spans, provided details about fasting’s lifelong effects. Yeast, which are simpler organisms, allowed Longo to uncover the biological mechanisms that fasting triggers at a cellular level. And a pilot study in humans found evidence that the mouse and yeast studies were, indeed, applicable to humans.
Bimonthly cycles that lasted four days of an FMD which started at middle age extended life span, reduced the incidence of cancer, boosted the immune system, reduced inflammatory diseases, slowed bone mineral density loss and improved the cognitive abilities of older mice tracked in the study. The total monthly calorie intake was the same for the FMD and control diet groups, indicating that the effects were not the result of an overall dietary restriction.
In a pilot human trial, three cycles of a similar diet given to 19 subjects once a month for five days decreased risk factors and biomarkers for aging, diabetes, cardiovascular disease and cancer with no major adverse side effects, according to Longo.
“Strict fasting is hard for people to stick to, and it can also be dangerous, so we developed a complex diet that triggers the same effects in the body,” said Longo, Edna M. Jones Professor of Biogerontology at the USC Davis School of Gerontology and director of the USC Longevity Institute. Longo has a joint appointment at the USC Dornsife College of Letters, Arts and Sciences. “I’ve personally tried both, and the fasting mimicking diet is a lot easier and also a lot safer.”
The diet slashed the individual’s caloric intake down to 34 to 54 percent of normal, with a specific composition of proteins, carbohydrates, fats and micronutrients. It decreased amounts of the hormone IGF-I, which is required during development to grow, but it is a promoter of aging and has been linked to cancer susceptibility. It also increased the amount of the hormone IGFBP-, and reduced biomarkers/risk factors linked to diabetes and cardiovascular disease, including glucose, trunk fat and C-reactive protein without negatively affecting muscle and bone mass.
Longo has previously shown how fasting can help starve out cancer cells while protecting immune and other cells from chemotherapy toxicity.
“It’s about reprogramming the body so it enters a slower aging mode, but also rejuvenating it through stem cell-based regeneration,” Longo said. “It’s not a typical diet because it isn’t something you need to stay on.”
For 25 days a month, study participants went back to their regular eating habits — good or bad — once they finished the treatment. They were not asked to change their diet and still saw positive changes.
Longo believes that for most normal people, the FMD can be done every three to six months, depending on the abdominal circumference and health status. For obese subjects or those with elevated disease risk factors, the FMD could be recommended by the physician as often as once every two weeks. His group is testing its effect in a randomized clinical trial, which will be completed soon, with more than 70 subjects.
“If the results remain as positive as the current ones, I believe this FMD will represent the first safe and effective intervention to promote positive changes associated with longevity and health span, which can be recommended by a physician,” Longo said. “We will soon meet with FDA officers to pursue several FDA claims for disease prevention and treatment.”
Despite its positive effects, Longo cautioned against water-only fasting and warned even about attempting the fasting mimicking diet without first consulting a doctor and seeking their supervision throughout the process.
“Not everyone is healthy enough to fast for five days, and the health consequences can be severe for a few who do it improperly,” he said. “Water-only fasting should only be done in a specialized clinic. Also, certain types of very low calorie diets, and particularly those with high protein content, can increase the incidence of gallstones in women at risk.”
“In contrast,” he added, “the fasting mimicking diet tested in the trial can be done anywhere under the supervision of a physician and carefully following the guidelines established in the clinical trials.”
Longo also cautioned that diabetes subjects should not undergo either fasting or fasting mimicking diets while receiving insulin, metformin or similar drugs. He also said that subjects with body mass index less than 18 should not undergo the FMD diet.
For the study, Longo collaborated with researchers and clinicians from USC as well as from Texas, Italy and England. The study was funded by the National Institute on Aging.
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