It’s Your Money Column – Rein in the Mind to Make Good Investment Strategies

It’s almost the New Year and time to take stock of the highlights of 2002 for you and your family and to think of what you would like to accomplish in 2003.

For many people, 2002 was not a good year for their investments. After years of seemingly risk-free, exceptional returns, the vagaries of the stock market took its toll. A recent article by Jason Zweig in the October 2002 Money Magazine suggests that the way our brains function influences our investment decisions, so we may be making this stock market situation even worse without knowing it.

Zweig describes how medical devices such as MRIs and electrode monitoring devices can shed light on the way we value rewards, interpret probabilities and evaluate risks. Neuroscientists can track human response to financial gains and losses, and research suggests that the anticipation of losses can trigger panic selling. This emotional brain-stimulated response can cause people to sell and be out of the market when it rebounds.

Another interesting finding from the neuroscience of investing is that another part of the brain manages long-term planning. Experiments with men who had injured the prefrontal cortex of the brain fond that the men were fine with short-term goals but spent virtually no time making long-term plans such as for retirement.

Several other findings lead neuroscientists to believe that our brains may lead us in directions we do not wish to go, and so we must develop strategies to deal with the strengths and limitations our brains impose on us. Zweig suggests the following strategies.

Tune out. Stay away from media and other sources that may cause you to panic. Instead, sign up for an automatic investment plan so you’ll be achieving your financial plan even in the face of fear.

Gamble small. If you love the adrenalin rush of going for the latest winner, do it with only a small part of your money. Make this your fun money and keep the rest on a steady path.

Protect yourself. The prefrontal cortex of your brain is responsible for evaluating the consequences of your actions. This part of the brain may be impaired in some older people. Warn yourself or help older family members stay clear of fabulous (but fraudulent) investment offers from ads, telemarketers, mail and e-mail by posting reminders around the house to never invest in an unsolicited offer without first talking it over with someone you know and trust.

Read more about neuroeconomics in Paul Glimcher’s book, "Decisions, Uncertainty, and the Brain: The Science of Neuroeconomics," available in 2003.