Ever wonder what pulses through your brain when money comes your way —— $300 on the sidewalk or when your 401(k) perks up?
Jason Zweig explores that topic in Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich.
Now, you may not get rich reading this book. But you might slow down to the point where emotion and intellect co-exist happily, the perfect money mood.
Zweig is a senior writer at Money magazine and the editor of the revised edition of Benjamin Graham’s The Intelligent Investor, the classic text about investing.
The new science of neuroeconomics is a combination of neuroscience (study of the molecular and cellular levels of the nervous system), economics and psychology.
Zweig explores answers to such questions as: What makes investors overconfident? Why does emotion overrule reason?
Zweig gamely offers his own brain as a guinea pig and heads to laboratories operated by leading neuroeconomists at Stanford, Emory, Duke and other universities. He undergoes MRIs (magnetic resonance imaging) to monitor his brain activity while he plays investing video games.
The scanner pinpoints changes in the level of oxygen as blood ebbs and flows within the brain, enabling researchers to map the regions engaged by a particular task, he explains.
And here’s the rub. There is a battle between the “reflexive brain” (emotion-driven biological circuits that make us crave rewards) and the “reflective brain” (analytical circuits).
Your brain becomes intensely aroused when you anticipate a financial gain: “Your brain treats potential investing (or gambling) profits as a broad class of basic rewards, like food, drink, shelter, safety, sex” or drugs.
That hot state of anticipation cools down as soon as you earn the money, yielding a lukewarm satisfaction in the reflective brain.
As evidence, there are images of Zweig’s brain when he’s feeling greedy after getting a chance to win $5, compared with the milder satisfaction when he wins $5.
“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,” he writes.
And that, readers, sets you up for chronic disappointment.
Legendary investor Warren Buffett is the prime example of the balanced approach to investing. One story about Buffett is that he read the annual report of Anheuser-Busch every year for 25 years, familiarizing himself with the company while he patiently waited for the stock to become cheap enough for him to want to own it, writes Zweig. Finally, in 2005, the stock dropped, and Buffett, who knew the business inside and out, snapped up a major stake.
The most powerful and reassuring lesson from new research into happiness is that you don’t have to be rich to be happy, concludes Zweig.
“When it comes to increasing your sense of well-being, managing your emotions and expectations is at least as important as managing your money. There are many small steps you can take, and a few big ones, to get the maximum happiness out of your money with a minimum of effort,” he writes.
Your Money and Your Brain by Jason Zweig; Simon & Schuster, 340 pages, $26.