Book Review: Your Money & Your Brain

Your Money and Your Brain, by Jason Zweig, is one of the latest book on behavioural finance (or neuroeconomics).

Basically, what differentiates this book from other books is that it include brain scans of the author's brain as the author is subjected to various behavioural experiments. And, as each chapter concentrates on a certain behavioural weakness, each chapter also contains tips to combat the behavioural weakness.

Generally, I would think that the book is marvelous, especially since I like to read up on behavioural finance. NLB has the book (332.6019 ZWE).

Some learning points are:
1) We generally have two brains, one thinking brain and one feeling brain. Or in other words, one reflective brain and one reflexive brain. In investing, it is important to have the right mixture between thinking and feeling. Some tips to maintain the right balance are asking another question (looking from other angles), try to disprove (instead of proving), know when feelings will rule, count to ten before acting.

2) We may be greedy because we get satisfaction from anticipating rewards. Sometimes, the joy of anticipation of getting an item is even larger than the joy that comes from having the item. Some tips to overcome our greed are:
- there are no certain things and trees do not grow to the sky.
- One seldom strikes lottery twice.
- Control the frequency of cues. Or simply, avoid looking at stock prices.
- Think twice

3) We like predictions. Unfortunately, we are overconfident in our predictions. Or simply, our predictions suck. Some tips are:
- Control those that can be controlled such as your expectations, your risk, your expenses etc
- Stop predicting. Instead, try to restrict yourselves or your options. For example, one can restrict oneself to dollar-cost-averaging
- Ask for the proof
- Test repeatedly to see if your predictions are more accurate than you think. In other words, if you think you are a good stock picker, you can test it by starting a paper portfolio for a year. And then accept the result of the test.
- Take a break from the markets. And do not obsess over stock prices

4) We are overconfident in our abilities. To overcome this trait, some tips are:
- admit your ignorance. Know that you do not know.
- Have a "Too Hard" category (from Buffett).
- Be conservative in your valuation.
- Keep an investing diary
- Learn what works and what does not.
- Learn from mistakes.
- Be diversified

5) Our risk tolerance is not fixed. It is frame dependent. Seek to reframe your reference point by look outside yourself (look from other angles) and looking at past history.

6) Our fear sometimes may be irrational. That is, we fear the wrong things and our fears are susceptible to recency bias. To overcome the fears, try not thinking the fear by taking a walk or exercising. Or get away from the crowd by seeking an outside opinion.

7) We are susceptible to regrets. In other words, we sometimes choose an alternative, say A, so as to avoid regret over the outcome if we choose other alternatives. Some ways to reduce our regrets are
- Create rules and follow the rules.
- Aid yourself to act. A way is to place post-it notes to remind yourself to act according to your rules.
- Cut your losses, especially if something is wrong with the business.
- Have inertia work for you. Put yourself on auto-pilot plans.
- Examine your portfolio prices infrequently. You cannot regret over what you do not know.

I would recommend you to read the book for more details.


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