Lizard brain & investing

There's a new word... well, to me, in the 25 Oct. 2006 WSJ piece "Why Your 'Lizard Brain' Makes You A Bad Investor -- and How to Battle Back:" neuroeconomics.

Investors often make foolish financial decisions, and lots of folks are trying to figure out why. Specialists in behavioral finance have sketched out some of our more persistent mental mistakes. Neuroeconomics is looking at how the brain functions. Happiness researchers are trying to understand why our rising standard of living hasn't made us happier.

Now, some experts are turning to evolutionary psychology. Why do we make so many financial errors? Maybe, deep down, we're just cavemen and women.

The concepts behind why the human brain, evolved as it has, is so poorly designed for the modern world in terms of finances, is so well explained by the piece that I paste most of it here.

It's helpful to think of our brains as having two parts, says Boston money manager Terry Burnham, author of "Mean Markets and Lizard Brains" and co-author of "Mean Genes."

There's the analytical part, which is the part that calculates that we need to save $542 a month for retirement. And then there's what Mr. Burnham calls the "lizard brain," which includes the instincts that helped our ancestors survive. And the lizard brain says it's better to consume, so let's take that $542 and go shopping.

As Mr. Burnham sees it, the problem is that the world has changed far faster than our lizard brains, so our instincts are out of step with modern financial life. Result? We make frequent financial mistakes -- including these five:

• We constantly strive for bigger paychecks, larger homes and fancier cars. Yet research indicates that these things won't make us much happier in the long run.

So why do we keep striving for more? Think about our ancestors. They didn't say, "We've got enough for dinner, let's knock off work early today." Instead, they survived and were able to reproduce because they had greater drive than those around them.

"There isn't necessarily a stop mechanism in us that says, 'Relax, you've got enough,' " notes Robert Trivers, an evolutionary biologist at Rutgers University in New Brunswick, N.J. "We've evolved to be maximizing machines."

• There's much handwringing over America's pitifully low savings rate. Perhaps, however, we can blame that on our ancestors as well.

After all, for them, the best way to save for the future was to consume now. By eating food when it was abundant, they could store the extra calories in their bodies, in the hope that this would carry them through any lean times that lay ahead.

"We have very little history of saving," Mr. Burnham says. "It should not be too surprising that we are terrible, on average, at this novel behavior." Because saving is such a new concept for us, some folks save too much -- and many save way too little.

• If you give people a choice between a small reward now and a larger reward in a few months, they'll typically opt for today's small reward. Partly, this reflects our tendency to regard consumption today as a form of savings.

But it may also reflect the lousy rates of return available to our ancestors. Forget earning a positive return on savings, like we can today. If our hunter-gatherer ancestors hung on to food, it might rot, it might get stolen, and they might not live long to enjoy it.

"There were a lot of things coming together to encourage us to consume now rather than to wait," says Cornell University economics professor Robert Frank, author of "Luxury Fever."

• As behavioral-finance experts have discovered, the pain we get from losing, say, $1,000 is far greater than the pleasure we get from gaining $1,000. This can cause us to shy away from stocks, especially if we focus too intently on short-term results.

Prof. Frank speculates that this loss aversion may have evolutionary roots. "Animals will fight viciously to protect territory that they hold, but they won't fight nearly as hard to extend their territory," he notes. The reason: Gaining territory won't benefit them much, but losing territory is a threat to their existence.

• For our ancestors to survive, they had to be good at spotting patterns, such as figuring out when and where they were likely to find wild animals, fish and other food.

But relying on past patterns can be a disaster if you are hunting for winners in today's markets. Just ask buyers of Internet stocks in early 2000 or purchasers of Florida condominiums in late 2005. They adopted winning strategies -- but the strategies stopped winning.

"In almost all other settings, it's good or neutral to mimic other people," Mr. Burnham says. "But in the financial markets, it's exactly the wrong thing to do. If something is too popular, it will be overpriced."

Faced with mistakes like the five listed above, what should we do? In many cases, the trick is to arrange our finances so our ancient instincts don't get a chance to foul things up. For some tips on how to do that, check out the accompanying chart.

"In the financial markets, the lizard brain is very damaging," Mr. Burnham warns. "You've got to find a way to decouple emotions from money."

Aroma billboards

Marketplace's report "Relax and breathe in the fresh . . . marketing" from 25 Oct. 2006 talks about a company which I would say is in the neuromarketing business sells aromas to companies wanting to draw customers in.

Two statements stayed with me:

Smell being the sense most closely tied to memory...

The problem with all of this for me is that we think we're above these primal, biological responses to our environment. That we're more intellectual than that. But we're not. And marketers know we're not, and now we know they know it and yet we're still . . . vulnerable. But David van Epps says ambient scent isn't any different than ambient music or ambient lighting. And that business owners have a right to control their environment.

Being altruistic feels almost as good as...

From the 12 October 2006 issue of The Economist:

The joy of giving
Donating to charity rewards the brain

PROVIDING for relatives comes more naturally than reaching out to strangers. Nevertheless, it may be worth being kind to people outside the family as the favour might be reciprocated in future. But when it comes to anonymous benevolence, directed to causes that, unlike people, can give nothing in return, what could motivate a donor? The answer, according to neuroscience, is that it feels good.

Researchers at the National Institute of Neurological Disorders and Stroke in Bethesda, Maryland, wanted to find the neural basis for unselfish acts. They decided to peek into the brains of 19 volunteers who were choosing whether to give money to charity, or keep it for themselves. To do so, they used a standard technique called functional magnetic resonance imaging, which can map the activity of the various parts of the brain. The results were reported in this week's Proceedings of the National Academy of Sciences.

The subjects of the study were each given $128 and told that they could donate anonymously to any of a range of potentially controversial charities. These embraced a wide range of causes, including support for abortion, euthanasia and sex equality, and opposition to the death penalty, nuclear power and war. The experiment was set up so that the volunteers could choose to accept or reject choices such as: to give away money that cost them nothing; to give money that was subtracted from their pots; to oppose donation but not be penalised for it; or to oppose donation and have money taken from them. The instances where money was to be taken away were defined as “costly”. Such occasions set up a conflict between each volunteer's motivation to reward themselves by keeping the money and the desire to donate to or oppose a cause they felt strongly about.

Faced with such dilemmas in the minds of their subjects, the researchers were able to examine what went on inside each person's head as they made decisions based on moral beliefs. They found that the part of the brain that was active when a person donated happened to be the brain's reward centre—the mesolimbic pathway, to give it its proper name—responsible for doling out the dopamine-mediated euphoria associated with sex, money, food and drugs. Thus the warm glow that accompanies charitable giving has a physiological basis.

But it seems there is more to altruism. Donating also engaged the part of the brain that plays a role in the bonding behaviour between mother and child, and in romantic love. This involves oxytocin, a hormone that increases trust and co-operation. When subjects opposed a cause, the part of the brain right next to it was active. This area is thought to be responsible for decisions involving punishment. And a third part of the brain, an area called the anterior prefrontal cortex—which lies just behind the forehead, evolved relatively recently and is thought to be unique to humans—was involved in the complex, costly decisions when self-interest and moral beliefs were in conflict. Giving may make all sorts of animals feel good, but grappling with this particular sort of dilemma would appear to rely on a uniquely human part of the brain.

The biological link in the association between stress and depression

While this NEJM study is about how to differentiate the hypercortisolism found in depression versus Cushing's Syndrome, the study implies that high levels of cortisol is associated with depression. Is it the cause?

Actually, another study by Robert Sapolsky says that it's probably the other way around -- depression or its inducing stressor causes an elevation in cortisol, which in turn causes many of the affect changes associated with depression. That's how I interpreted this line:

An extensive literature demonstrates that such hypercortisolism can be both a response to the stressors preceding depression (arrow 2) and to depression itself (arrow 3), and can, in turn, contribute to the affective symptomology (arrow 4).

I wanna hold your hand!

Hand-holding affects the human brain by making it more capable to handling stress. This is my interpretation of the 5 October 2006 NY Times piece "A Show of Hands."

James Coan, an assistant professor of psychology and the neuroscience graduate program at the University of Virginia, has studied the impact of human touch, particularly how it affects the neural response to threatening situations, and said the results of a recent study were more dramatic than he expected.

“We found that holding the hand of really anyone, it made your brain work a little less hard in coping,” Dr. Coan said, adding that any sort of hand-holding relaxes the body.

The study, which will be published this year in the journal Psychological Science, involved 16 couples who were rated happily married based on the answers in a detailed questionnaire. The wives were put inside an M.R.I. machine and were told they were to receive mild electric shocks to an ankle. Brain images showed that regions of the women’s brains that had been activated in anticipation of pain and that were associated with negative emotions decreased when their husbands reached into the machine.

“With spouse hand-holding you also stop looking for other signs of danger and you start feeling more secure,” said Dr. Coan, who led the study. “If you’re in a really strong relationship, you may be protected against pain and stress hormones that may have a damaging effect on your immune system.”

Perhaps it is why so many people crave it.

I wonder if this has anything to do with Oxytocin, the neurotransmitter that's been linked to maternal bonding and is considered an anti-stress hormone as well.