Minding Your Money

Why do smart people make stupid financial choices—and how can they avoid repeating them? Having a head for investing, it turns out, isn't about doing arithmetic on napkins or studying spreadsheets. In fact, a key requirement is modesty and self-awareness, says Money magazine senior writer Jason Zweig, author of "Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich" (Simon & Schuster. $26). Zweig endured a series of MRIs to see for himself how the brain responds to financial challenges, and he culled insight from the growing field of neuroeconomics, which studies the biochemistry of our financial behavior. NEWSWEEK's Temma Ehrenfeld spoke to the author about the perils of our brain-triggered responses, how avid investors are like drug addicts and why women really are better investors. Excerpts:

NEWSWEEK: You're a financial writer. Did any one piece of research inspire you to go off in a new direction and write a book about neuroscience and psychology?
Jason Zweig: Years ago, I read about a series of brilliant experiments done by Paul Andreassen, a psychologist at Harvard. He tested an idea many considered a self-evident truth: the more information you have on your investments, the higher your return. He tested one group of investors in an artificial stock market that were kept virtually in the dark about their investments. Another got regular news and price updates. The surprise was that the people with less information made more money, because they traded less often. The more you trade, the less you keep, because you have to pay all the intermediaries in the system.

It's also true that the more often you look at prices, the sooner you'll see a pattern. Unfortunately, almost everything that looks like a pattern in the stock market is pure noise.

Something tells me many investors won't be happy to hear that. What point in your book gets the most resistance?
The fact that investment decisions are influenced by unconscious bias and emotion. There's reams of evidence that people make important decisions based on trivial and irrelevant factors like whether the initials of the stock match your own. But people refuse to believe that.

You write that "the neural activity of someone whose investments are making money is indistinguishable from that of someone who is high on cocaine or morphine." If being an avid investor is like being an addict, how do I know when I'm behaving dangerously?
If you're watching Jim Cramer's show more than once a year, you have a problem. Denial is the first sign. Listen to your family and friends and pick up on social cues. Your spouse knows if you're an addict.

According to the new field of neuroeconomics, do women and men invest differently?
Women are still better investors than men. They have less appetite for bad risk-taking. They make fewer errors, and those they make are less severe. There's also evidence that hormones change financial behavior. Oxytocin, the hormone exchanged between a woman and her baby when she's breast-feeding, makes you more trusting. If you and I were negotiating a business deal, and you put oxytocin into my sinus inhaler, you'd be able to roll me. Speculatively speaking, people with greater activity in the right prefrontal cortex tend to be more risk averse, and women are supposed to be more "right-brained."