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Mean Markets and Lizard Brains
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Mean Markets and Lizard Brains

How to Profit from the New Science of Irrationality

Terry Burnham
Wiley, 2005
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Editorial Rating

8

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  • Applicable

Recommendation

Conventional wisdom about investing suggests that people are basically rational, markets are basically efficient, and nobody can earn a reward without some risk. One corollary of this conventional wisdom is that individual investors ought to own stocks. Individual investors have been acting conventionally wise - but that may be exactly the wrong thing to do. Author Terry Burnham draws on the relatively new science of behavioral economics - informed by insights into human reasoning that have been discovered by cognitive researchers - and offers investment advice dramatically at odds with conventional wisdom. Burnham, a former Harvard professor with ample experience in finance, puts his thoughts in pop language, drawing not on market studies but on movies and other references to current culture, to make many of his most salient points. What he loses in gravitas, he gains in entertainment value. getAbstract.com finds that this investment book manages to be fun to read, while providing the grain of salt readers should take to temper more conventional economic advice.

Summary

Your Lizard Brain

After decades of deriving market models based on the assumption that people are rational, the profession of economics has finally taken a look at the human species and reconsidered that fundamental assumption. Lately, Nobel laurels have gone to researchers whose work reveals the irrationality of human economic decision-making. This work has profound implications for individual investors - implications that your mutual fund statement, investment advisor and 401K planning documents are unlikely to reveal.

It is as if people have two brains: a higher rational brain and an instinctual "lizard brain" full of irrationality and innate urges. Often, the lizard brain dominates.

Historically, economists have postulated that people act rationally, and that markets are on the whole rational. However, people do not behave rationally - especially in economic matters. A cold, clear, rational analysis of investing, for example, would indicate that people should invest in stocks for the long term, but do they? Conventional wisdom says that investors face a trade-off between risk and return, so investors seeking big returns have to take big risks. This so-called...

About the Author

Terry Burnham, a former economics professor at Harvard, a biological researcher and CFO of a biotechnology firm, is the co-author of the bestseller Mean Genes.

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