Your Money and Your Brain

It isn’t entirely fair to say that the brain is old since our species is not that old in evolutionary terms, but our brains are certainly old relative to the modern milieu in which we utilize them. As Jason Zweig says in Your Money and Your Brain:

“Homo sapiens is less than 200,000 years old. And the human brain has barely grown since then; in 1997 paleoanthropologists discovered a 154,000-year-old Homo sapiens skull in Ethiopia. The brain it once held would have been about 1,450 cubic centimeters in volume… no smaller than the brain of the average person living today.”

Our brains have remained relatively stagnant over the last 150,000 years, but the complexity of the world in which they operate has exponentiated. Formal markets like our stock market are just about 400 years old. It would be a gross understatement to say that our mental hardware has not caught up to the times.

Evolutionary vestiges are apparent in the actions of modern-day investors, even though the reasons for these evolutionary behaviors have long since vanished. In ancient times, our ancestors stored excess food supplies from the spring and summer to rely upon in the colder fall and winter months.

Oddly enough, saving and investing behavior ticks up today in the spring and summer months too, even when controlling for the impact of seasonality, past performance, advertising, and liquidity needs. These effects have been observed in the US, Canada, and even Australia, where the seasons are nearly six months out of sync with North America. Although the ancient need for food storage does not apply, modern investors inexplicably take risk in the spring and summer to ride out the harsh fall and winter.

One consequence of our old equipment is that the brain can end up doing double duty, with primitive structures tasked with parsing risk and reward now charged with a job foreign to their design. Emotional centers of the brain that helped guide primitive behavior, like avoiding attack, are now shown by brain scans to be involved in processing information about financial risks. These brain areas are found in mammals the world over and are blunt instruments designed for quick reaction, not precise thinking. Rapid, decisive action may save a squirrel from an owl, but it certainly doesn’t help investors.

The research by McClure and colleagues on how the brain processes patience reveals intriguing insights. They measured the brain activity of participants faced with choices involving either immediate or delayed monetary rewards. When the choices involved an immediate reward, regions like the ventral striatum, medial orbitofrontal cortex, and medial prefrontal cortex were active – areas linked to drug addiction and impulsive behavior. The allure of an immediate reward triggered a dopamine surge, making it hard to resist. Conversely, when participants considered delayed rewards, the prefrontal and parietal cortex – associated with deliberation – were activated. This study suggests our brains are inherently inclined toward immediate gratification, a trait beneficial in survival scenarios but challenging for long-term financial planning like retirement savings.

Excerpted from "The Behavioral Investor" - https://www.amazon.com/Behavioral-Investor-Daniel-Crosby/dp/0857196863/ref=sr_1_1?crid=V2WF05ZNF3TR&dib=eyJ2IjoiMSJ9.kRn1_vZzlp6a7h9ohqZcPLBY4eKa-BbMirggotmk0GJXYXjMZUtEDnX82_LdIOfZOb6JRAyGe_Id8qxXySSHovzCViQdwdFZjyXknS7td2NC8M_7_vSjAM_iaYn7grE5e9GSo_8xA3WgMdumlSUlWIXQ41HFHT7hyOrzIXQIqAgV6zgdbCSqbzDj1tMmKREGFjtJxXRIXMutKVRg-9tPbkX7ftrGw3dkQ4DRayKTPqQ.pDR4Rb7E80TpqVDeyudL17StO8Gjkl9zNsTNhBLT4YM&dib_tag=se&keywords=the+behavioral+investor&qid=1730468828&s=books&sprefix=the+behavioral+investor%2Cstripbooks%2C93&sr=1-1