Instead, explains psychologist Daniel Kahneman, “we tend to judge the probability of an event by the ease with which we can call it tomind.” The more recently it occurred or the more viv
Trang 1
bracing us to capture uncertain rewards Our anticipation
circuitry, says Paul Slovic, a psychologist atthe Univers
of Oregon, acts as a “beacon of incentive” that enables us to
pursue rewands that can be earned only with patience and
‘commitment If we derived no pleasure from imagining riches
down the road, we would grab only at those gains that loom
immediately in frontofus
‘Thus ourseeking system
functions partly as a blessing
and partly as a curse We pay
close attention to the possibi
ity of coming rewands, but we
also expect that the future will
feel better than it does once it
‘tums into the present
Avivid example of this is
the stock of Celera Genomics
Group In September 1999,
Celera began sequencing the
human genome By identi-
fying each of the 3 billion
molecular pairings that make
up human DNA, thecompany
could make one of the biggest
leaps in the history of biotech-
nology Investors went wild
with anticipation, driving
THE STUFF OF MEMORIES RESEARCHERS IN GERMANY tested whether anticipating a finan- cial gain can improve memory A team of neurologists scanned people's brains with an fMRI machine while showing them
pictures of objects like a hammer or a car, Some images were paired with the chance to win half aeuro, while others led to
no reward The participants soon learned which pictures were reliably associated
with the prospect of making
money, and the scan showed
that their anticipation
circuits fired furiously when those images appeared
Immediately afterward,
the researchers showed the
participantsa larger set of
pictures, including some that had notbeen displayed inside
the scanner, People were
highly accurate atdistin- guishing the pictures they
had seen during the experi- mentand equally adept at
recognizing which of those
pictureshad predicted a gain
‘Three weeks later the
the stock to a peak of $244 in
carly 2000 Then, on June 26,
Celera announced that ithad
participants came back to the Jab, where they were shown the pictures again This time
completed cracking the code
How did the stock react? By tan!
and another 12.7% the next day
Nothing had occurred to change the company’s fortunes for
the worse Quite the contrary: Celera had achieved a scientific
miracle, So what happened? The likeliest explanation issimply
thatthe anticipation of Celera’s success was so intense that
reality was a letdown Getting exactly what they wished for left
investors with nothing to look forward to, so they got out and
the stockcrashed
ing It dropped 10.2% that day
people could even more readily distinguish the pictures that had signaled a financial
gain from those thathad not—although they hadn't laid eyes
on them in 21 days! Astounded, the researchers wentback and re-examined the fMRI scans from three weeks earlier It
tumed out that the potentially rewarding pictures had set off
more intense activation not only in the anticipation circuits but
also in the hippocampus, a part of the brain where long-term
memories live
‘The fire of expectation, itseems, somehow sears the memory
m LOCK UPYOUR“MAD
MONEY” Put at least goae of
yyour stock money into a low-cost,
diversified index fund that owns
everything in the market Put 10%,
tops, at risk on speculative trades
Be sure this “mad money" residesin
2 separate account from your long
term investments; never mingle
them, Never add more money
to the speculative account (It's
especially important to resist that
temptation when your trades have
been doing well} If you get wiped
‘ut, close out the account
mm CONTROL YOUR CUES The stock market generates signals that can goad you into trading Try watching CNBC with the sound off
sa that none of the hullabaloo about what the matketis dọng this second can distract you Ifyou walk past
‘the local brokerage firm every day soyoucan sneak a peek at the elec:
‘tronic ticker, take a different route
Ifyou obsessively checka stock's price, use the “history” window on yourbrowser to count how many
‘times youve updated the price that day The number may shock you
USE YOUR WORDS
White vivid sights and sounds—say, red down arrows and scenes of
‘mayhem on the exchange floor—
fire up your emotions, the more complex cues of language activate analytical areas of your brain To prevent your feelings from over whelming the facts and leading you tosell ina panic, ask yourself:
(Other than price, what's changed?
» Aremy original reasons to invest still valid?
Should like tis investment even more now that it's cheaper?
mt TRACK YOUR FEELINGS
‘Many of the world's best inves tors have learned to treat their own feelings as reverse indicators! Excitement becomes a cue that it's
‘time to consider selling; ear tells
‘them they should be thinking about buying | once asked renowned fund manager Brian Posner of Fidelity and Legg Mason how he sensed whether a stock would be amoneymaker “Ifit makes me feel like Iwant to throw up." he answered, "I can be pretty sure it's
great investment.”
MONEY MAGAZINE@35|1972-2007 September 107
Trang 2
YOUR MONEY AND YOUR BRAIN
of potential rewards more deeply into the brain
tion of reward,’ says neurologist Emrah Diizel, “is more impor-
tant for memory formation than is the receiptof reward”
Anticipation has another unusual neural wrinkle, Brian
Knutson has found that while your reflexive brain is highly
responsive to variations in the amount of rewand at stake,
itis much lesssensitive to
changes in the probability of
receivingareward Ifa lottery
jackpot was $100 million and
the posted odds of winning
fell fromone in10 million to
one in 100 million, would you
be 10 times less likely to buy
aticket? Ifyou're like most
people, you probably would
shrug, say “Along shot's along
shot” and be justas happy
buyinga ticketas before
‘That's because, as econo-
mist George Loewenstein of
Carnegie Mellon University
explains, the “mental image
of $100 million sets offa burst
of anticipation in the reflexive
regions of your brain Only
later will the analytical, or
reflective, areas calculate
that you're less likely to win
than Ozzy Osbourne is tobe
elected Pope, When possibil-
ityisin theroom, probability
phe anticipa-
reactor at Chernobyl, Ukraine melted down in 1986 Early
estimates were that tens of thousands of people might be killed
by radiation poisoning By 2006, however, fewer than 100 had died, Meanwhile, nearly 8,000 Americans are killed every year
by skin cancer, commonly caused by overexposure to the sun
In the typical year, deer are responsible for roughly 130
human fatalities—seven times more than alligators, bears, sharks and snakes combined Deer, of course, don't attack
Instead, they step in front of
cars, causing deadly collisions None of this means that nuclear radiation is good for you or that rattlesnakes are
harmless, What it does mean
is that we are often most
afraid of the least likely dan- gers and frequently not wor- ried enough aboutthe risks
that have the greatest chances
ofcominghome to roost We're no differentwhen
it comesto money Every
investor's worst nightmare isa
stock market collapse like the
crash of 1929 According toa
recent survey of 1,000 inves-
tors, there’sa 51% chance that inany given year, theU.S
stock market might drop by
one-third.” In fact, the odds
goes out the window
Ie’sno different when you
that US stocks will lose a third oftheir value in a given year are around 2%, The real
Your expectation of scoring a
big gain elbows aside your ability to evaluate how likely you are
to earn it That means your brain will tend to get you into trou-
ble whenever you're confronted with an opportunity to buy an
investment with a hot—but probably unsustainable—retum,
WHAT ARE YOU AFRAID OF?
Here are two questions that might, at first, seem silly
1 Which sriskler: a nuclear reactor or sunlight?
2 Which animal is responsible for the greatest number of
human deaths inthe US.?
Snake
Now let's look atthe answers
‘The worst nuclear accident in history occurred when the
melt down but that inflation will erode your savings Yet only 31% of the people surveyed were worried that they might run out of money during their first 10 years of retirement
If we were logical we would judge the odds ofa riskby asking how often something bad has actually happened under similar circumstances Instead, explains psychologist Daniel Kahneman, “we tend to judge the probability of an event by the ease with which we can call it tomind.” The more recently it occurred or the more vivid our memory of something like tin the past, the more “available” an event will be in our minds— and the more probable its recurrence will seem
THE HOT BUTTON OF THE BRAIN
DEEP INTHE CENTER OF YOUR BRAIN, level with the top ofyour
ears, lies a small, almond-shaped knob of tissue called the
amygdala (ah-mig-dah-lah) When you confronta potential
risk, this part of your reflexive brain acts asan alarm system— shooting signals upto the reflective brain like waming flares, (There are two amygdalas, one on each side of your brain.)
108 September MONEY MAGAZINE@35]1972-2007
Trang 3
The results that amoment of panic can wreak havoc on
your investing strategy Because the amygdala is so attuned
to big changes, a sudden drop in the market tends to be more
upsetting than a longer, slower decline, even ifits greater in
total On Oct 19, 1987, the US stock market plunged
deeper one-day drop than the crash of 29 Big, sudden and
inexplicable, the '87 crash
was exactly the kind of event
thatsparks the amygdala, The
memory was hard to shake: In
198i
billion more worth of shares
in stock mutual fundsthan
they bought, and their net
purchases ofstock funds didn’t
recover top!
until 1991 One bad Monday
disrupted the behavior of mil-
lions of people for years
There was something more
at work here than merely,
investors’ individual fears
Anyone who has everbeen a
teenager knows that peer pres:
sure can make you do things as
part ofa group thatyou might
neverdoon yourown Butdo
you make aconscious choice
to conform ordoes the herd
exert an automatic, almost
magnetic, force?
People were recently asked
investors sold $
crash levels
FRIGHT MAKES RIGHT
I LEARNED HOW MY OWN AMYGDALA REACTS TO RISK when I participated in an experiment atthe University of lowa First Iwas wired up with electrodes and other monitoring devices
to track my breathing, heartbeat, perspiration and muscle activity Then I played a computer game designed by neurolo-
gists Antoine Bechara and Antonio Damasio, Starting with $2,000 in play money, Iclicked a mouseto select a card from one of four decks
displayed on the monitor in front ofme Each “draw” of a card made me either “richer” or“poore
that the two left decks were
Isoon learned
more likely to produce big gains but even bigger losses, while the two right decks blended more frequent but smaller gains with a lower chance of big losses Gradually I began picking most of my cands from the decks on the right by the end of theexperiment I had drawn 24 cards in a row from those safer decks
Afterward I looked over the printout that traced my spiking heartbeat and pant- ing breath asthe red alertof
to judge whether three-dimen-
sional objects were the same
risksweptthrough my body, even though Ididnt recall
folks being tested made these
choices in isolation, Other times they first saw the responses of
four “peers” (who were, n fact, colluding with the researcher),
When people made their own choices, they were right 84%
of the time When the peer group all made the wrong choice,
luals being tested chase correctly just 59%
of the time Brain scans showed that when the subjects fol-
lowed the peer group, activation in parts of their frontal cortex
decreased, as ifsocial pressure was somehow overpowering the
reflective, or analytical, brain
When people did buck the consensus, brain scans found
intense firing in the amygdala Neuroscientist Gregory Berns,
who led the study, calls this flare-up a sign of “the emotional
load associated with standing up for one's belief” Socialisola-
tion activates some of the same areas in the brain that are trig-
gered by physical pain In short, you go along with the herd not
hurts not to Being part of
however, the ind
because you want to but becaust
alarge group of investors can make you feel safer when ever
thingiis going great But once risk rears itsugly head, there's no
safety in numbers
on, when I drew a card that lost me $1,140, my pulse rate shot from 75 to 145 After a few more bad losses from the risky decks, my body would start reacting even before I selected a card from one of them Merely moving the cursor over the risky decks was enough to make my physiological functions go haywire My decisions, it turns out, had been driven by fear even though the “thinking” part of my mind had no idea I was afraid
Ironically—and thankfully—this highly emotional part of our brain can actually help us act more rationally When Bechara and Damasio run their card-picking game with people whose amygdalashave been injured, the subjects never learn to avoid choosing from the riskier decks Iftold that they have just lost money, their body doesn’t react; they can no longer feel a finan- ial loss Without the saving grace of fear, the analytical parts
of the brain will keep tryingto beat the odds, with disastrous
iding advantageously” concludes
so emotional.” $
results The process of de
Damasio, is not just logical but FEEDBACK: imvestor@moneymailcom
MONEY MAGAZINE®35|
September 109
Trang 5
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Trang 6
éé1£s ORSe€RS€ to say money cant buy happiness
But people exaggerate the extent +o which
more money can buy more happiness 99
Lae ere Se etc
Trang 7
Masterofthe
Imperfect Mind Daniel Kahneman won a Nobel for explaining why people habitually make the wrong
moves when investing or spending their money Who better to tell you how to do it right?
finance, but Daniel Kahneman isn'tan ordinary psycholo-
gist In 2002 he won a Nobel Prize in economics for his
research into how people confront uncertainty Raised in France
and Israel and formerly a professor at the Hebrew University of
Jerusalem, UC-Berkeley and Princeton, Kahneman has spent
halfa century studyinghow the human mind works—or failsto,
Just retired at age 73, Kahneman is now writing abook about
decision-making in collaboration with MONEY’s Jason Zweig
‘Thetwo recently chatted on the record
> Itisn't often that a psychologist helps exphiin personal
Q Are people rational?
A Economists argue that people are rational—that they use all
available information to make decisions and that those deci-
sions are consistent over time Psychologists say that istorally
unrealistic Economists think about what people ought to do
Psychologists watch what they actually do
Q Such as?
‘A How people respond to arisk depends partly on how it is
described An investment said to have an 80% chance of suc-
cess sounds far more attractive than one with a20% chance of
failure The mind can't easily recognize that they are the same
Q You once said we'd all be better Investors if we Just made
fewer decisions
‘A Two decisions really matter: how much of your wealth you
‘want to put at risk and how much risk you want to take with it
Q Those aren't easy decisions!
A No, but they are few Investing should bean orderly process
in which you make long-term commitments along the course
those two big decisions set for you Small decisions tend to
be based on what the market does, and are likely to be wrong
‘That's why you should implement policies in a broad frame
rather than make decisions in a narrow frame
Q.What's the difference?
‘A Here's one example If you use a narrow frame and make
small decisions, you will buy and sell stocks one at atime You
will have high trading costs, sell your winners too soon and
PHOTOGRAPH BY JONATHAN SAUNDERS
hangon toyour losers too long On the other hand, if you usea
broad frame and implement a policy, you will rebalance regu- Jarly and automatically You will buy or sell stocks asa class, rather than one by one, and you will do so only when they cross atargetlevel that you have set in advance
Why does everything in life seem to go over budget?
A That's what I call the planning fallacy When you have a project to complete, you try to be realistic about how long it will take and what it will cost But your plan isstill largely a
best-case scenario, because it isbased only on your inside view Q.So if you'rerenovating your bathroom, say, don’t Just ask the contractor for his estimate—
‘A, —but also look atbroader statistics, like the national average
of what it costs to remodel abathroom—
'Q.—which,when werenovated the one in my house, was a lot closer to the final price than my contractor's lowball estimate
had been | thought I was getting a bargain [Pause.] Can we
change the subject, please? Does money make people happy?
A It's nonsense to say money doesn't buy happiness, but people exagyerate the extent to which more money can buy
more happiness Happiness is determined by factors like your health, your family relationships and friendships, and above all
by feeling that you are in control of how you spend your time
Q Can buying things make us happier?
A There’s an important difference between pleasures and comforts Pleasures are things like flowers, feasts, vacations— investments in family, friends and memories Comforts are material goods like a big new car or a giant plasma TV or—
Q.—arenovated bathroom
A, That's right Comforts always seem like abetter idea before you buy them than afterward Trust me, you will get more
‘durable satisfaction out of the money you spend on pleasures $
(MINDSOVER MONEY: In honor of MONEY's sth anniversary, we're run- ning special interviews with the smartest thinkers we've come across in three
‘Plus decades Send feedback to investor @moneymail com
MONEY MAGAZINE@®35|1972-2007 September 13
Trang 9
SPECIAL REPORT
ofHumt
Again
including a prosperous third-generation family business
But all that couldn°t keep them in this still struggling city
BY MARLYS HARRIS PHOTOGRAPHS BY MELANIE GRIZZEL
Two years have passed since Hurricane Katrina smashed into New Orleans
And if you hang out downtown and don't look too closely, you might think that everything is back to normal The French Quarter, home to the city’s famous jazz clubs and eateries, is thỉck with tourists, and the Ernest N
hungry and hopeless hurricane survivors, again plays host to groups like the American Association of Law Libraries.and the International
Trang 10
ty
CouncilofS jopping Centers Butto the
cast, off Interstate 90, in the city’s hard-
est-hitneighborhoods, the landscape is
till post-apocalyptic On major arter-
ies, practically everything is boarded
up: shopping centers, supermarkets,
Walgreens, Wendy's, even gas stations,
Whatever side street you
‘tum into, the scene is pretty
much the same: couple of
rebuilt houses framed by
flowersand lawns, butalso
acres of empty lots, FEMA
trailers, tumbledown dwell-
ings and weeds that have
grown nose-high in the damp
Louisiana heat
Mark Pellissier, 44, and
his wife Billie, 41, who live
onsucha street, have had
enough This summer they
are leaving New Orleans,
where both were born and
grew up, to move—regret-
fully—to Adanta, Butthey
feel they have no choice The
storm sent Mark's business,
the Radiator Shop of New
Orleans, an automotive ser-
vices company that has been
inhis family for three gen-
erations, into a death spiral,
droppingits annual revenue
from $550,000 pre-Katr
to about $125,000 last year
They're fed up with the
molasses
The
PREKATRINA
452,
Now
PREKATRINA Now PREKATRINA Now
e pace of recov-
ery; even now they can't
getan ordinary phone line
installed And they're anx-
ious about the increase in PREKATRINA
violent crime and its threat
to their three boys, Jason, 16,
Jared, 14, and Jordan, 5 Only
a few months ago, a shoot-
ing occurred right on their
block They are also relue-
Now
PREKATRINA
tantto invest in a new house
“(don’t think anyone can
guarantee the levees,” says
Billie, a nurse If another
Now
116 September MONEY MAGAZINE®@35)1972-200;
NEW ORLEANS
Slow Road Back
223,288
mm
128
58
mm
23
12
368
61
$243,697
$196,174 Een
1%
4%
More aetEankony
‘ounce ana nx June 20,
storm comes along, New Orleans could
flood again, “I'm just not that kind of gambler,” she adds
‘The Pellissiershave already piled
up plenty of losses—for starters, their
$350,000 three-bedroom house
Lakeview, apricey neighborhood near
Lake Pontchartrain A rental house they own in East New
Orleans (and now live in) also suffered floor-to-rafters
damage Even though they had insurance on all their properties, payments fell
about 30% short of their
losses, not including their
personal belongings
in
170 Inleaving, the family
joins a diaspora ofhun-
dreds of thousands of Gulf
Coast residents who now live
in just aboutevery statein the
nation Some evacuated and stayed where they landed
Others lacked the means to return Still others, like the
Pollissiers, have grown
discouraged According to the
Katrina Index, amonthly report monitoring Gulf Coast rebuilding, New Orleans’
population has dropped by
51% The loss has been crippling, Such a sparse
number of people spread
randomly across acity makes
itnearly impossible for neighborhood businesses to survive or for familiesto find
viabk
to resettle
By moving to Atlanta, the
Pellissiers hope to recapture anormal life—one where supermarkets and hospi tals are open, where kids can travel safely to school and where ahouse stands a chance of appreciating, But
they still face substantial
communities in which
BROKEN DISHES, BROKEN BUSINESS Afterthe floodwaters receded, the Pellissiers Toundthelr homeln Tulns."Itwasover- whelming,"says Bille ‘Markandhisemploy- eeshadtoshovelthelr waylntohisshop
challenges The biggest: figuring out what todo with the Radiator Shop and
what Mark should do to earn a liv-
ing in Atlanta if the decision is to sell
Fairly free-spending before Katrina, the Pellissiers have little savings Billie's
40169 from an old job is wortha scant
$20,000; Mark has about the same in a
and they
have putaside nothing fortheirchil- dren's college education, Most difficult of all, perhaps, will be picking up a new life
in a town where they don't know every-
business retirement accoun