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Burnham T. Mean Markets and Lizard Brains How to Profit from the New Science of Irrationality (2005)Burnham T. 
Contents Preface vii Acknowledgments ix Chapter One Introduction: Mean Markets and Lizard Brains 1 Part One: The New Science of Irrationality 9 Chapter Two Crazy People: Lizard Brains and the New Science of Irrationality 11 cognitive confusion • split-brains • superstitious pigeons • neuroeconomics • winning Chapter Three Crazy World: Mean Markets and the New Science of Irrationality 35 stampedes • invisible hands • efficient markets • financial blind spots • opportunity Part Two: The Old Art of Macroeconomics 63 Chapter Four U.S. Economic Snapshot: America the Talented Debtor 65 profligacy & productivity • Keynes' grandchildren • Darwin's elephants • prosperity Chapter Five Inflation: Rising Prices and Shrinking Dollars 85 kidney barter • rice dollars • seashell arbitrage • jubilee • Yogi Berra's diet • protection Chapter Six Deficits and Dollars: Uncle Sam the International Beggar 115 loan sharks • a golden brain squandered • limp loonies and plummeting pesos • escape Part Three: Applying Science and Art to Bonds, Stocks, and Real Estate 137 Chapter Seven Bonds: Are They Only for Wimps? 139 Reagan bonds • the mother of all deficits • social security lockbox • squirrel savings • profit Chapter Eight Stocks: For the Long Run or for Losers? 159 time travel • Michael Jordan • stock speed limits • tears and a journey • stock picks Chapter Nine Real Estate: Live in Your Home; Make Your Money at Work 193 Tiger Woods • Godzilla • Groucho Marx • risky ARMs • housing bubble • advice Part Four: Profiting from the New Science of Irrationality 227 Chapter Ten Timeless Advice: How to Shackle the Lizard Brain 229 Isiah Thomas • humans in zoos • lizard logic • mast-strapping • beware the red zone • 8 timeless tips Chapter Eleven Timely Advice: Investing in the Meanest of Markets 265 a golden generation • lizard brain kryptonite • B.F. Skinner • returns without risk Notes 289 Index 299 Preface Mean Markets and Lizard Brains applies a new science of irrationality to personal finance. Conventional financial advice is based on the assumption that both people and markets are rational. New research is uncovering the reasons that real people and actual markets are often crazy. This new work leads to novel insights into how and where to invest. This book combines two of my passions: financial markets and the scientific study of human nature. I had my first taste of speculation back in the early 1980s. Because of asbestos litigation, the price of Johns Manville Corporation's stock approached zero. I thought the low price was irrational so I bought some shares. The stock went up over 20% the day after I bought it; I sold my shares and pocketed several weeks' worth of my salary. This trade had two effects. First, I acquired a taste for financial markets. I have been actively involved for more than 20 years, and have broadened my scope beyond buying stocks to include options, bonds, gold, currencies, and more. Second, I was puzzled by a market that produced opportunities like Manville almost for free (Warren Buffett also recognized the value and eventually bought the firm).1 Years later, while I was getting my Ph.D. in the Harvard economics department, I found an intellectual home in the study of human nature. For more than a decade now, first as a graduate student and then as a Harvard economics professor, I have studied one central question: Why do people have problems in so many areas, ranging from food to sex to money? My search for an answer has taken interesting turns, including studying negotiators' testosterone levels and living at a research station in Africa to learn from the behavior of wild chimpanzees. An important source of our problems, I have become convinced, is that we are built to solve the problems faced by our ancestors. Because modern industrialized society differs systematically from the world of our ancestors, we tend to get into trouble. In my first book, Mean Genes, Jay Phelan and I investigate how the human brain—shaped in the Pleistocene—contributes to obesity, drug addiction, and poverty. Mean Markets and Lizard Brains is a much more detailed look at one of the topics from Mean Genes. What mistakes do people tend to make in financial markets, and what can investors do to improve performance? Both book titles start with "mean" because each addresses areas of our lives where our instincts push us towards failure. It is a central feature of industrialized life that our passions conflict with our goals. Because of this, the world can sometimes seem mean. Markets can be mean to investors who buy when excited and sell when afraid. Because we are built for a very different world, our instincts tend to be out of sync with financial opportunity. Consequently, making money requires understanding and shackling that part of our brain that pushes us to make costly investing decisions. This "lizard brain," which we all have lurking underneath the more cognitive parts of our brains, is great for finding food and shelter, but terrible at navigating markets. Mean Markets and Lizard Brains thus provides an answer to my question from two decades ago. Markets are irrational because of quirks in human nature. Those who understand this and harness the lizard brain can convert mean markets into money. |
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Mean Markets and Lizard Brains How to Profit from the New Science of Irrationality (2005)