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July 23, 2012

Articles about studies that show that our brains may limit our financial abilities.

Jason Zweig’s article, “Why We’re Driven to Trade”  in the July 21st Wall Street Journal is an example.  Many people approach investing with a short-term view rather than a long-term view.  “In a study published last month in the Journal of Neuroscience, researchers from California Institute of Technology, New York University and the University of Iowa looked at how people use past rewards to predict future payoffs.” 
“When confronted with the unpredictable… the frontopolar cortex [brain] refuses to admit defeat.  It draws on all your computational abilities to search for patters in random data.  In the absence of real patters, it will detect illusory ones.  And it will prompt you to act on them.  No wonder so many investors find it hard to muster the willpower to buy and hold a handful of investments for years at a time.”

“In the lousy markets of the past decade, various alternatives such as ‘tactical asset allocation’ (or market timing), mathematical risk-reduction techniques and even plain old intuition haven’t worked out all that well, either.”

“Every investing decision you make should should be the result of a deliberate process.  Start by creating a checklist of criteria that every stock or fund must meet before you buy or sell.  Make sure you never buy or sell an investment exclusively because its price has gone up or down.  In advance, list three reasons having nothing to do with price that would justify buying or selling.”

“You don’t have to trade like mad just because the people who grab headlines hold stocks for a few minutes or seconds at a time.  Knowing the limits of your knowledge is the highest form of intelligence.”

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