Your Money & Your Brain - Surprise (READ THIS)

Jason Zweig writes the following in chapter 8: "After writing about Wall Street since 1987 and studying centuries worth of financial history, I have become convinced that the prevailing view of what the future holds is almost always wrong. In fact, the only incontrovertible evidence that the past offers about the financial markets is that they will surprise us in the future. The corollary to this historical law is that the future will most brutally surprise those who are the most certain they understand it. Sooner or later, sometimes slowly and sometimes suddenly - but with a diabolical ability to root out everyone who has ever gazed into a crystal ball - the financial markets will humiliate whoever thinks he knows whats coming"

Zweig wrote the above in 2007.

I like this because it flies in the face of all the CNBC and financial prognosticators who are so confident they know the next turn of the market or hot stock or hot sector.

In this chapter on surprise Zweig explains that it is our anterior cingulate cortex (ACC) that tunes the rest of our brain to danger. Its part of our intuitive system that helps us respond quickly to danger. In the biological world that we live in, it is more important to respond quickly to dangers versus successes.

This helps account for our panic when markets start to fall.

Zweig reminds us to:

* Remember that "everyone knows nothing" - what everybody knows is already embedded in the price, so what everybody knows does not give you an edge. Unless you have some great insight, you don't know anything that the market has already built into the price.

and that,

*High hopes cause trouble. Growth stocks that miss earnings by just a small amount can spell big losses. Conversely, value stocks tend to have low hopes and so when positive news on a value stock becomes public they tend to have large increases. Classic examples of our brain reacting to surprises.