From Jason Zweig's Your Money and Your Brain:
The reflexive brain (or lizard brain) is that part of your brain that reacts to external stimuli, sometimes within a tenth of a second. It has developed to protect us from risk in our environment. It operates below the level of consciousness.
This is important to understand because your reflexive system is so fixated on change it is hard to focus on what remains constant. For example, we react to a 100 point drop in the Dow, but we don't keep it in context that it is only a 1% drop. Academic studies have shown that investors who focus on price levels outperform those who focus on price changes.
The other part of your brain: the reflective brain organizes information, categorizes it and tries to develop patterns. But, you cant depend on your reflective abilities, they are limited by your memory and the complexity of the problem. Doctors and engineers as a group are poor investors because they try to find patterns and they miss the unforeseen event that renders their system useless.
The lizard brain dominance over the reflective brain can be observed in the average investors purchase of mutual funds. Most investors focus on the flashy factors when choosing a mutual fund: mutual fund manager, recent performance, reputation. They ignore fund expenses, which rigorous study has shown to be the most critical factor in predicting future performance.
Based on studies like the annual Dalbar study of investor behavior, it is evident that our lizard brain dominates in most decisions for the average investor.
It helps to have a trusted advisor, paid or unpaid with some understanding of human and market behaviors, to help you manage your natural reactions and stay true to your investment course.
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