I have currently being reading a wonderful book on the history of financial speculation: Devil Take The Hindmost, A History of Financial Speculation, by Edward Chncellor.While reading this book, I have been re-posting some chapter summaries from Jason Zweig's, Your Money & Your Brain, and I cant help but see the connection between how our brains drive us and the booms and busts we see in the investment cycle.
What we know is that making money creates a euphoria in our brain that is similar to a cocaine high. But when we start to lose, our lizard (reactive) brain takes over and we panic and flee. Neither state is rational.
What we have observed in the 300 years, or so, of market history is that financial markets tend to swing wildly. This is not new to the last few years. There is a rich history of boom and bust cycles. Investors drive up the price of everything; from tulips in Holland in the 1600's to on-line pet stores in the 1990's, all in an irrational frenzy of greed, then see it destroyed when some event trips their collective lizard brain into a protective panic state. As I read I will occasionally leave some quotes from the book that reflect how investment history repeats itself. It was already reapeating itself in the early 1800's. This from Lord Overtone in 1825:
"First we find it in a state of quiet, -next improvement,-growing confidence,-pressure,-prosperity,-excitement,-overtrading,-convulsions,-pressure,-stagnation,-distress,ending again in quiet."
Maybe Wall St, or government policies are not to blame for extreme fluctuations in investments, maybe our collective human brains are more to blame.
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