From Your Money and Your Brain, by Jason Zweig, writer for the Wall Street Journal.
In the book, Jason introduces the reader to the field of Neuroeconomics -the combination of imaging technology and psychological studies that have lead scientists to better understand humans reactions to risk. It explains why our investing brains often drive us to do things that do not make logical sense but make perfect emotional sense. Our brains were developed to survive - to react to risk. Our logical brain is no match for our reactive, risk protecting brain.
Scientists have found:
* Monetary gain or loss has a profound physical effect on the brain and body.
* The neural activity of someone making money is indistinguishable from that of someone high on cocaine.
* Financial losses are processed in the same areas of the brain that responds to mortal danger.
* Once people believe that an investment return is "predictable" their brains respond with alarm if the pattern is broken.
The key for investors and investment professionals is to understand the above psychological effects and better manage them. Many recent supporting studies indicate that the average investor severely under performs market benchmarks because of these effects.
