Why intelligent investors should get in touch with their feelings

BOOK REVIEW: Fiona Reddanreviews Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Richby Jason Zweig

WITH GLOBAL equity markets in freefall, a book full of stock-market investment tips may not be top of anyone's agenda at the moment, with government-guaranteed deposit accounts looking like the safest bet.

However, timing is everything in investment and, for those brave investors seeking to get back into the market, this book, which reveals how our emotions affect our investment decisions, might be of interest.

Author Jason Zweig comes with solid credentials, having edited the revised edition of Benjamin Graham's respected investment guide, the Intelligent Investor. He is also a senior writer for Moneymagazine and columnist for Time.

The main thesis of the book is that "the investing brain is far from the consistent, efficient, logical device that we like to pretend it is". Zweig uses neuroeconomics - a hybrid of neuroscience, economics and psychology - to explain what drives investing behaviour.

As outlined in the book, there is an emotional impact on investing when, for example, anticipating a gain is more emotionally intense than earning that gain; expecting to lose money feels worse than losing it turns out to be; and the fear signals generated by the brain in response to the threat of a market crash are more dreadful than the pain an actual crash will cause.

Zweig says our investing brains often drive us to do things that make no logical sense but make perfect emotional sense.

He has a point.

"Everyone knows that Wall Street strategists can't predict what the market is about to do - but investors still hang on their every word," he says.

He demonstrates how stocks, whose trading names or "tickers" resemble familiar words - such as MOO, GEEK or KAR - tend to outperform those with unpronounceable symbols like LXK or CINF or PHM - at least in the short run. In the long run, however, these stocks have a "disconcerting tendency" to go bust.

It is said that stock markets rise on greed and fall on fear. Zweig adds that prediction, confidence, risk, surprise, regret and happiness also determine our financial behaviour, and he bases the book on these eight emotions.

While the book's title may put some people off, overall Zweig takes a common-sense approach to using neuroscience to learn about investment techniques.

For example, for investors who tend to get carried away by greed and invest somewhat recklessly due to their monetary ambitions, Zweig proposes four steps to keep such behaviour in check:

1)Remember that there's only one sure thing on Wall Street - and that's that there are no sure things;

2)Lightning seldom strikes twice - be especially wary of investing in stocks that remind you of that one you made a killing on long ago;

3)Lock up your "mad money" and throw away the key - you should put a cap on how much you will risk on speculative trading;

4)Control your cues - by watching CNBC with the sound turned off, or writing a checklist of standards that every investment must meet before you buy or sell it à la investment supremo Warren Buffett.

Most investors will have felt that sinking feeling of regret in the pit of their stomachs and will berate themselves for what they should have done or not done - which may lead to them take additional action, which might compound the original mistake.

Zweig says mistakes are inevitable, but what an investor needs to learn to do when faced with such circumstances is to do as little as possible.

"Instead of making judgements one at a time, you should follow policies and procedures that put your investing decisions on autopilot. Think of it as cruise control for your portfolio," he advises.

Of most interest perhaps to today's investors is the chapter on fear.

With panic-selling leading to significant daily falls on markets around the world, Zweig urges investors to take a rational approach to risk.

"We underestimate the likelihood and severity of common risks, and we overestimate the likelihood and severity of rare risks," he says.

Giving the example of June 1999, when eBay's website crashed for almost a day, Zweig says overreacting to raw feelings in the face of risk is one of the riskiest things an investor can do.

In the case of eBay, its share price fell by 26 per cent over three days as investors panicked and sold the stock - but the problem was soon fixed and over the next five years eBay's stock price almost tripled.

In a regular market, Zweig's advice of "track your feelings", "get away from the herd" and "get it off your mind", might help to produce more rational investment behaviour from investors faced with a nervous situation. However, it does not offer the most helpful guidance in the current circumstances, with investors possibly facing the biggest financial crisis since the Wall Street crash of 1929.

• Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Richby Jason Zweig; Souvenir Press; €27