This article is composed by Bogleheads® forum member digarei.
Seventeen people attended the thirty sixth meeting of the Sacramento Area Local Chapter. The April 14, 2018 meeting took place between 10:00 AM – 12:30 PM and consisted of:
- Introductions: 24 mins (All)
- Presentation: How we are Programmed to be Financially Insane -and what to do about it. 97 mins (Chris Goslow)
Can you identify the topic from reading these disparate statements?
- I’m of a mind to say, “Yes, let’s do this!”while another part of me says, “No, better to wait and see”
- She’s of two minds about how to approach the problem.
- Yin and Yang • Light & Dark • 0011 0010
- “Most prescient decisions are in-formed gut reactions–the heart informs the mind.”1
- He says one thing… and does another.
- Instinctive vs. Logical • Emotion vs. Reason
- System 1 and System 2
At the conclusion, seven of us met together at a nearby restaurant (Kupros Cafe) on 21st Street to enjoy a leisurely brunch.
Neuroeconomics is a synthesis of evolutionary psychology, behavioral economics and neuroscience. It has a number of permutations but few as interesting to investors than that described most famously by psychologist Daniel Kahneman (Thinking, Fast and Slow) and by financial writer Jason Zweig in a book, Your Money and Your Brain, authored in 2007.
We have surprisingly limited awareness of the process whereby decisions are reached in our own minds. If pressed we can often recount (or invent) a vague history, enlisting facts and beliefs, logic and feelings that led us to this or that decision, or action. In a quiet moment we may admit that we don’t always know why we [do or say or] think the way we do. Our own mind is a black box. Yet we do act as though our decisions and thoughts originate from a single source and are produced by straightforward means.
The compelling research Zweig reports on in Your Money and Your Brain postulates a dualistic view of the human mind: our thinking is a product of two brains.
- The ‘Reflexive Brain’
- The ‘Reflective Brain’
Of course, humans evolved a centralized nervous system and a highly developed and complex physical brain (singular); its soft tissues are protected by the cranium. It has long been studied—dissected post mortem; examined, probed and sampled during surgery; by x-ray and other imaging in a quest to understand how it works.
The Hippocratic physicians may have been the first to assert that the seat of consciousness was in the brain—not the heart, as was believed by most ancient philosophers and priests. Yet rudimentary explanations of how personality and consciousness interfaced with neural tissues were not forthcoming until the 16th century. In the same era greatly improved depictions of human anatomy were published (e.g., Vesalius 2) and more enlightened and educated individuals would learn that observation and testing could best authority and edict. 3
Eventually, some of the body’s functions and pathologies could be linked (localized) to specific regions of the brain, enabling more successful diagnoses and advances in physiology. During the last 100 years, the sciences have flourished. Though ‘dual process theory’ has roots in the past, cognitive science, high resolution imaging and the field of neuroeconomics are all quite recent endeavors. 4
The “two brains” are two separate systems that are in charge of our decision-making processes and are often but not always in sync with each other.
The Reflexive is associated with blindingly quick reactions (e.g., fight or flight), intuition and emotion; it is the default and always the first to act when danger is perceived. Low-level signal processing. Involuntary and subconscious.
The Reflective brings order to chaos by organizing and managing day to day operations; performs complex tasks and executive functions; it resolves issues and is able to contemplate the future but it is much slower in execution. Operates at a conscious level and is controlled by our volition. We can and do “change our mind”.
Please note what’s being discussed here. These descriptions are *not* the invention of an enthusiastic psychology undergrad, the musings of a philosopher, nor are they untested hypotheses, in that controlled fMRI studies have demonstrated specific physical structures in the brain used in each type of thinking. Dual process theory is supported by science but has not been proven or accepted at the level of say, the theory of evolution or the theory of gravity. It could one day be superseded by a different or more refined theory,
The two minds are distinctive yet integral and complementary modes of thinking. The Reflexive is dominant most of the time.
- System 1
- Function: Intuition
- Located in:
• Cerebral cortex
• layers V, VI to
• sub cortical
• • Basal Ganglia
• Limbic (amygdala, thalamus
- Interacts with system 2
- System 2
- Function: Analysis
- Located in
• Prefrontal cortex
• Parietal cortex
- Interacts with system 1
What does all of this have to do with Investing?
Our brains have a reflexive system that automatically makes us greedy or fearful, and it often overrides the reflective system, which aids careful deliberation and good decisions.
Example: Many people get excited to see a $500 million lotto jackpot but they ignore the fact that their chance of winning is dismal. 1 to 100,000,000?
The reflexive brain is programmed to anticipate the possibility of gain (or loss) but does not evaluate probabilities, a job best suited to a different part of our brain: the reflective system.
But can we be so sure that the rational / reflective brain is reliable, leads to good outcomes?
For a more complete introduction to this material, check out the following:
- 8 Things I Learned From ‘Your Money & Your Brain’, Ben Carlson. 2013 A Wealth of Common Sense
- Your Money and Your Brain, Jason Zweig. Softcover 2008 Simon & Schuster
- Your Money and Your Brain, Jason Zweig. Hardcover 2007 Amazon
- Thinking, Fast and Slow, Daniel Kahneman. Hardcover 2013 Amazon
Notes & Links
1 “Most prescient decisions […]” (All quoted text in Item D) Copyright © Greg Dietrich 2018
3 “The Hippocratic physicians may have been the first […]” Great source for pre-20th century medicine. Magner, Lois N. (1992). A History of Medicine. Purdue University. Marcel Dekker, NY.
4 “Cognitive science, high resolution imaging, dual process theory […]” more info for general readers:
- Dual process theory
- Counter argument: ‘Issues with the dual-process account of reasoning’
- History of neurology and neurosurgery ; Decision-making
- Cognitive science ; Consciousness
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