Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality

(15 customer reviews)

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PDF

Pages

321

Published Date

2005

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Description

In Mean Markets and Lizard Brains, Terry Burnham, an economist who has a proven ability to translate complex topics into everyday language, reveals the biological causes of irrationality. The human brain contains ancient structures that exert powerful and often unconscious influences on behavior. This “lizard brain” may have helped our ancestors eat and reproduce, but it wreaks havoc with our finances. Going far beyond cataloguing our financial foibles, Dr. Burnham applies this novel approach to all of today’s most important financial topics: the stock market, the economy, real estate, bonds, mortgages, inflation, and savings. This broad and scholarly investigation provides an in-depth look at why manias, panics, and crashes happen, and why people are built to want to buy at irrationally high prices and sell at irrationally low prices. Most importantly, by incorporating the new science of irrationality, readers can position themselves to profit from financial markets that often seem downright mean.

Author’s Note:

Mean Markets and Lizard Brains applies a new science of irrationality to personal finance. Conventional financial advice is based on the assumption that both people and markets are rational. New research is uncovering the reasons that real people and actual markets are often crazy. This new work leads to novel insights into how and where to invest. This book combines two of my passions: financial markets and the scientific study of human nature. I had my first taste of speculation back in the early 1980s. Because of asbestos litigation, the price of Johns Manville Corporation’s stock approached zero. I thought the low price was irrational so I bought some shares. The stock went up over 20% the day after I bought it; I sold my shares and pocketed several weeks’ worth of my salary.

This trade had two effects. First, I acquired a taste for financial markets. I have been actively involved for more than 20 years, and have broadened my scope beyond buying stocks to include options, bonds, gold, currencies, and more. Second, I was puzzled by a market that produced opportunities like Manville almost for free (Warren Buffett also recognized the value and eventually bought the firm). Years later, while I was getting my Ph.D. in the Harvard economics department, I found an intellectual home in the study of human nature. For more than a decade now, first as a graduate student and then as a Harvard economics professor, I have studied one central question: Why do people have problems in so many areas, ranging from food to sex to money? My search for an answer has taken interesting turns, including studying negotiators’ testosterone levels and living at a research station in Africa to learn from the behavior of wild chimpanzees.

An important source of our problems, I have become convinced, is that we are built to solve the problems faced by our ancestors. Because modern industrialized society differs systematically from the world of our ancestors, we tend to get into trouble. In my first book, Mean Genes, Jay Phelan and I investigate how the human brain—shaped in the Pleistocene—contributes to obesity, drug addiction, and poverty.

Mean Markets and Lizard Brains is a much more detailed look at one of the topics from Mean Genes. What mistakes do people tend to make in financial markets, and what can investors do to improve performance?Both book titles start with “mean” because each addresses areas of our lives where our instincts push us towards failure. It is a central feature of industrialized life that our passions conflict with our goals. Because of this, the world can sometimes seem mean.

Markets can be mean to investors who buy when excited and sell when afraid. Because we are built for a very different world, our instincts tend to be out of sync with financial opportunity. Consequently, making money requires understanding and shackling that part of our brain that pushes us to make costly investing decisions. This “lizard brain,” which we all have lurking underneath the more cognitive parts of our brains, is great for finding food and shelter, but terrible at navigating markets. Mean Markets and Lizard Brains thus provides an answer to my question from two decades ago. Markets are irrational because of quirks in human nature. Those who understand this and harness the lizard brain can convert mean markets into money.

Contents:

  • Introduction: Mean Markets and Lizard Brains
  • Crazy People: Lizard Brains and the New Science of Irrationality
  • Crazy World: Mean Markets and the New Science of Irrationality
  • U.S. Economic Snapshot: America the Talented Debtor
  • Inflation: Rising Prices and Shrinking Dollars
  • Deficits and Dollars: Uncle Sam the International Beggar
  • Bonds: Are They Only for Wimps?
  • Stocks: For the Long Run or for Losers?
  • Real Estate: Live in Your Home; Make Your Money at Work
  • Timeless Advice: How to Shackle the Lizard Brain
  • Timely Advice: Investing in the Meanest of Markets
Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality By Terry Burnham pdf
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15 reviews for Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality

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  1. Estelle Hamilton (verified owner)

    What a cool book! Terry Burnham wants to help his readers understand that while we fancy ourselves users of reason and rational beings we still have blind spots in our thinking and behavior that can get us into a great deal of trouble when making investment decisions. That is, unless we are explicitly aware of these problems and consciously work to train ourselves to avoid them and be continuously on guard against falling into their pit.

    Burnham organizes the book into four parts. The first chapter is the introduction and presents the gist of the book. What is a mean market? The fact that markets can defy the accepted bromides about rational markets and wipe out investors surprisingly quickly and without any hint of mercy. The idea of cosmological indifference comes to mind. The author’s vivid image of the “Lizard Brain” refers less to any explicit structure in the brain or any claim to specific evolutionary path to brain development.

    Instead, Burnham is referring to the fact that we all have a set of tendencies, hard wired ways of perceiving the world, and bred in behavioral tendencies that worked well in keeping our ancestors alive in the ancient world. However, they are as out of place in our technological world as a lizard might be at the Met. For example, our brains are very good in seeing patterns. The problem is we often see patterns where none exist. On the other hand, we are terrible at perceiving frequencies. However, with training and discipline we can learn to deal with both of these natural tendencies. Without being aware of these potential problems, we too often get ourselves in trouble.

    The first part weighs the traditional Efficient Market Hypothesis (EMH) of rational markets against the oceans of evidence that people do behave irrationally. Here is where I differ slightly with Burnham. My understanding of EMH does not require that each individual act rationally or that any given price at any instant in time be the “right” price. Instead, it indicates that in the aggregate that most irrationality cancels each other out and resources get allocated surprisingly efficiently. As for prices, the notion is not that the price is free from being too high or too low, but that there is a “right” price at all that will be in the area of most of the trading with some of it too high and some too low.

    However, the EMH doesn’t help the investor account for irrationality or how to avoid its dangers in one’s own behavior or capitalize on its existence in others. And this is where the book’s strengths are to be found.

    The second part takes us through a survey of evidence of irrationality in the American markets and the limits of growth that are so often ignored in pricing equities. The author also takes us through the uses and perceptions of money, barter, inflation, and deflation. All interesting and useful information.

    In part three we get Burnham’s actual views on how to pull all this together in viewing Bonds, Stocks, and Real Estate for investments at the time of this book (2005). Burnham is an economist and discounts the optimism of many people who tout these products. I think he makes a great deal of sense. However, it is up to you to make your own decisions.

    Part four provides two chapters full of principles for us to apply in making our own investment decisions. The first chapter gives “timeless advice”. That is, those principles that are applicable in any type of market at any time. The second chapter offers “timely advice”. That is, advice that is market condition specific. Burnham gives us principles to apply in rising or declining markets and how to know when to use them.

    The issue is whether we have the discipline to apply them or will we surrender to the emotional pull of the lizard brain and find ourselves in trouble.

    Burnham makes this subject quite lively, is able to put some nice color to it with some good anecdotes, illustrative stories, and some actually funny jokes.

    Recommended.

  2. Evelynn Lloyd (verified owner)

    As a lot of what happens in the market world today seems to be based on perception of effects from various events and is caused by our reaction to it, its nice to have a book that looks at that aspect instead of going over charts and formulas. This is a good read on how people’s fear and poor decisions can cause them problems.

  3. Yahir Lowery (verified owner)

    …so goes the line of one of my favorite songs, ‘Don’t you know’ by Jimmy Buffett. As a human evolutionary biologist, I am always tickled when Darwinian evolution is correctly, accurately, and elegantly invoked to address contemporary issues of the human condition. As a forty something man who keeps a close eye on his investments and retirement portfolio, I was delighted to see that Dr. Burnham had written a book that illustrates how the ‘lizard brain’ is often out of sync with the ‘invisible hand’. The writing is witty yet Burnham explains intricate aspects of fiscal management and economics with skill and clarity. More importantly to this biological anthropologist, unlike all too many authors who proport to understand evolutionary biology, Burnham actually delivers. Read this book, share it with your friends and family.

  4. Joshua Prince (verified owner)

    great book on psychology and investments. a must read for anyone interested in looking at market psychology.

  5. Brylee Turner (verified owner)

    Don’t let the funny sounding title turn you away…you’d be doing so at your own peril. Amateur investors are constantly screwing up their portfolios by routinely buying high and selling low with every bull and bear market and yet they expect a different result each time. This is one of the very few books out there that can actually make you a superior investor by simply educating you to the numerous behavioral blunders that the “herd” makes time and time again. Volatility creates enormous opportunities for making market beating gains routinely but you must understand and avoid the typical pitfalls of the clueless masses. A good knowledge base of behavioral investing will give you a substantial advantage in all types of markets and this outstanding book can get you there. As an experienced professional investor and financial/retirement advisor, I can’t recommend this book strongly enough. Learn more to earn more.

  6. Jason Pruitt (verified owner)

    Maybe its just oversimplification, but some of the information here is just plain wrong. For example, in one section he states “There is speculation (both whispered and in the futures prices) the dollar will eventually weaken…” Anyone who had an iota of background in currency futures knows that futures prices are solely a function of the current prices and interest rates in the two countries as there is a risk-free arbitrage opportunity if futures prices responded to sentiment. The riff against efficient markets was also very one-sided and not especially helpful. The first 50 pages were great, the rest wasn’t worth reading.

  7. Trace Caldwell (verified owner)

    Like most markets and investing books you would do well to take them with a grain of salt. That is the case with this book.

    I appreciate the subject matter and the book came highly recommended to me.

    As a Chartered Financial Analyst with almost 20 years experience I am having a difficult time finishing this book. The author makes factual assertions without any empirical backup. For instance, he asserts that fundamentally greater wealth does not make a person happier. This is not factual.

    There is a great deal of current research into happiness and wealth, greater wealth suffers from diminishing returns, but suffice to say that people with double the average income are in aggregate happier than the average American.

    If this was the only example I would hold my tongue, but it is not.

    Caution: Read with a grain of salt.

  8. Bonnie Mayer (verified owner)

    If there is one thing this book teaches you, it is to know oneself. The idea of restraining your impulses and thinking things through is really driven home. I’ve been devouring investing and economic texts for some time. This one has nicely filled a gap that was missing in my investment ideology.

  9. Amira Russell (verified owner)

    Interesting to read with the benefit of hindsight. Written in 2005 and author discussed the possibility of a housing bubble and stated he saw no evidence of it!!! Primary focus of the book — contrarian investing was well written.

  10. Kassidy Salgado (verified owner)

    very informative on US economy

  11. Greta Pittman (verified owner)

    LOVED!

  12. Valentino Castaneda (verified owner)

    Good analysis of irrationality as it applies to markets. Nice summary of actions a ‘rational’ investor should take in irrational markets. A few years out of date

  13. Keira Sellers (verified owner)

    I was expecting much more but this book, losing it’s timeliness quickly, is a general book about investing with a splash of behavioral economics. That means, its a good book for a general investor or a new person to the investment world, but I was expecting more. Sadly, when you make “bold” predictions, and I guess the author felt he needed to, your book will stand on its own against history. Well, the book got the real estate market really wrong. Not that its fair to pick on him for being really wrong on real estate but with the crash in 2008-9 a lot of the theories of the book went down the tube too.

  14. Zaire Poole (verified owner)

    If you want information that is 20-30 years out of date, buy this book. The theories are valid but the facts are way out of date. The author claims to have updated the book, but the update is from 15 years ago and are just a paragraph or two at the end of a chapter.

  15. Madden Welch (verified owner)

    I bought this book because I read Nassim Taleb’s comment on top of the book. This book is really generic, if you are in financial markets and know some basic stuff about decision making then this book is not for you. I honestly didn’t learn anything from the book.

    It’s good for beginners with no knowledge of markets and who are new to trading/investing. If you have read works of NNT, Kahneman and few other books in the field then this is not worth it.

    The book is easy to read.

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