Our Brains are Wired Poorly for Processing Investment Choices

The human brain is a remarkable thing, and I’m usually glad to have mine hanging out in my skull. But, the brain works in mysterious ways, and not always in our best interests. For instance, brains process risks poorly (like financial choices), especially when those choices are spread over time. The longer the time horizon, the worse our judgment. This isn’t just about instant gratification, although wanting something now rather than the promise of something greater in the future is indeed understandable. Our brains stubbornly refuse to reliably process future risks and rewards.

Our brains can make use of sober mathematical analyses and come up with a sound investing strategy, but all that tends to go out the window if the stock market nosedives. Suddenly, we find ourselves starring in Jackass: The Investor pulling all kinds of stupid investing stunts.  We sell low in fear and buy back high in greed.  The point here is that our gut instinct fails us.