Still, when there is so much to learn, obviously, one book
can only take us so far.
But this book is a good place to start.
And takes us through at least some of the issues involved
in human decision making:
a) Limbic impatience.
c) Loss aversion.
d) Mental accounting.
e) The anchoring effect.
f) Rational vs. emotional
g) Outsourcing of decisions.
Neural learning:And in order to improve our understanding - We must first understand that we are in for a learning experience. We can not just praise ourselves for our current understanding.
Here we are just like kids - I.e. the problem with praising kids for their innate intelligence - is that it misrepresents the neural reality of education. It encourages kids to avoid the most useful learning experience, which is learning from mistakes. Unless you experience the unpleasant symptoms of being wrong, your brain will never revise its models. Before you can be right, you will be wrong. There are no shortcuts for this painstaking process.
|Inside the fMRI machine one can see an activated amygdala whenever a person thinks about losing something. So, framing a question in the direction of loss activates the amygdala and warps the decision towards not taking risks.||
Financial investments and loss aversionWhen markets are booming, investors keep increasing their investment. Not to invest is the same is waving goodbye to a lot of money. And then - just when the investors are convinced that the buble isnt a buble - the buble bursts.
According to Lehrer: Since the market is a random walk, the best solution is actually to pick a low-cost index fund and wait. Dont fixate on what might have been or obsess over someone elses profits. Indeed the passive investor who does almost nothing outperforms the average active investor by nearly 10 percent.
Still, one should be willing to take risks. Since 1926, the annual return on stocks after inflation has been 6.4 percent, while the return on treasure bills has been less than 0.5 percent. Then why are low-yield bonds so popular?
According to Schlomo Benartzi the key is loss aversion. Investors buy bonds because they hate losing money, and bonds are a safe bet.
So, sure - bonds is a well- intentioned strategy. But also misguided - when the fear of losses make investors accept such a measly rate of return.
Indeed, loss aversion makes us irrational when it comes to evaluating risky gambles.
In a brain study by Damasio and Loewenstein - people, with intact emotional brains, dont invest as much, as would be the rational thing to do - because of loss adversion. People are wired to dislike potential losses. Content to sacrifice profit for security. With the willingness to invest almost non-existing just after a loss. The pain of losing to fresh. Neurologically impaired patients on the other hand, who dosn't experience the full emotional sting of losing, actually perform better than the normal patients. As they are more rational in realizing that investing is actually the best long term strategy (at least in the Damasio & Loewenstein experiment).
|Indeed, to much information is a huge distraction. As the brain has a lot of trouble ignoring irrelevant information.||
The anchoring effectIs about the brains spectacular inability to dismiss irrelevant information. In the United Nations game (first demonstrated by Daniel Kahneman) people are asked to estimate the percentage of African countries in the United Nations.
Before people guess, a random number is generated. People who see high numbers on the random number generator (-- fully aware that it is indeed a random number with no connection to the question --) generate significantly higher guesses for the percentage of African countries in the UN, than those who see lower numbers. Being exposed to extra, irrelevant information is indeed a distraction!
According to Herbert Simon: A wealth of information, creates a powerty of attention.