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| Visions & Revisions |
The Edge of Reason
Jan Alexander
05/02/2005
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Terry Burnham says investors harm themselves by relying on their primitive, inherited instincts—what he calls their “lizard brains”—when making investment decisions. The synthesis of evolutionary psychology and finance that underpins this view comes as no surprise, considering Burnham’s background. He studied under Pulitzer Prize–winning biologist Edward O. Wilson, the herald of sociobiology, and Nobel Prize–winning economic empiricist Vernon Smith, while pursuing his PhD in business economics at Harvard. Burnham’s new book, Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality, intertwines elementary investment advice (think long-term and diversify) with a lively treatise on human evolution. Burnham recently spoke with Worth to explain why the lizard brain makes investors gravitate to crowded, popular markets when they should be out hunting their next big kill.
People are not lizards.
The lizard brain is verbal shorthand for the less cognitive, less abstract mental forces that influence our behavior. We have a prefrontal cortex that is rational—though often far from perfect—and we have the lizard brain, which is powerful, mysterious and ingenious. You think you can outsmart it, but you’re wrong.
For the lizard brain to help us, it has to spot signals that mean the same thing today that they did to our cave-dwelling ancestors. For thousands of years we could predict the outcome of the hunt by observing an animal’s footprints. When we look for cues in the patterns of financial markets, though, every single thing our brain was built to do is 100 percent wrong.
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