Excerpts: Wealthtrack Interview with Jason Zweig

JASON ZWEIG: Well, I think one of the central things I learned from being a guinea pig in these experiments that I couldn't have learned in any other way is the difference between expectation and experience. The human brain, it turns out, is designed to expect events much more intensely than we actually experience them. You hope to make money. That's what we call greed. Greed is an intensely powerful experience. But actually making money rarely feels as good as hoping you will make it feels. Likewise, losing money is something we dread when we think about it in the future, even more than we experience when it actually occurs to us. We're all actually more afraid of losing money than we probably should be. Because it feels terrible, but it never feels quite as bad as you think it will if you're expecting it.

CONSUELO MACK: One of the interesting illustrations where you did not use your brain shows expecting dough, expecting to make money, and it shows the segment of the brain, how it reacts. And then expecting dope, which was actually a cocaine user expecting to score? Or a hit? Whatever it is. What did that show you, number one, and what does it tell you about our brains and our expectations?

JASON ZWEIG: Well, what it shows is what I call the prediction addiction. It's very easy for investors after only a few repetitions of a profitable trade, or a stock where the ticks go up, up, up. The stock is $10.12, then it's $10.14, then it's $10.17- you're a genius. You're actually addicted to your own belief in your predictive ability.

CONSUELO MACK: And your brain shows, I mean, shows an addiction? Right? There's a way ...

JASON ZWEIG: The way we can identify it is very simple. If you compare a brain scan of someone under those circumstances, who’s on a hot streak with a financial investment, against the brain scan of a drug addict expecting to get the next hit from a needle, you can't tell the two brain scans apart. That's very important for people to realize. Because what it tells you is that being right is also dangerous. Because that's when people take the wild risks that come home to roost.

CONSUELO MACK: When is it that you're at most danger?

JASON ZWEIG: One of the really astonishing discoveries to come out of neuroeconomics is that the brain has automatic formation of expectations. So once something happens twice in a row, you will, you shall, believe that it will happen a third time. So if a stock goes up, and then up, it's almost impossible for you not to believe that it's going to go up a third time. And Ben Graham wrote about this many years ago in The Intelligent Investor, when he said that the investing public is incorrigible. It cannot count beyond three. And it's as if Ben actually anticipated this discovery of neuroeconomics. And that's important for people to realize too. You will perceive a trend so fast in the modern Internet, you know, financial television world, where things are broadcast continuously in real time. You see ticks constantly. Our parents could only price their portfolios once a day, maybe once a week. We can do it five, ten times a minute. And that leads us to perceive trends constantly. And most of them are just illusions.

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CONSUELO MACK: So when do emotions play a constructive role in the investment process?

JASON ZWEIG: Well, emotions can be so helpful if you're able to put them in context. And one of the bits of advice I give in the book is to keep an emotional registry, a kind of diary or journal. And only if you do that can you really learn when you should trust your emotions. Chances are you can't trust them much at all, but you may be able to use them as a perfect guide to what your behavior should be by always doing, in effect, doing the opposite. And that's why Warren Buffet likes to say, "I try to be greedy when other people are fearful, and fearful when other people are greedy." The trick is, it's hard to turn your emotions inside out. You certainly can't turn them off. But what you can do is you can adjust your rules with a little input from your emotion. For example, if your normal target for owning stocks is 70 percent of your portfolio and you feel that the market has gone way up, and you feel that you're euphoric, then you have to signal that you should just, you know, buy a little bit more in bonds. At that moment.

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CONSUELO MACK: One other question. What was the biggest surprise for you in Your Money and Your Brain, as far as your experience?

JASON ZWEIG: I think the biggest surprise for me was learning that the brain can make decisions without you being aware of it. I participated in an experiment at Emory University, where my job, my task in the brain scanner, was to try and identify which of two investments would have a higher return. And it was a fiendishly clever experiment. And we can't explain it completely on the air. But to make a long story short, I was attempting, with my conscious brain, to identify the winning pattern. When, all of a sudden, my automatic brain, the very primitive part of the brain that some people call the "reptile brain," identified it without my even realizing it. And I was furiously tapping my left finger on the button press inside the machine. Because this part of my brain had figured out what to do, while the thinking part was completely stymied. And what did it was I got a few hits of sugar water through the pacifier that was stuck in my mouth. And what this tells you is that you can be motivated by the most primitive stimulus, and it can lead you to an automatic decision that you're completely unaware of, and you may never realize it happened to you.

CONSUELO MACK: Was it the right decision?

JASON ZWEIG: In that case it was, yeah. I walked away $40 richer.