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Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich [Hardcover]

Jason Zweig
4.0 out of 5 stars  See all reviews (1 customer review)

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Book Description

Sept. 4 2007
What happens inside our brains when we think about money? Quite a lot, actually, and some of it isn't good for our financial health. In "Your Money and Your Brain, " Jason Zweig explains why smart people make stupid financial decisions -- and what they can do to avoid these mistakes. Zweig, a veteran financial journalist, draws on the latest research in neuroeconomics, a fascinating new discipline that combines psychology, neuroscience, and economics to better understand financial decision making. He shows why we often misunderstand risk and why we tend to be overconfident about our investment decisions. "Your Money and Your Brain" offers some radical new insights into investing and shows investors how to take control of the battlefield between reason and emotion."Your Money and Your Brain" is as entertaining as it is enlightening. In the course of his research, Zweig visited leading neuroscience laboratories and subjected himself to numerous experiments. He blends anecdotes from these experiences with stories about investing mistakes, including confessions of stupidity from some highly successful people. Then he draws lessons and offers original practical steps that investors can take to make wiser decisions.Anyone who has ever looked back on a financial decision and said, "How could I have been so stupid?" will benefit from reading this book.

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From Publishers Weekly

Starred Review. It's tempting to blame your upbringing or your stingy boss, but the real culprit in your flawed relationship with money is your very own brain, argues finance writer Zweig. Combining concepts in neuroscience, economics and psychology, he explains how our biology drives us toward good or bad investment decision. Our brains are pretty self-deceptive, it turns out: we have difficulty admitting our lack of knowledge about finances; we overestimate our own wisdom and performance; and our preference for mistakes of action rather than inaction often leads us to irrational investment decisions. Most tellingly, humans believe we're smart enough to forecast the future even when we have been explicitly told that it is unpredictable. Among the book's fun facts: the MRI brain scan of a cocaine addict is virtually identical to that of someone who thinks he is about to make money. Backed by stellar research and written in an entertaining, informal style that makes a complex subject accessible to the layperson, Zweig makes clear how we can understand what our brains are doing and how to use that knowledge to get out of our own way and invest wisely. (Sept.)
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.

From Booklist

Do you fret over the value of your investments on a daily basis? Do you buy stocks based on a "hunch" or a gut feeling? According to Zweig, the latest scientific evidence shows that this common behavior usually results in financial loss and is caused by the way our brain reacts when we think about money. According to recent research in the emerging science of "neuroeconomics," the pleasure center in the brain that is stimulated in anticipation of "the big payout" is the same area that is affected during sex or drug use and is responsible for the addiction to gambling. Our brains, which evolved more than 200,000 years ago to react quickly to patterns and minute changes in our environment, are not equipped to handle the randomness of the stock market; but nevertheless we attempt to create meaningful patterns where there are none and base our investment decisions on erroneous assumptions. The good news is that awareness of this phenomenon can make us better investors, and Zweig offers some simple tips to avoid the pitfalls, such as taking the long view and avoiding overtrading. Siegfried, David

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1 of 1 people found the following review helpful
4.0 out of 5 stars Interesting and Applicable May 8 2014
Format:Paperback
Chapters are broken into short easy to read segments. There is a surprising amount of information, all of it useful to know.
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Most Helpful Customer Reviews on Amazon.com (beta)
Amazon.com: 4.1 out of 5 stars  51 reviews
99 of 102 people found the following review helpful
3.0 out of 5 stars Fun Read but Very Limited Practical Applications Dec 17 2007
By Dale C. Maley - Published on Amazon.com
Format:Hardcover|Verified Purchase
The last 5 years I have read many research papers on behavioral finance, so I have a fair amount of knowledge about its findings.

I first read Pompian's book Behavioral Finance and Wealth Management, and then a few weeks later read Jason Zweig's Your Money and Your Brain.

Pompian's book wins hands down from a practical viewpoint......how you can use behavioral finance findings as an investor or investment advisor. Pompian lists all 20 common biases, and then gives examples of how to deal with them. I also enjoyed his section on using Briggs Myers test results coupled with behavioral finance principles.....to develop better financial plans which fit people better.

Zweig's book is a fascinating read.......but when I got done......my question was.....How do I apply these behavioral finance findings to my investments or my client's financial plans? I would have to re-read Zweig's book......and develop the practical uses myself from his book. Pompian has already put this together for you in his book.

If you have never been exposed to behavioral finance, then maybe reading both books is a good idea. You can get a general over-view by reading Zweig's book first......then get practical advice on how to apply the findings from Pompian's book.

It is interesting that Zweig's book at $17 has an Amazon sales rank of 2,075......and Pompian's book at $38 is only ranked 38,940. I have always enjoyed reading Zweig's columns in Money magazine. It is interesting to see where future research in behavioral finance is headed in Zweig's book.......but in my opinion; you get more practical advice (or value) for the dollar from Pompian's book than Zweig's book.

To compliment this book.....I would suggest a couple good books on index fund investing and asset allocation.

The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing
83 of 87 people found the following review helpful
4.0 out of 5 stars To Optimize Your Wealth, First Optimize Your Mind Sept. 4 2007
By James East - Published on Amazon.com
Format:Hardcover
The above is the premise of Jason Zweig's Your Money & Your Brain. As the research continues to mount that we are indeed more hardwired like our animal ancestors than we care to admit, it helps to know these hardwired systems in ourselves to more understand our response mechanisms that can and do trigger our emotions and ultimately our actions. To assist in this effort, the book highlights and goes into some detail of the more recognized emotions like Greed, Fear, Regret, and Confidence of which all play on our performance in life, as well, and even more so in optimizing our wealth in the investing process. Since the investment world and markets themselves are full of triggers that fool our brains into taking actions that in the end are not good for wealth optimization, this book will help you understand some of these triggers and hopefully avoid some of the actions they promote.

It was a treat to read this very well written (read as not too technical) on the pitfalls of our decision making and how we sometimes unknowingly do things that are against our own best interests. To illustrate with one of the topics of Confidence, we are hardwired to be confident because if we weren't we would more often then not be paralyzed to never be able to make a decision. However; when it comes to investments, we are mostly too confident in our own abilities which itself leads to overconfidence. For example, we believe that our own selected lottery ticket has a better chance of winning than someone else's selected ticket even though all of us know that the odds are the same for everyone. But when asked to give your ticket up for someone else's, the response is usually -- no way. This fact has been tested over and over with the same conclusion that we believe our own cognitive skills or luck is better than someone other than ourselves. In the investment world, the path to ruin is full of disasters where investors were overconfident. Let us just be reminded of the ".com" boom or Long Term Capital Management episode.

Or let's take another look and topic in the book of Risk. What is your Risk tolerance? This may entirely depend on what your mood was when the question was asked, or what was the last color you saw prior to being asked, or more importantly of how the question was asked. For example, if you were asked that a said portfolio has a 78% chance of meeting your financial goals does this meet your risk tolerance? You may answer in the affirmative, yes, that this is a good risk profile for me. However, if you were told that said portfolio has a 22 out of 100 chance of not meeting your financial goals and you may be eating beans for the next 10 years, your risk profile may have changed drastically though these are exactly the same. Its all in the framing.

As you move on and educate yourself on the other hardwired triggers like Fear, Regret, Greed, plus others, you should be in better shape to improve your investment results, or at a minimum to at least recognize some of the pitfalls. All in, required reading if you're a serious investor or have not read some other excellent books on the subject, such as, Mean Markets and Lizard Brains by Terry Burnham, Psychology of Judgment by Scott Plous, or How We Know What Isn't So by Thomas Gilovich.

Side note: The footnotes and background information are very well documented in the back. However, some of the figures referenced are in the middle of the book. For example, when I read (See Figure 3.1) and could not find it, I thought that they had left it out though it was between Chapters 6 & 7 in a separate section. This did not distract from the book too much as it was probably a technical issue to place all color pictures in one section, but thought it odd of not telling the reader up front.

Though not to leave with a negative feeling, with praise from the likes of Daniel Kahneman, Bill Miller, and David Dreman -- it is hard to go too wrong and I believe Jason Zweig has indeed succeeded. So enjoy an educating and fun read :)
33 of 35 people found the following review helpful
4.0 out of 5 stars Money & Brains Sept. 9 2007
By Sherman L. Doll - Published on Amazon.com
Format:Hardcover|Verified Purchase
In my professional life I advise high net worth individuals on making smart decisions with their money. I've read a number of the behavioral finance books but this one is different. It was fascinating to read how our brains work and it explains a lot of what I've observed in my clients and in myself. I plan to buy several copies as gifts for my clients.

I would have given the book 5 out of 5 except that it seemed like a number of the studies and stories in the book were mentioned more than once or they were just similiar. Either way, some of it got a bit tedious.
30 of 33 people found the following review helpful
5.0 out of 5 stars Inner Workings of the Investing Brain Sept. 4 2007
By Allan S. Roth - Published on Amazon.com
Format:Hardcover|Verified Purchase
As the title reveals, this book is about the inner workings of the investing brain. It not only explains the mistakes we all make, it takes the next step by telling us what we can do to become better investors.

First of all, this book will dispel any notion that our brains are predisposed to act only in ways that are about increasing wealth. As it happens, our financial decision-making is more about intangibles, such as avoiding regret and achieving pride. Never underestimate the value that comes with bragging about some brilliant investment to anybody who will listen.

Mr. Zweig explains that we really have two brains. Our reflexive brain gets the first crack at decision making, and is essentially based on intuition or how we feel. Our reflective brain, on the other hand, is more logical. The problem is that we usually don't know which part of the brain is at the switch when we make any decision. One key to maximizing wealth is to give the reflective brain some time to respond, and not to react immediately to our gut instinct.

Just when I thought the book couldn't get any better, I read the last chapter on "happiness." It explored the relationship between money and happiness. In spite of the lip service that is paid to believing that money doesn't buy happiness, we all seem to be on the treadmill of acquiring as much of it as we can. The disappointment sets in when we find that raise we got, or that windfall profit, doesn't actually make us happier for long periods.

In summary, content is fascinating but it is Mr. Zweig's writing style that kept me reading when I could barely keep my eyes open. It is a rare gem in its genre, a book that will change your way of investing and your life, and be fun to read.
18 of 21 people found the following review helpful
5.0 out of 5 stars Your Mind's Effect on your Money Nov. 14 2007
By Craig L. Howe - Published on Amazon.com
Format:Hardcover|Verified Purchase
Controlling one's emotions is a major key to successful money management. No one who has withered under the emotional pressure of making split second investment decision will argue that it is not.

Financial writer Jason Zweig combining concepts in neuroscience, economics and psychology to explain how our biology drives us toward good or bad investment decisions. He argues our brains lead us to self-deception. We are oath to admit our lack of financial knowledge. We overestimate our ability to perform. We believe we're smart enough to forecast the future even when we have been explicitly told that it is unpredictable. Our impetuousness leads to mistakes of action rather than inaction. In short, although we see ourselves as rational beings; we make irrational investment decisions.

His book blends tales from his visits to neuroscience labs with stories of investing mistakes. From them he pulls lessons and counsel on how investors can make more profitable investment decisions. They are:

1. Take a global view.
2. Hope for the best: expect the worst.
3. Investigate; then invest.
4. Never say always.
5. Know what you do not know.
6. Past is not prologue.
7. Weigh what they say.
8. If it sounds too good to be true, it probably is.
9. Costs are killer.
10. Eggs go splat.

Another that should be added to the list is The Paradox of Choice: Why More Is Less. More general in its approach, it cites many of the same studies. Schwartz, a Swarthmore College professor, cited research from psychologists, economists, market researchers and decision scientists to make five counter-intuitive arguments: We would be better off if we:
1. Voluntarily constrained our freedom of choice.
2. Sought "good enough" instead of "the best."
3. Lowered our expectations about decision's results.
4. Made nonreversible decisions.
5. Paid less attention to what others around us do.

Thoroughly researched, Your Money and Your Brain needs to be studied by anyone seeking to make wiser and more profitable investment decisions.
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