It might seem a book about investing isn’t really suited to a popular science site, but hold on – Jason Zweig’s book is much more than a ‘how to make money on the stock market’ tome. Yes, it does give some lessons for would-be investors, but the subject of the book is much more interesting (with a scientific hat on). In fact the investment advice, when you come to it, is fairly bog standard stuff like the need to investigate a company before buying shares, not just relying on the shares’ track record on the stock exchange. This book is almost back to front. What it really is, is an in-depth exploration of why the way our brains work make us hideously unsuited to playing the stock market.
Before assessing the book as a whole, I do need to clarify one issue that nearly stopped me reading it. There’s an example on page 20 that just doesn’t make any sense. It is supposed to show how people make the wrong assumptions about the evidence they need to make a decision, but unfortunately the way the problem is stated makes the assumed ‘wrong answer’ correct. Zweig has attempted to correct this in the US paperback, but after discussing this with both the author and the academic on whose paper the example is based, it’s clear that the example would probably never be able to usefully show what was required here. So if you read the book and get hung up on the problem of the consultant who says the market rises every time after he predicts it, don’t. It doesn’t work – ignore it!
Once past that issue, the book has fascinating detail about the way different parts of the brain react to the types of stimuli presented to us by stock trading, whether it’s fear, risk, surprise, regret or prediction. By using MRI scans and other technology, Zweig takes us through how the brain reacts under those pressures, making the kinds of decision stock market players have to make and demonstrates not only what happens in the brain, but how our natural responses make us highly unsuited to the whole business. The aim is that we can be aware of these natural faults and overcome them, but the reality is it makes you feel that no one sane would ever have anything to do with these kinds of investments. It has always worried and irritated me when I hear on the news that a stock index has collapsed because traders were worried about something or panicking about something. The financial basis of our institutions shouldn’t be animal, reflexive reaction. Yet Zweig shows this is almost inevitable.
So whether, like me, the impact of the book is to make you think it’s time we did away with stocks and shares and introduced a more reasoned way of financing businesses, or, as Zweig intended, you use this as a book to get insight into the best possible way of investing, there can be no doubt that this is an interesting read and one that is much more about the brain and human response than it is about money. If you have an absolute aversion to matters financial you might find it a little hard going in places, but if, like me, you find business interesting and the human brain wonderful, this book will provide plenty of food for thought.