Outsmart Your Brain
These five take-home lessons of the new science of neuroeconomics can make you a better investor
(MONEY Magazine) – Control What's Controllable
• Whether your investments beat the market is largely outside your control. But some things are entirely in your hands: cutting your tax and brokerage bills by trading less often, and keeping your expenses down by relying on index funds or lower-cost managed funds like those in the MONEY 65.
Kick the Habit
• If watching financial TV or clicking on investing websites gives you the itch to get rich quick, turn off the sound or use the "history" window on your Web browser to count how many times you visit the site each day. Just like a smoker trying to quit, you may need tricks like these to help bolster your self-control.
• "It's important to realize," says Stanford University neuroeconomist Brian Knutson, "that the magnitude of a long-shot reward is going to drive your behavior far more than the probabilities, which are minuscule." Making an investing decision while you're inflamed by the hope of a big gain is a terrible idea. Instead, reconsider after your anticipation circuits have cooled off. If you like a stock, try waiting two weeks without ever checking its price. Then study the company's financial reports to estimate the per-share value of the business. Afterward, you can check the current share price--and invest only if the business value is higher.
Separate Your Savings
• If you still can't resist "hot" investments, isolate them in a "mad money" account, funded with no more than 10% of your capital. Never put more than that at risk.
• A tip can itself be enough to inflame your anticipation circuits and overpower the analytical part of your brain. To reduce the odds that emotion will dominate your decisions, handcuff yourself in advance. By dollar-cost averaging (automatically investing a fixed amount every month into a mutual fund or brokerage account), you can be sure most of your money goes to work on autopilot, where the heat of the moment can't melt your resolve.