Jonah lehrer how we decide

Fooled by a Feeling \ 69 the money that might have been earned if they'd only made bet­ ter decisions.

But fictive-error learning isn't always adaptive. Montague ar­ gues that these computational signals are also a main cause of financial bubbles. When the market keeps going up, people are led to make larger and larger investments in the boom. Their greedy brains are convinced that they've solved the stock mar­ ket, and so they don't think about the possibility of losses. But just when investors are most convinced that the bubble isn't a bubble—many of Montague's subjects eventually put all of their money into the booming market—the bubble bursts. The Dow sinks, the Nasdaq implodes, the Nikkei collapses. All of a sud­ den, the same investors who'd regretted not fully investing in the market and had subsequently invested more were now despair­ ing of their plummeting net worth. "You get the exact opposite effect when the market heads down," Montague says. "People just can't wait to get out, because the brain doesn't want to re­ gret staying in." At this point, the brain realizes that it's made some very expensive prediction errors, and the investor races to dump any assets that are declining in value. That's when you get a financial panic.

The lesson here is that it's silly to try to beat the market with your brain. Dopamine neurons weren't designed to deal with the random oscillations of Wall Street. When you spend lots of money on investment-management fees, or sink your savings into the latest hot mutual fund, or pursue unrealistic growth goals, you are slavishly following your primitive reward circuits.

Unfortunately, the same circuits that are so good at tracking juice rewards and radar blips will fail completely in these utterly un­ predictable situations. That's why, over the long run, a randomly selected stock portfolio will beat the expensive experts with their fancy computer models. And why the vast majority of mutual funds in any given year will underperform the S&cP 500. Even