So You Think You’re a Risk-Taker? | Jason Zweig

This is a very interesting article by Jason Zweig about how are brain affects our investment choices.

I think you will enjoy it.

Steve

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Nothing is more important for investors than learning how much they can stand to lose. But nothing is harder to learn—before it’s too late.

The stock market’s sharp swings earlier this month, after three years of steady profits, weren’t nearly steep enough to remind us all how much it hurts to lose money.

Because people have a remarkable ability to distort their own memories, investors who panicked in 2008 and 2009 may be kidding themselves about their ability to survive another crisis. And the typical “risk-tolerance quiz” used by financial advisers is almost useless in predicting how you will react to losses, because perceptions of risk vary so widely.

Increasingly, scientists are tackling the problem. A new study, just published in the prestigious Journal of Neuroscience by a team of researchers at University College London, the University of Sydney, the University of Pennsylvania, New York University and Yale University, found that the density of cells in one region of the brain predicts how willing people are to take financial risk.

This research appears to “provide the first link between brain structure and risky choice,” says neuroscientist Scott Huettel of Duke University, who wasn’t involved in the study.

I recently volunteered as a guinea pig in the same experiment, which has been run on more than five dozen people; the results have been controlled for age and sex. A scan of my brain showed that the thickness of gray matter in my right posterior parietal cortex—a small area toward the rear crest of my skull—is slightly below average.

via So You Think You’re a Risk-Taker? | Jason Zweig.

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