Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality

Overview

In Mean Markets and Lizard Brains, Terry Burnham-an economist who has a proven ability to translate complex topics into everyday language-reveals the biological causes of irrationality and its connection to the way we invest. The human brain contains ancient structures that exert powerful and often unconscious influences on behavior. This "lizard brain" may have helped our ancestors eat and reproduce, but it wreaks havoc on our finances. Going far beyond cataloguing our financial foibles, Dr. Burnham applies this...
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Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality

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Overview

In Mean Markets and Lizard Brains, Terry Burnham-an economist who has a proven ability to translate complex topics into everyday language-reveals the biological causes of irrationality and its connection to the way we invest. The human brain contains ancient structures that exert powerful and often unconscious influences on behavior. This "lizard brain" may have helped our ancestors eat and reproduce, but it wreaks havoc on our finances. Going far beyond cataloguing our financial foibles, Dr. Burnham applies this novel approach to all of today's most important financial topics-the stock market, the economy, real estate, bonds, mortgages, inflation, and savings. This broad and scholarly investigation provides an in-depth look at why manias, panics, and crashes occur and how you can profit from this knowledge.

The investigation into the economic implications of the lizard brain began in the late 1970s-and led to a 2002 Nobel Prize in Economics being awarded to the scholars of this new approach-but only recently have individual investors and market professionals begun to exploit these findings to explain, analyze, and predict market direction. In contrast to old-school assumptions of cool-headed rationality, the new school embraces hot-blooded human irrationality as a core feature of both individuals and financial markets.

Mean Markets and Lizard Brains converts cutting-edge intellectual developments into practical investment steps. Filled with in-depth insights and real-world advice, this guide: Provides a timeless blueprint for effective and low-stress investing through a thorough examination and explanation of the lizard brain. Summarizes the key findings of the science of irrationality and reveals the biological forces that cause even the smartest of people to make systematic mistakes. Sets the macroeconomic stage for choosing investments, with discussions of the economy, inflation, and the value of the U.S. dollar. Evaluates investments based on understanding how the lizard brain operates in today's global macroeconomic landscape.

By understanding and taming the lizard brain, you can position yourself to prosper in financial markets that often seem downright mean. Mean Markets and Lizard Brains skillfully identifies the craziness that is part of human nature, helps us see it in ourselves, and then shows us how to profit from a world that doesn't always make sense.

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Product Details

  • ISBN-13: 9780471602453
  • Publisher: Wiley
  • Publication date: 2/28/2005
  • Edition number: 1
  • Pages: 320
  • Product dimensions: 6.28 (w) x 9.10 (h) x 0.93 (d)

Table of Contents

Preface vii
Acknowledgments ix
Chapter 1 Introduction: Mean Markets and Lizard Brains 1
Part 1 The New Science of Irrationality 9
Chapter 2 Crazy People: Lizard Brains and the New Science of Irrationality 11
Cognitive confusion
Split-brains
Superstitious pigeons
Neuroeconomics
Winning
Chapter 3 Crazy World: Mean Markets and the New Science of Irrationality 35
Stampedes
Invisible hands
Efficient markets
Financial blind spots
Opportunity
Part 2 The Old Art of Macroeconomics 63
Chapter 4 U.S. Economic Snapshot: America the Talented Debtor 65
Profligacy & productivity
Keynes' grandchildren
Darwin's elephants
Prosperity
Chapter 5 Inflation: Rising Prices and Shrinking Dollars 85
Kidney barter
Rice dollars
Seashell arbitrage
Jubilee
Yogi Berra's diet
Protection
Chapter 6 Deficits and Dollars: Uncle Sam the International Beggar 115
Loan sharks
A golden brain squandered
Limp loonies and plummeting pesos
Escape
Part 3 Applying Science and Art to Bonds, Stocks, and Real Estate 137
Chapter 7 Bonds: Are They Only for Wimps? 139
Reagan bonds
The mother of all deficits
Social security lockbox
Squirrel savings
Profit
Chapter 8 Stocks: For the Long Run or for Losers? 159
Time travel
Michael Jordan
Stock speed limits
Tears and a journey
Stock picks
Chapter 9 Real Estate: Live in Your Home; Make Your Money at Work 193
Tiger Woods
Godzilla
Groucho Marx
Risky ARMs
Housing bubble
Advice
Part 4 Profiting from the New Science of Irrationality 227
Chapter 10 Timeless Advice: How to Shackle the Lizard Brain 229
Isiah Thomas
Humans in zoos
Lizard logic
Mast-strapping
Beware the red zone
8 timeless tips
Chapter 11 Timely Advice: Investing in the Meanest of Markets 265
A golden generation
Lizard brain kryptonite
B.F. Skinner
Returns without risk
Notes 289
Index 299
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Sort by: Showing all of 5 Customer Reviews
  • Anonymous

    Posted January 9, 2006

    Fun and interesting read!

    Conventional wisdom about investing suggests that people are basically rational, markets are basically efficient, and nobody can earn a reward without some risk. One corollary of this conventional wisdom is that individual investors ought to own stocks. Individual investors have been acting conventionally wise - but that may be exactly the wrong thing to do. Author Terry Burnham draws on the relatively new science of behavioral economics - informed by insights into human reasoning that have been discovered by cognitive researchers - and offers investment advice dramatically at odds with conventional wisdom. Burnham, a former Harvard professor with ample experience in finance, puts his thoughts in pop language, drawing not on market studies but on movies and other references to current culture, to make many of his most salient points. What he loses in `gravitas¿, he gains in entertainment value. We find that this investment book manages to be fun to read, while providing the grain of salt readers should take to temper more conventional economic advice.

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  • Anonymous

    Posted August 25, 2005

    Dubious Reasoning

    The book is disappointing. I was hoping that it would cover the ¿science of irrationality¿ in some detail. The coverage did not seem very thorough or very useful. While there is some advice for making investments, I question the usefulness of that advice because I think the author has made some errors in reasoning. On page 271 the authors lists three ¿facts,¿ two of which I do not think are true. The first, that stock prices cannot grow faster than the economy forever. The third, that the United States cannot run a trade deficit forever. On page 178 the author apparently gives his rationale for the first conclusion: ¿This is a mathematical truism. A part of a system cannot sustain a higher growth rate than the system for an indefinite time.¿ Unfortunately for the author, the value of stocks (implicitly the value of businesses at a point in time) is not included in the value of the economy (the value of goods and services produced during a time period). As a counter example, assume that stock prices vary with profits and that profits are based on a return on assets less the cost of debt. If the return on assets increases, profits can increase faster than the growth in assets (e.g., the growth in the economy). Return on assets can increase indefinitely because it can be based on intellectual or intangible factors. Profits could also increase indefinitely if businesses increasingly took on more debt and the cost of debt were less than the return on assets. Regarding the third ¿fact,¿ I believe that if the demographic profile of the United States remained older than its trading partners, there could be an indefinite current account deficit. I think the author¿s fallacy here is to apply what is true for the global economy to a subset. The United States could be consistently consuming more than it produces if the remainder of the globe were in the opposite position. It would naturally be in a consuming posture if it had more retired people. To pay for this consumption, of course, there would be a transfer of assets from the U.S. to the net producers. The author makes a silly statement on page 185: ¿When it comes to investments, the logic of averages is unavoidable. No investment class can be above average indefinitely.¿ Of course it is difficult to know what the author means, but the implication from the surrounding material is that the returns on cash, bonds, stocks, real estate, and other asset classes will all be the same over the long term. Clearly there is more risk with some classes than others. Why would any investor settle for the same return on a more risky investment as on a riskless investment?

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  • Anonymous

    Posted March 6, 2005

    I hate financial books, but . . .

    I hate financial books, but in this case I was most pleasantly surprised. The book is not only informative but entertaining as well. The author takes you by the hand and literally skips you through the mine field of investment clichés, emerging at the other side, the reader has a passel of useful and actionable investment knowledge based on hard facts and real data. Mean Markets and Lizard Brains is just great!

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  • Anonymous

    Posted November 21, 2008

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  • Anonymous

    Posted August 1, 2010

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