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anything random, you will search for patterns within it.
It’s how your brain is built.
• It is uncontrollable. You can’t turn this kind of processing
off or make it go away. (Fortunately, as we’ll see, you
can take steps to counteract it.)
How We Got Our Brains
Why are we cursed with this blessing—or blessed with this
curse—of compulsively seeking patterns in random data? “It’s
a really weird thing,” exclaims Paul Glimcher, a neurobiologist
at New York University’s Center for Neural Science. “I hang out
with my economist friends, and they analyze financial decisionmaking
as if it were a Platonic problem in reasoning. They
don’t have a clue that it’s a biological problem. We’ve got millions
of years of primate evolution behind us. We are biological
organisms. Of course there’s something biological going on!
Evolution must drive the decisions we make when we face the
kinds of situations we evolved to encounter.”
For nearly our entire history as a species, humans were
hunter-gatherers, living in small nomadic bands, seeking mates,
finding shelter, pursuing prey and avoiding predators, foraging
for edible fruits, seeds, and roots. For our earliest ancestors,
decisions were fewer and less complex: Avoid the places where
leopards lurk. Learn the hints of coming rainfall, the clues of
antelope just over the horizon, the signs of fresh water nearby.
Understand who is trustworthy, figure out how to collaborate
with them, learn how to outsmart those who are not. Those
are the kinds of tasks our brains evolved to perform.
“The main difference between us and apes,” explains
anthropologist Todd Preuss of Emory University, “seems to
be less a matter of adding new areas [in the brain], and more
a matter of enlarging existing areas and modifying their
internal machinery to do new and different things. The ‘what
if’ questions, the ‘what will happen when’ questions, the
short-term and long-term consequences of doing X or Y—we
have lots more of the brain where that kind of processing
goes on.” Humans are not the only animals that make tools,
show insight, or plan for the future. But no other species can
match our phenomenal ability to forecast and extrapolate, to
observe correlations, to infer cause from effect.
Our own advanced species, Homo sapiens sapiens, is less
than 200,000 years old. And the human brain has barely
grown since then; in 1997, paleoanthropologists discovered
a 154,000-year-old Homo sapiens skull in Ethiopia. The brain it
once held would have been about 1,450 cubic centimeters in
volume. That is at least three times the volume of a gorilla or
chimpanzee brain—but no smaller than the brain of the average
person living today. Our brains are deeply rooted in the
primeval environments in which our earlier ancestors evolved,
long before Homo sapiens arose. Evolution has not stopped,
but most of the “modern” areas of the human brain, like the
prefrontal cortex, developed largely during the Stone Age.
It’s easy to visualize the ancient East African plain: a highly
variable and camouflaged environment, with alternating
dapples of sun and shade, patches of dense foliage, and rolling
open ground broken by sharply banked streambeds. In
that landscape, extrapolation—figuring out the next link that
would complete a simple pattern of repeating visual cues—
became a vital adaptation for survival. Once a sample of information
yielded the correct answer (ample food, safe shelter),
it would never have occurred to the early hominids to look
for more proof that they had made the right decision. So our
ancestors learned to make the most of small samples of data,
and our investing brains today still specialize in this kind of
“I get it” behavior: perceiving patterns everywhere, leaping
to conclusions from fragmentary evidence, overrelying on the
short run when we plan for the long-term future.
We like to imagine that a long history of technological
advancement stands behind us, but domesticated food crops
and the first cities date back only about 11,000 years. The earliest
known financial markets—in which products like barley,
wheat, millet, chickpeas, and silver were sporadically traded—
sprang up in Mesopotamia around 2500 B.C. And formal markets
with regular trading of stocks and bonds date back only
about four centuries. It took our ancestors more than 6 million
years to progress to that point; if you imagine all of hominid
history inscribed on a scroll one mile long, the first stock
exchange would not show up until four inches from the end.
No wonder our ancient brains find the modern challenges
of investing so hard to manage. The human mind is a highperformance
machine—“a Maserati,” says Baylor College of
Medicine neuroscientist P. Read Montague—when it comes
to solving prehistoric problems like recognizing simple
patterns or generating emotional responses with lightning
speed. But it’s not so good at discerning long-term trends,
recognizing when outcomes are truly random, or focusing
on a multitude of factors at once—challenges that our early
ancestors rarely faced but that your investing brain confronts
every time you log on to a financial Web site, watch CNBC,
talk to a financial advisor, or open the Wall Street Journal.
Why Do You Think They Call It Dopamine?
Wolfram Schultz, a neurophysiologist at the University of
Cambridge in England, has closely cropped grey hair and a
neatly trimmed silver mustache. He is so fastidious that he
turns his office teacups upside down on a towel when he’s
not using them, lest they get dusty. The day I visited him,
the only notable decoration in his office was a poster of the
Rosetta Stone, a reminder of how enormous a task neuroscientists
face as they try to drill down to the biological bedrock
of how we make decisions. A German who spent years teaching
in Switzerland, Schultz seems tailor-made to explore the
microstructure of the brain by monitoring the electrochemical
activity of one neuron at a time.
Schultz specializes in studying dopamine, a chemical in the
brain that helps animals, including humans, figure out how to
take actions that will result in rewards at the right time. Dopamine
signals originate deep in the underbelly of the brain, where your
cerebral machinery connects to your spinal cord. Of the brain’s
roughly 100 billion neurons, well under one-thousandth of 1
percent produce dopamine. But this minuscule neural minority
wields enormous power over your investing decisions.
“Dopamine spreads its fingers all over the brain,” as neuroscientist
Antoine Bechara of the University of Southern California
describes it. When the dopamine neurons light up, they don’t
focus their signals as if they were flashlights aiming at isolated
14
July/August 2008