Dr. Daniel J. Levitin is one of the world’s top neuroscientists, a best-selling author, and a multi-platinum record producer who has worked with the likes of U2, David Byrne and Stevie Wonder. He is also one of the coolest and most fascinating people on the planet.
Dr. Levitin spends his days studying how our brains process information and, by extension, how we perceive the world through the miracle that sits between our ears. In his latest book, The Organized Mind: Thinking Straight in the Age of Information Overload, he makes a compelling case that I think should be required reading for all investors, about how the hard-wiring in our brains can significantly impact the choices we make – and lead us into making some very bad financial decisions.
According to Dr. Levitin, our brains are built for the hunter-gatherer age, not the Information Age. This natural evolution has a variety of implications for how we perceive and react to the world. Some of those reactions serve us well. Others not so much.
In the hunter-gatherer era, for instance, we might have encountered at most a thousand people in our entire lifetimes. Today, if you go for a stroll through downtown Toronto at lunch, you’ll likely run into twice that many people over the course of a single hour. That’s a big difference. But while our conscious minds may realize how much things have changed, our brains still want to process the world around us like we’re back on the savanna.
For example, when we need to remember something important today, most of us write it down. But writing was only invented about 5,000 years ago. Our brains, on the other hand, have been evolving to survive as hunter-gatherers for more than 200,000 years. Since we didn’t have writing for most of those 200,000 years, our brains had to figure out other ways to remember the stuff that was really important. One of the most effective strategies was to associate those important memories with vivid first-person accounts that would make them impossible to forget.
If someone you knew died after eating poison berries, for instance, that was pretty important information to have. To help you remember it, the you of 200,000 years ago might have attached a story to the berry incident – like how the person who died was related to you, how they had angered the spirits before going foraging that day, or any other number of personal details to make the account as vivid, memorable and transferable among a small group of people as possible.
First-person accounts were especially reliable back then, because you only ran into a small group of people in a relatively limited area, so whatever happened to those people likely applied to you as well. There wasn’t a mass of data and information to deal with. Just the simple, eat-or-don’t-eat decisions that meant the difference between life and death.
Fast-forward to today. We now have access to millions of times more information than our ancestors could’ve ever imagined. But our brains are still programmed to prefer those vivid, first-person accounts.
That’s why, when advertisers want to launch the latest anti-depressant drug, they don’t buy 10 minutes of airtime and lay out all the scientific data. Instead, they show us people frolicking happily in a field, while a voiceover talks very quietly in the background about all the ways this shiny new pill might kill you. Marketers know that all we’ll remember is the frolicking part – not the bit about how taking the pill could actually make us feel worse.
When it comes to investing, we have just as strong an urge to accept emotional first-person stories as truth, while simultaneously ignoring the real facts that could actually help us make smarter decisions. I was talking to a friend the other day who told me that his “Uncle Ted” had lost all his money in the stock market. Based on that story, my friend had decided that stocks clearly weren’t a safe investment.
Since people like Warren Buffett make billions of dollars in the stock market year after year, we all know something’s not quite right with my friend’s conclusion. But because his Uncle Ted is a more vivid and personal character in his life than the Wizard of Omaha, he’s more inclined to look to his uncle’s story for guidance, rather than patterning his actions after the most successful investor the world has ever known.
If my friend wanted to make a decision informed by facts, he would need to look closely at the specifics of the strategy his uncle adopted, to see where his plan fell apart. But what happened to Uncle Ted is more powerful than mere objective analysis. It’s a good story about someone he actually knows. And good stories are very, very sticky to our hunter-gatherer brains.
Take the expression: “you’d be better off putting your money under your mattress.” It’s hard to argue with what feels like the emotional “truth” of this old chestnut. But you might find it interesting to know that this expression was born during the Great Depression, when mass deflation meant that a dollar hidden in your mattress would actually be worth about 25% more a few years later.
In the 80-plus years since the Depression, however, we’ve had nothing but inflation. A dollar hidden in your mattress 20 years ago would be worth much less today than it was when you first squirreled it away. But despite this fact, the deflation of the 1930s made such a massive, vivid and personal impact on everyone who went through it that even now, generations later, we still feel on some level like that mattress idea might just be a solid investment strategy.
When it comes to making important decisions – and not just investment decisions, either – we need to watch how our underlying wiring may be trying to mislead us. Even now, when we have virtually unlimited information at our fingertips, our brains are still programmed to prefer personal anecdotes over objective evidence.
Sometimes, those stories may be right. But if they can’t stand up to the cold, hard light of scrutiny, then maybe it’s time to re-think whether a better decision might be just a few facts away.
Alan MacDonald an investment advisor with Richardson GMP Limited, helps investors with over $500,000 of assets make smart decisions about money. Alan is the co-author of “The Copperjar System, Your Blueprint for Financial Fitness” available on Amazon.
For more information please visit www.alanmacdonald.ca or email Alan at Alan.Macdonald@RichardsonGMP.com.
All material by Alan MacDonald, Investment Advisor at Richardson GMP Limited. The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP or its affiliates. Past performance is not indicative of future results.
Richardson GMP Limited, Member Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.