Advanced Personal Finance

Like a lot of the stuff I read, I heard about a great new book, Your Money & Your Brain, from NPR. If there’s nothing else you get out of listening to NPR (and the Diane Rehm show especially), it’s the great books. But this isn’t about NPR, it’s about a really interesting alternative to the same stale ‘here’s how to invest’ books.

Your Money and Your Brain by Jason Zweig is an entertaining look at how neuroeconomics is being used to dissect the modern investor. Zweig’s subtitle is “How the new science of neuroeconomics can help make you rich,” which is a little bit much. However, I recommend this book to anyone even the slightest bit interested in why they do the things they do in personal finance.

Neuroeconomics is a new field that fuses…wait for it…neurology and economics. What that really boils down to is an area of study trying to find out why people continue to do knuckleheaded things with their money. If you’ve ever listened to how much money your friends were making in [fill in bubble here], then gone and invested a bunch of money at the top right before it crashed, you’ll be interested in this book.

Zweig is a writer for Money magazine and formerly of Forbes as their mutual funds editor. His writing is easy to read, not too technically dense for a subject like this, and sprinkled with just the right amount of personal anecdotes.

In Your Money & Your Brain, Zweig covers some key concepts in personal investing - greed, fear, risk, and confidence, among others. The format for each chapter is the same. First he introduces a regular person who provides an example of what the chapter is about. Then he gives the neuroeconomic background and explains how in manifests in people. At the end of each chapter, he gives a short list of ideas to counteract our investing biology.

My favorite chapter was on risk. Zweig explains that how a risk is framed or compared to others largely determines how a person sees the risk. He gives lots of examples, but my favorite is this one. If you invested 1% of your money in a single stock and it became absolutely worthless, you’d probably freak. But the effect is the same as if your entire portfolio went down by 1%, a practically everyday occurence on Wall Street.

Much of the book deals with how people invest in individual stocks and which mutual fund to choose. I don’t save and invest that way, so some of his ideas were lost on me (I just do index funds - I don’t believe in stock picking). But if you’ve ever done some of the stupid investing things I’ve done, you might enjoy finding out why, just like I did when I read Your Money & Your Brain.

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This entry was posted on Wednesday, October 17th, 2007 at 8:01 am and is filed under Reviews. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.