How does the human brain and memory evaluate risks, rewards, and probabilities, whether we gamble or invest? Let’s look at a few examples.
On August 18, 1913, the ball on the Monte Carlo Casino’s roulette table landed on black 26 times in a row. The infamous Monte Carlo Fallacy was born, fooling gamblers who bet according to their own cognitive bias. Studies of Kahneman and Tversky suggest that the human mind evaluates the probability of a specific outcome by comparing it to previous experiences, while failing to realize that the odds of landing on red or black are always the same. Consequently, our brain stores millions of patterns in our long-term memory to compare with new situations.
Edward O. Thorp developed another blackjack winning strategy called “card counting,” in which players use their working memory to maintain a running tally of all the low and high value cards on the blackjack table, increasing the odds of a winning hand. While casinos began using six decks to counteract the card counting strategy, the emphasis on memory and concentration is more intense.
Since I have trained thousands of people in specific memory systems for business and education, some of my techniques include the ability to remember large amounts of information in the form of playing cards. Having a trained memory can reduce your risk and increase your rewards in this particular game of chance, increasing your odds of winning by 1 to 2.5 percent.
In a study published in Neuron, researchers in Germany showed participants pictures of objects — some were paired with the chance to win money while others were given no incentive of reward. As this happened, their brains were scanned with an MRI. Three weeks later, the participants returned to the lab, where they were shown the images again. Not too surprisingly, the people who saw the images paired with rewards were able to recall what they had seen more accurately than their control group. The MRIs seemed to suggest an intense activation of the hippocampus where long-term memories are created. “The anticipation of reward is more important for memory formation than is the receipt of reward,” said researcher Emrah Düzel.
Once you learn that a gamble or investment could produce financial gain, you will remember the situation and expect another win. It is the anticipation of financial reward that burns into your memory more than the reward itself. That is why millions of people buy lottery tickets every day even though chances of winning the jackpot are very remote.
In his book “Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich,” Jason Zweig talks about lessons that emerged from the science of neuroeconomics:
- A monetary loss or gain is not just financial. It produces a biological change that has profound effects on the brain and body.
- The neural activity of someone whose investments in the stock market are making money is indistinguishable from someone high on cocaine or morphine.
- Anticipating a gain, and actually receiving it, is expressed in entirely different ways in the brain, helping to explain why “money does not buy happiness.”
Money’s not a comfortable subject for many people to discuss. In fact, the average person would rather speak frankly about politics or sexual exploits before admitting to how much money they make annually. Scientific evidence shows us again and again that emotions and rewards are closely intertwined. Therefore, it is with a degree of rationality that you must approach all financial decisions.
As a student of the stock market myself, I can readily distinguish between pure gambling and the characteristics of a sophisticated investor:
- A rational investor does thorough research and planning before taking a risk.
- An investor looks at the long-term versus the gambler who seeks immediate rewards.
- An objective investor tries to prevent emotions from influencing decisions. It has often been said that money is the root of all evil, the driving force behind insatiable greed and the source of all the world’s problems.
I don’t believe that. If used and managed properly, money can be a source of great joy — allowing you and your family to live comfortably while giving a helping hand to others in need. Training your brain to be financially literate and to invest wisely is the key to a happy and prosperous life.
Frank Felberbaum is the author of “The Business of Memory: How to Maximize Your Brain Power and Fast Track Your Career.”
This article was originally published in the Fall 2014 issue of Brain World Magazine.
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