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Praise for
Mean Markets

“Conventional finance axioms”no-frills rationality and maximizing
happy campers”are found wanting. In his wonderful Mean Markets
and Lizard Brains, Terry Burnham shows you why. Comingling biology
and finance has never been so entertaining.”
”Jamil Baz, Head of Global Rates Research,
Deutsche Bank

“A fascinating application of evolutionary theory that revolutionizes our
understanding of how financial markets behave. I have already altered
my own portfolio allocation after reading this book. If you read it, I am
sure you will too.” ”Nitin Nohria, Richard P. Chapman
Professor, Harvard Business School
and coauthor of
Driven: How Human Nature
Shapes Our Choices

“Mean Markets and Lizard Brains should be required reading for every
Wall Street professional whether in sales, trading, research, or corporate
finance. It reveals that individuals often act irrationally for a very ratio-
nal reason; they have inherited a thought process that goes way back to
the days of hunter-gatherers so that brains are built to be out of sync
with rational financial decision making. Understanding this profound
message should allow investors to improve performance and make
fewer mistakes. This is a fascinating book that is certain to become a
must read for every investor in the financial markets.”
”Sadek Wahba, Managing Director,
Morgan Stanley

Terry Burnham

John Wiley & Sons, Inc.
Copyright © 2005 by Terry Burnham. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada

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10 9 8 7 6 5 4 3 2 1

Preface vii
Acknowledgments ix

Chapter One Introduction: Mean Markets and Lizard Brains 1

Part One: The New Science of Irrationality 9

Chapter Two Crazy People: Lizard Brains and the New Science
of Irrationality 11
cognitive confusion • split-brains • superstitious pigeons •
neuroeconomics • winning

Chapter Three Crazy World: Mean Markets and the New Science
of Irrationality 35
stampedes • invisible hands • efficient markets •
financial blind spots • opportunity

Part Two: The Old Art of Macroeconomics 63

Chapter Four U.S. Economic Snapshot: America the Talented Debtor 65
profligacy & productivity • Keynes™ grandchildren •
Darwin™s elephants • prosperity
vi Contents

Chapter Five Inflation: Rising Prices and Shrinking Dollars 85
kidney barter • rice dollars • seashell arbitrage • jubilee •
Yogi Berra™s diet • protection

Chapter Six Deficits and Dollars: Uncle Sam the International Beggar 115
loan sharks • a golden brain squandered • limp loonies
and plummeting pesos • escape

Part Three: Applying Science and Art to Bonds, Stocks,
and Real Estate 137

Chapter Seven Bonds: Are They Only for Wimps? 139
Reagan bonds • the mother of all deficits • social security
lockbox • squirrel savings • profit

Chapter Eight Stocks: For the Long Run or for Losers? 159
time travel • Michael Jordan • stock speed limits •
tears and a journey • stock picks

Chapter Nine Real Estate: Live in Your Home; Make Your Money
at Work 193
Tiger Woods • Godzilla • Groucho Marx • risky ARMs •
housing bubble • advice

Part Four: Profiting from the New Science of Irrationality 227

Chapter Ten 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 Eleven 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

Mean Markets and Lizard Brains applies a new science of irrationality to
personal finance. Conventional financial advice is based on the assump-
tion that both people and markets are rational. New research is uncover-
ing the reasons that real people and actual markets are often crazy. This
new work leads to novel insights into how and where to invest.
This book combines two of my passions: financial markets and the
scientific study of human nature. I had my first taste of speculation back
in the early 1980s. Because of asbestos litigation, the price of Johns
Manville Corporation™s stock approached zero. I thought the low price
was irrational so I bought some shares. The stock went up over 20% the
day after I bought it; I sold my shares and pocketed several weeks™ worth
of my salary.
This trade had two effects. First, I acquired a taste for financial mar-
kets. I have been actively involved for more than 20 years, and have
broadened my scope beyond buying stocks to include options, bonds,
gold, currencies, and more. Second, I was puzzled by a market that pro-
duced opportunities like Manville almost for free (Warren Buffett also
recognized the value and eventually bought the firm).1
Years later, while I was getting my Ph.D. in the Harvard economics
department, I found an intellectual home in the study of human nature.
For more than a decade now, first as a graduate student and then as a

viii Preface

Harvard economics professor, I have studied one central question: Why
do people have problems in so many areas, ranging from food to sex to
money? My search for an answer has taken interesting turns, including
studying negotiators™ testosterone levels and living at a research station in
Africa to learn from the behavior of wild chimpanzees.
An important source of our problems, I have become convinced, is
that we are built to solve the problems faced by our ancestors. Because
modern industrialized society differs systematically from the world of
our ancestors, we tend to get into trouble. In my first book, Mean Genes,
Jay Phelan and I investigate how the human brain”shaped in the Pleis-
tocene”contributes to obesity, drug addiction, and poverty.
Mean Markets and Lizard Brains is a much more detailed look at one
of the topics from Mean Genes. What mistakes do people tend to make in
financial markets, and what can investors do to improve performance?
Both book titles start with “mean” because each addresses areas of our
lives where our instincts push us towards failure. It is a central feature of
industrialized life that our passions conflict with our goals. Because of
this, the world can sometimes seem mean.
Markets can be mean to investors who buy when excited and sell when
afraid. Because we are built for a very different world, our instincts tend
to be out of sync with financial opportunity. Consequently, making
money requires understanding and shackling that part of our brain that
pushes us to make costly investing decisions. This “lizard brain,” which
we all have lurking underneath the more cognitive parts of our brains, is
great for finding food and shelter, but terrible at navigating markets.
Mean Markets and Lizard Brains thus provides an answer to my ques-
tion from two decades ago. Markets are irrational because of quirks in
human nature. Those who understand this and harness the lizard brain
can convert mean markets into money.

Jay Phelan and I have spent 10 years discussing and writing about the
mismatch between Pleistocene brains and modern industrial societies. As
is the case in such collaborations, most ideas are joint products. Beyond
shared credit for the general concepts underlying Mean Markets and
Lizard Brains, Jay deserves specific credit for aspects ranging from
structure to style that are drawn from our coauthored book, Mean Genes.
Many friends donated time reading drafts and providing crucial feed-
back. Doug Bodenstab has read and critiqued every chapter (some of
them several times). Chris Corcoran has similarly been involved at each
stage, bringing his physicist™s intuition to the book™s underlying mathe-
matics. Jon Goldberg applied his common sense, depth of trading expe-
rience, and apt analogies from the world of golf. Jay Phelan asked the
tough questions and often supplied the answers.
In addition, others who read part of the book and made substantial
contributions include: David Bear, Jeff Bodenstab, Peter Borish, Jane
Burnham, Thomas and Marie Burnham, Judith Chapman, Adam Chec-
chi, David Epstein, Brent Flewelling, Sue Flewelling, Lisa Gosselaar,
Paul Greenberg, Brian Hare, Justin Holtzman, Matthew McIntyre,
Michael Schwartz, Joel Smith, Martin Stapleton, Scott Stephens, and
Sadek Wahba. Danielle Lake did a fantastic job of copyediting the

x Acknowledgments

Pamela Van Giessen, my editor at Wiley, deserves fundamental credit.
From conception through writing and publication, Pamela has provided
the support and the vision to create a book that is both deeply practical
and academically rigorous. And thank you to Peter Borish for introduc-
ing me to Pamela.
Throughout every stage of the book™s development, my wife, Barbara
Li Smith, has been a steadfast supporter and constantly pushed me to
make the work fun. Her thoughtful advice and unselfish help made the
book possible. And finally, our beautiful new baby, Charlotte Valentine,
has provided daily inspiration.

Thank you all.
chapter one

Mean Markets and Lizard Brains

Where Should We Invest Our Money?

“Where should I invest my money?” So asked Adam, a former Harvard

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