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In the 1980s, I lived in San Diego and took periodic road trips to Las
Vegas with my buddy Jim. During one of those trips, I found him sitting
at the roulette table using an “interesting” betting strategy. When the
roulette ball landed on red he would place a bet on black for the next spin.
Conversely, whenever the ball landed on black he would place his next
bet on red. I asked Jim to explain his strategy, and he said, “Dude, isn™t it
unlikely that the ball will land on the same color twice in a row?”
Jim™s analysis was not correct. As long as the roulette wheel is fair, it
doesn™t remember the previous spin. Thus, the bet on red has the same
chance on every spin, even if, for example, it follows a streak of 10 red in
a row.
Jim™s logic reminds me of the misguided traveler who takes a bomb on
a plane, not to blow it up, but rather for protection. When asked how a
bomb (that he doesn™t plan to explode) provides protection, the traveler
responds with, “Dude, isn™t it unlikely that there will be two bombs on
the same plane?”
Although Jim™s logic was not perfect, his betting strategy was fine. In
fact, his alternating strategy has exactly the same probability of winning
as other strategies, including bet red every time, or bet black every time,
or even to bet black on sunny days. Any strategy that wagers on red or
black has the same expected payoff.
In Full Metal Jacket, the Marine drill instructor says that he does
not look down on anyone in particular. Rather than target some types
of recruits for his abuse, he says, “Here, you are all equally worthless.”
Similarly, all betting strategies on the roulette wheel are equally worth-
less”they all cost the gambler money, and earn profits for the casino.
Timeless Advice 239



Recall that our lizard brain is built to find patterns, even when there are
none. There is a study showing physiological surprise (as measured by
electrical activity) when a pattern is broken. For example, when flipping
coins, the more heads that occur the less surprised we are by another
occurrence of heads. Even though the prefrontal cortex knows that the
chance of heads is 50%, part of the brain uses the past to predict the
future.7 So if we sit and watch a roulette wheel long enough, our lizard
brain will find a pattern, even if our prefrontal cortex knows that any pat-
tern must be the result of randomness.
Fortunately, the roulette wheel is neutral with regard to the use of any
strategy built on faulty pattern seeking. So in one sense our irrational
pattern-seeking brain is harmless in memoryless settings like roulette.
(Of course, the very fact that people enjoy betting on gambles that lose
more often than they win is a costly exploitation of our lizard brains.)



Helpful Setting: The Lizard Brain Finds Food in
the Kalahari Desert

Although our instincts seem silly in casinos, in other settings they help
people make good decisions. In fact, many aspects of our brains, includ-
ing the parts that see patterns when there are none, arose to help our
ancestors.
Because our modern world is unnatural in so many ways, some of the
best examples of instinctual problem solving come from the behavior of
people living like our ancestors did, in small groups of foragers. Many of
these foraging cultures, where people survive by hunting animals and
gathering plants, existed just a few decades ago. Most such societies have
disappeared (or been destroyed), but we have anthropological records of
their foraging lifestyles.8
Until recently, for example, the !Kung San lived in the Kalahari Desert
by gathering plants and hunting animals much as their ancestors had for
ten thousand years or more. (The “!” is a “click” used in a few places
240 Profiting from the New Science of Irrationality



around the world including the Khoisan language of these people, and
!Kung San means “real people.”)
In separate anthropological studies, Professor Richard Lee and Pro-
fessor Irven DeVore lived among The !Kung San of the 1960s. They each
report that these people were excellent at living in a very harsh environ-
ment.
Professor Lee writes that the !Kung San “are such superb trackers and
make such accurate deduction from the faintest marks in the sand that at
first their skill seems uncanny . . . Perhaps the most amazing skill is in
the hunter™s ability to figure out the number of minutes or hours elapsed
since the animal went through.”9
The ability to find and use patterns was a key survival skill of the
!Kung San in the harsh desert. The !Kung San can read something
extremely subtle in an animal™s track, for example, and that allows them
to obtain meat. Finding an animal thus relies precisely on the ability to
find patterns in an uncertain world.
In natural settings our pattern-seeking brains can work beautifully.
Unlike the casino, in the natural world it is usually good to look for pat-
terns.
Until the invention of agriculture about ten thousand years ago, all
humans foraged for a living. There is evidence that our brains today still
reflect those ancestral foraging problems.10 This suggestion comes from
a variety of studies including some showing that men and women have
different abilities that may have helped our ancestors find food.
In almost all foraging societies, there is a division of labor where
women gather plants and men hunt animals. Without baby formula and
plastic bottles, women must travel with infants so they can breast-feed.
Thus, even if an ancestral society were equalitarian, it would be harder
for women to hunt than for men. Thus, the need for women to feed babies
directly through lactation pushed men and women toward different
lifestyles, even in societies that were not sexist.
Among our foraging ancestors, men and women had different roles. In
Timeless Advice 241



particular, the plant food that women sought did not move, while the ani-
mal food that men sought tended to move around a lot. This sexual divi-
sion of labor caused researchers Irwin Silverman and Marion Eals to
predict that woman would be better at remembering the location of
objects.11 Plants don™t move, so it pays to remember where they are
located. This type of memory is not very useful for hunting animals.
Experimentally, Silverman and Eals showed that women are signifi-
cantly better at what they call “object location memory” tasks. This dif-
ference is so profound that it is easy to replicate even in small groups, and
I like to test my students in class. After they have provided their answers,
but before revealing their scores, I show my students the data from stud-
ies around the world. Out of a perfect score of 20, men average about 12
on this test, and women average about 14.
When running this task in my classes, I always disclose the men™s
score first. Harvard men are so good that they are even better than the
average woman from around the world. So I get average male scores in
the range of 16, which leads the Harvard men to think they will defeat the
Harvard women. This is just a setup as Harvard women score almost per-
fect 20s and have always soundly defeated the men in my classes.
If Silverman and Eals are right, as this task suggests, not only are peo-
ple built to solve ancestral problems, we are even adapted to solve certain
types of problems. (A humorous strand of the research related to Silver-
man and Eals™s work looks at differences in the way that men and women
give directions. As far as I know, there is no scientific reason for the fact
that men never ask for directions.)
So our natural instincts look pretty good in our natural environment.
It™s almost as though we were designed to be hunters and gatherers. As
Richard Lee said of the !Kung San, we are almost “uncanny” in our abil-
ities. We have brains that worked well to solve ancestral problems. Diffi-
culties arise, however, when we take those ancestral instincts to unnatural
environments. And there is no more unnatural environment for a human
brain than a financial market.
242 Profiting from the New Science of Irrationality



Dangerous Setting: The Lizard Brain Loses
Money on Wall Street

While the !Kung San can find reliable clues to make good decisions,
investors face a very different situation. As we have discussed and shown
repeatedly throughout this book, we tend to buy when we ought sell, and
vice versa. By its very nature, investing requires us to be forward looking
to anticipate future events. Our lizard brains, however, are designed to
look backwards. Thus, the lizard brain causes us to be optimistic at mar-
ket peaks (after rises) and to be pessimistic at market bottoms (after
falls).
This backward-looking aspect of the lizard brain works well in natural
tasks, even those that are very complex. For example, it is better to pick
the closer of two identical animals. Thus, a !Kung San hunter should
always pick the fresher of two identical trails. Furthermore, such a hunter
can learn how to best use even extremely subtle signs that might lead to
success.
In hunting, the relationship between information and success tends to
be invariant. Precisely that which worked in the past is most likely to
work in the future. Accordingly, the lizard brain is built to look for pat-
terns in what worked in the past.
There are no similar rules in investing. Should we, for example, buy
the stocks of fast-growing companies? Perhaps, unless too many other
investors are also buying the stocks of fast-growing companies. If so,
then the stock prices of these companies will be overvalued, and we™d be
better off selling them.
Investing is fundamentally different from many ancestral tasks. Rather
than do what worked best in the past, investing requires staying a step
ahead of others. Thus, there can be no stable relationship between infor-
mation and the correct course of action. This attempt to stay one step
ahead of others, who are also trying to be one step ahead of you, leads to
some strange statements.
Only in investing can you say, “As expected, Microsoft™s earnings
Timeless Advice 243



exceeded expectations by more than expected. In after-hours trading, the
stock is falling because the earnings surprise was smaller than was
widely anticipated.”
For investing, the only rule is to predict what everyone else is doing,
and move to profit from their behavior. Investors who do what comes
naturally”or who use a fixed rule based on fundamental data”tend to
become prey.
Investing is therefore the ultimate cognitive situation where we need
precisely to restrain our instincts in order to make money. Unlike neutral
games of chance, or ancestral problems like gathering and hunting, finan-
cial success means suppressing our “gut” response.
All of the irrational investing tips in this chapter are methods to pre-
vent our less analytic parts from making our financial decisions. In
short, to make money we need to shackle the lizard brain and throw away
the key.



Shackle the Lizard Brain Investing Lesson #1:
Don™t Trade Emotionally, Unless You Are
Tom Cruise

In a debriefing of his flying in Top Gun, Maverick (played by Tom
Cruise) is criticized for risky flying. Civilian contractor Charlotte “Char-
lie” Blackwood (played by Kelly McGillis) says, “You perform a split S?
That™s the last thing you should do. The bandit is right on your tail”
What were you thinking here, Maverick?” to which he replies:

You don™t have time to think up there. If you think, you™re dead.

Maverick is the ultimate instinctual pilot. Because he™s got great natural
skills he can win even with unconventional tactics. The analysis of Mav-
erick™s split S ends with, “Maverick makes an aggressive vertical move
here, comes over the top and defeats the bandit with a missile shot. The
244 Profiting from the New Science of Irrationality



encounter was a victory, but we™ve shown it as an example of what not
to do.”
Similarly, some people can make money almost by instinct. In January
1987, I was visiting the New York offices of the legendary trader Paul
Tudor Jones II. He was not in the office, but rather was on a chartered jet
flying out to the Super Bowl in California.
Paul called the office for a market update. In those days it was harder
to stay current with market prices because the Internet was rudimentary
and wireless technology was not well developed. Thus, when Paul called
from the plane he didn™t have any current information on the market.
Paul had started the day thinking that stocks would rise, and the previ-
ous day he had purchased what can be described as “a boatload” of S&P
futures. So when he called to ask where the market stood, the higher the
market, the more money he would have made. At the beginning of the
call, Paul received some good news; the market was up a lot, and he had
made some millions of dollars.
Just moments into the call, however, the stock market began to fall
precipitously. As Paul heard the prices change, he asked to be patched
through to the exchange floor in Chicago where the S&P futures trade.
Shouting from his jet into the phone, patched through a noisy connection,
I heard Paul sell all of his stock position”“get me out, now.” In just a few
moments the voice from Chicago told Paul that he was out. With a quick
reaction to a fast-moving market, Paul exited his position for a hefty
profit.
I was then surprised to hear Paul instruct Chicago to sell even more
stock futures. Since he didn™t own any, these additional sales created a
short position where he would profit from a further market decline. In the
space of just moments Paul had gone from a massive and profitable bet
that stocks would go up to a massive bet that stocks would go down.
Throughout the next few hours, stocks did, in fact, decline substantially
and this earned Paul millions more.
“Gutsiest move I ever saw.” Maverick™s rival Slider whispers this
Timeless Advice 245



about the risky and successful split S just after the official criticism of the
maneuver. Paul Tudor Jones™ instantaneous reversal”from betting on
stocks to betting against stocks”qualifies as the gutsiest trading move
that I ever saw.
In Top Gun, the instructors suggest that the other pilots learn not from
the instinctual Maverick, but rather from the unemotional pilot Ice Man
(played by Val Kilmer). Similarly, while we might all wish we could
trade like Paul Tudor Jones, we probably should not attempt to mimic the
instinctual nature of his trading.
Recall from Chapter 3 that Professor Odean finds typical investors
tend to make precisely the wrong moves. The nonprofessionals in
Odean™s study tended to buy bad stocks and sell good ones. For these
investors the instinctual split S moves tend to lead to losses not profits.
Professor Odean has published another study that confirms his earlier
finding that trading is dangerous to most people™s pocketbook. As with
the previous work, this second study (coauthored with Professor Brad
Barber) examined the brokerage accounts of thousands of individual
investors. The goal was to look at the difference between men and

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