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and stock that I could not sell. About a year later, and after some business
successes, Progenics restarted the IPO process. Once again I resolved to
remain frugal in the face of my impending wealth, and once again I
failed. Fortunately, this time the company went public, and I was easily
able to pay off my debts.
If productivity growth can continue at its abnormally high pace it may
do for the country what Progenics™ IPO did for me. If we are all going to
be much, much richer because of information technology, then it makes
sense to spend some of our windfall in advance. The high levels of debt
in our society, and even the high level of our trade deficit, can be seen as
the logical pre-spending of our future wealth.
The negative alternative, however, is that productivity growth will
recede toward historical averages. If so, then we may be stuck with the
debts we have, and the attendant consequences. Therefore, high produc-
tivity growth appears to be necessary if we are to escape our debts.
With high enough productivity, financial assets can continue to pros-
per. This is possible even though stocks cannot outgrow the economy,
interest rates cannot continue to decline, and the United States will stop
Timely Advice 275

consuming more than we produce. Thus, productivity is the single fun-
damental indicator that I will watch most closely in coming years.
The risk of being a conservative investor (owning low-risk invest-
ments) is missing out on a productivity-led boom. If financial markets
continue to climb, then the low-risk investing strategy will earn lower
returns than a higher-risk strategy.

The Pain of Low-Risk Investments

A Harvard faculty colleague of mine ends his course on decision making
by giving two bits of advice. First, if you smoke, quit. Second, try to be
less envious. Of these two suggestions, quitting smoking might be the
easier one. Those who shift to a lower risk strategy must face the possi-
bility that the risky investments they sell will continue to soar.
Very few people succeed without setbacks. Early in the life of my
biotech startup, Progenics, I met with Paul Tudor Jones II, a lead
investor. He asked how things were going, and I responded fine. He was
seated and I was standing up on the opposite side of his desk. Paul rose,
walked to my side of the desk and sort of backed me up against the wall.
He said, “You must anticipate being pressed to your limits”and that™s if
you succeed.”
Paul was prescient and along the way to Progenics™ success, we had
to weather several crises, including twice almost going broke and miss-
ing payroll. I felt tremendous stress, particularly because we had hired
scientists from around the world and some of them had young children.
One of these near-bankruptcy episodes was so stressful that some of my
hair stopped growing, and I had to receive cortisone shots to revive the
Similarly, a low-risk investing strategy is likely to be stressful. One
has to anticipate being pressed to one™s limit. With near certainty, there
will be times when everything appears rosy. At such times, our tendency
to be envious will make us want to jump on the risk bandwagon. Such
276 Profiting from the New Science of Irrationality

emotional points, we have learned, are likely to be terrible moments to
change strategy.
If productivity stays significantly above historical levels, and financial
risk continues to be rewarded, we will all gain. Even those of us who
have a conservative financial plan. The benefits we will receive in a rosy
world are direct and indirect. Most important, our opportunities will be
vastly expanded, wages will rise, and the assets we own will increase in
In addition, even conservative investors will gain from national pros-
perity. Current projections show that the retirement of the baby boomers
will put serious pressure on the U.S. budget. The annual budget deficit
that currently stands at half a trillion dollars could soar to several trillion.
In such an environment, it is inevitable that taxes will rise and benefits
such as social security will fall.
Productivity and prosperity can save us from the baby boom retire-
ment disaster. If they do, our taxes will be lower, our government bene-
fits higher, and our opportunities far greater. Thus, even those who own
no risky assets will earn a handsome return if the financial markets con-
tinue to rise.
Unfortunately, envy seems to be an integral part of human nature. In
fact, the tenth commandment says, “You shall not covet your neighbor™s
house; you shall not covet your neighbor™s wife, or his manservant, or his
maidservant, or his ox, or his ass, or anything that is your neighbor™s.”
The need to include this prohibition in the Bible reinforces the idea that
envy and covetousness are part of human nature.
One technique to suppress human urges including envy is to construct
a “frame,” or a way of viewing investments. In this manner, I suggest
viewing lower-risk investments as insurance. No one is unhappy when a
car insurance policy is not used. We don™t get mad if we pay money and
then get through the year without an accident.
If we take out insurance in the form of a low-risk investment strategy
we should similarly rejoice when that insurance is not used. Thus, we
should think of our low-risk investments as a guarantee against an
Timely Advice 277

unpleasant world, or “dry powder” for those moments when prices
become irrationally low. Such framing is useful, but the problem of
decreasing risk is not so easily solved because our lizard brains create
fundamental, psychological barriers.

The Barrier to Low-Risk Investing

Near the end of his career, a group of students allegedly played a joke on
the famous behaviorist, Professor B.F. Skinner. During a lecture the stu-
dents agreed upon the following secret plan. Every time Professor Skin-
ner moved to his left, the students would smile at him. In contrast,
whenever he took a step to his right, the students would frown and look
at their notes.
By the end of the lecture, Professor Skinner was standing at the side of
the room with his left arm essentially pinned against the wall. He had
been induced to move to his left by the subtle signals sent by the students.
A central view of Professor Skinner™s approach is that all animals,
including people, learn to repeat pleasurable acts and to avoid those that
are painful. Human brains are built with a “stimulus-response” mecha-
nism that helps us navigate through the world.
I™m reminded of my own stimulus-response behavior whenever I drive
to the Boston airport. As I enter the tunnel that leads under the harbor, my
mind invariably flashes to the state trooper who pulled me over at that
spot for speeding. As I recall the unpleasant memory of turning the cor-
ner and seeing him with a radar gun, I slow down. I may get ticketed for
speeding again in my life, but never in the same spot as this previous
Professor Skinner™s students played a trick on him. Stimulus-response
behavior modification can be more subtle than a state trooper with a siren
or a burned hand on a hot stove. Humans are social creatures, and we get
pleasure and pain from our interactions with each other. With their facial
expressions, Skinner™s students “rewarded” him for his moves to the left
278 Profiting from the New Science of Irrationality

and “punished” him for moves to the right. Unconsciously, he began to
do more of the rewarded behavior and less of the punished, thus leading
him to be pinned against the wall.
Professor Skinner was extreme in focusing on the conditioning effects
of rewards and punishments, and ignoring the mental processes driving
behavior. Even though the world now has a more nuanced and better
understanding of behavior than Professor Skinner, no one denies the
importance of stimulus-response. We humans share with other animals
the brain machinery that teaches us to do again that which rewarded us in
the past.
Our human stimulus-reward system can produce destructive behavior.
A reformed crack addict whom I chatted with described his previous
lifestyle as follows: A typical night begins with a group of friends all car-
rying as much money as they can scrounge up. The group drives (at least
in California) to a crack house and smokes some drug.
The evening alternates between bouts of consuming crack and down
time. The group generally travels between crack houses. The journey
only ends when every penny has been spent. Almost every crack house
includes women who will trade sex for drugs. Early in the night, when
money is relatively easy, crack plus sex is better than crack without sex
and worth the expenditure. Later in the night, when money is tight, the
extra pleasure of sex is not worth the cost. The binge ends when everyone
is broke, and the addicts find someplace to sleep. When they wake, they
seek money to begin the process again.
One night after dropping off his buddies by car, my source told me that
he chanced upon a big “rock” of crack that had somehow been left in the
backseat. He couldn™t believe his good fortune and enjoyed this unex-
pected final high for the night. For years afterwards, he would always
look in the same spot when he got out of his car. In a manner that would
have made Professor Skinner smile, this addict™s brain had been altered
by a potent reward.
Like a crack addict, we are built to look for rewards in the places (both
literally and metaphorically) of our past joys. Presumably this stimulus-
reward system was adaptive for our ancestors who lived in their natural
Timely Advice 279

environment. For rats in cages, and for humans in industrialized soci-
eties, the quest for dopamine can get us into serious trouble.
In Austin Powers, our hero, the international man of mystery, says,
“Only two things scare me, and one of them is nuclear war.” Similarly
two things scare me about our human stimulus-response system, and one
of them is drug addiction. While some people™s lives are destroyed by the
maladaptive activation of the stimulus-response system by drugs, almost
all of us lose money because of its effects on our finances.
We are built to seek the dopamine high that comes from successes. For
our ancestors, this system led them toward useful behaviors. In the finan-
cial world, however, this system is almost perfectly designed to create
poverty. Investing is a changing game where the best strategy today is
almost never the best strategy of yesterday. So our brains are built to
replicate successful behaviors, but the financial markets punish such
Those who invest by stimulus-response will tend to do that which has
worked, not that which will work. For example, after the huge stock mar-
ket gains in the 1990s, investors ploughed a record $309 billion into stock
mutual funds in 2000, just in time for the stock market bubble to burst.
Over the two years of 2001 and 2002, investors invested a total of just $4
billion into stock funds, again timed perfectly to miss the huge stock
market rally in 2003. In 2003, investors ploughed over $150 billion into
equity funds.4 To date, stocks have lost ground in 2004 (through mid-
July). The backward-looking, stimulus-response system of investing is
not profitable.
On a far grander scale, we have been rewarded for taking financial risk
for a generation. The lizard brain is built to continue this behavior. This
presents a significant barrier to taking a low-risk financial strategy.

How Little Risk Can You Stand?

My Harvard retirement money is deposited with a large investment com-
pany (chosen by Harvard). On their website, the company provides
280 Profiting from the New Science of Irrationality

investment advice that is tailored to each individual. The investor
answers a set of questions including attitudes toward risk and time until
retirement. From these answers, a computer program suggests how much
money to invest in stocks, bonds, and risk-free cash.
The computer advisor suggests that I invest 80% of my retirement
money into stocks! I completely disagree with this recommendation, but
I answered every question honestly. Why the disagreement?
Standard investing advice (and my firm is no different from most
others) is based on two key premises. First, markets are efficient. Second,
because markets are efficient, investors who want to make a lot of money,
have to take a lot of risk. Because stocks are risky, they must be prof-
itable. (I™m not making this bizarre logic up.)
So, this mainstream view says stocks provide the highest return, with
two caveats. Investors must be in the game for the long run, and they
must be able to take the ups and downs of the stock market. Thus, stan-
dard investing advice asks two main types of questions. Is the investor in
the game for the long run? And can the investor take the bumps along the
road? If so, back up the truck and buy stocks.
If markets were efficient, what should I do? I™m definitely in the
investing game for the long run. Furthermore, I love volatility. The thrill
of the ups and downs is so powerful for me that I even understand the
wacky views of compulsive gamblers.
In Double Down, for example, Frederick and Stephen Barthelme
explain how they gambled away their $250,000 inheritance. They explain
that winning was better than losing, but losing was better than quitting.5
Although I don™t gamble, I love risk enough to understand the Barthelme
brothers™ odd priorities.
So if markets were efficient, then a risk-loving guy like me with a long
horizon ought to buy risky stocks. If markets are not efficient, however, it
is possible to make high returns without taking risk. Academic studies
have found significant time periods when low-risk investments have high
returns. The Mean Markets and Lizard Brains conclusion is that we are
living in one of these time periods.
If the Mean Markets and Lizard Brains conclusion is correct, then it is
Timely Advice 281

possible to get the highest returns along with the lowest risk. Thus, the
investments that are the safest may also end up with the highest return.
Whenever somebody gives an opinion, I think of the economic con-
cept of “revealed preference.” It cautions us to observe behavior and not
listen to words.
Some years ago, my father-in-law, Joel, learned about revealed prefer-
ence. During the early declines following the stock market bubble, I sug-
gested that he sell the stock that he owned through a money management
firm. Joel notified the firm of his decision to sell. One of the firm™s bosses
called to ask why Joel was “getting out at the bottom.” Joel asked where
the boss had his personal money invested and was told, “I™ve been in cash
for quite a while.” Joel hung up the phone and cursed under his breath.
A similar lesson is found in Swingers, where heartbroken Mike
(played by Jon Favreau) learns dating rituals from suave Trent (a.k.a.
“Big-T,” played by Vince Vaughn). Mike asks, “After I get a woman™s
phone number, how long do I wait to call?” Big-T says, “if you call too
soon you might scare off a nice baby who™s ready to party” and con-
cludes, “three days is kind of money.” Mike then asks the revealed pref-
erence question about the three-day rule: how long until Big-T will call
his “baby”? Big-T answers, “six days.”


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