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Just why do we behave so strangely?
ONE of the great puzzles for behavioural finance adherents has been just why it is that human beings make such persistent, bad decisions in investing.
Jason Zweig, well-known international author and columnist on investor behaviour and general investment trends, wrote in an article in Money magazine in 2002 that much of this behaviour can be explained by the way our brains are wired. In the academic research that Zweig reviewed, the suggestion was that from an evolutionary perspective, these types of cognitive behaviours served a hunting/gathering skill set very effectively. But, clearly the persistence of these responses in the complex world of investing, is problematic.
For example, Zweig in his report and supporting research identified that, while the amygdala is the early warning system of the brain, it also reacts strongly to the thought of financial gains or losses.
The fear of losses also leads to some form of hard coding taking place, thanks to the adrenalin release, while...