Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality [Hardcover]

The decision to purchase Mean Markets was not pre-meditated. I was wandering around the bookstore and happened to see Mean Markets displayed fairly prominently at Borders. I was intrigued by the title and the lizard on the back. At the very least, the book looked like an unconventional investment book. Oddly, what made me purchase the book was seeing a very positive blurb from Nassim Nicholas Taleb on the back. I consider Nassim's latest book "Fooled by Randomness" one of the best investment books over the last few years. In the blurb, Taleb actually says, "Should be required reading for anyone trying to understand financial markets...." I took the blurb seriously since Taleb doesn't seem like the type to give blurbs to books he doesn't like. In Fooled by Randomness, he specifically cited occasions he gave bad reviews or didn't allow blurbs. I should've taken some caution in seeing Isiah Thomas and Mark-Paul Gosselaar (former star of Saved by the Bell) also providing blurbs.

Among other things, the books intent is to serve as a primer to behavioral finance and teach how to invest according to the new findings. While the book is very readable, it's not particularly innovative or useful for a non-beginning investor.

The first of the three sections, "The New Science of Irrationality" is by far the most interesting. Mr. Burnham shows us that there is effective two parts to our brain: the pre-frontal cortex and the rest, which is the lizard brain. The pre-frontal cortex is responsible for analysis. The lizard brain controls our instincts and impulses. Our goal in investing should be to rely on the pre-frontal cortex and limit our lizard brains. In certain environments, such as hunting for food or playing football, our impulses and lizard brains are perfectly fine for dictating decisions. Conversely, the markets are an area that our minds are not suited for. For example, humans are notoriously bad at calculating conditional probabilities.

The second section is (oddly) a primer on issues facing the US and global economy. Mr. Burnham provides the conventional bull and bear case for the global economy. The chapter tackles many of the major issues including the twin deficits, productivity, interest rates and inflation. For the reader without any knowledge of these issues, the section is very useful. That said any reader who reads the Economist Magazine or pays any attention to macro-economic issues will gain little. There's nothing new the chapter introduces. Mr. Burnham barely discusses how the new science of irrationality allows us to better analyze the global economy.

The third section, very similar to the second, is a primer on the major assets classes: stocks, bonds and real estate. The only difference is that he's bearish on all three. Once again, he provides a very clear explanation on why the asset classes won't do as well. However, he again deviates little from the standard investment book or for that matter magazine article on the markets. There's no new method irrational analysis.

From a different perspective, Nassim Nicholas Taleb statement that this is a "must read" isn't completely inaccurate. While there are certain topics not covered by traditional investment books, the bulk of the book really is just an overview of the issues facing the economy and the markets. For the reader who's not at all familiar with these issues, this book will get him caught up.

However, the book really isn't about lizard brains or the new science of irrationality. I get the impression that Mr. Burnham simply wanted to write a traditional book. My guess is that his publishers needed some type of hook. They then inserted the lizard brain stuff. At the end of the day it's a traditional book and doesn't provide much further insight than any other book.

Conventional wisdom about investing suggests that people are basically rational, markets are basically efficient, and nobody can earn a reward without some risk. One corollary of this conventional wisdom is that individual investors ought to own stocks. Individual investors have been acting conventionally wise - but that may be exactly the wrong thing to do. Author Terry Burnham draws on the relatively new science of behavioral economics - informed by insights into human reasoning that have been discovered by cognitive researchers - and offers investment advice dramatically at odds with conventional wisdom. Burnham, a former Harvard professor with ample experience in finance, puts his thoughts in pop language, drawing not on market studies but on movies and other references to current culture, to make many of his most salient points. What he loses in `gravitas', he gains in entertainment value. We find that this investment book manages to be fun to read, while providing the grain of salt readers should take to temper more conventional economic advice.

From "Essays on Genetic Evolution and Economics" to the widely acclaimed "Mean Genes", Terry Burnham has been a leader in applying learnings from sociobiology broadly. His gift is making complicated academic research accessible to all. His novel message is that our underlying human behavior, honed through thousands of years of genetic evolution, actually gets in the way of our logical thought processes when it comes to playing the stock market, buying a house, or trying to save up for our kids' college education. Nowhere are his great insights more valuable than in analyzing the problems we face when making these personal investment decisions, as he does in "Mean Markets and Lizard Brains : How to Profit from the Science of Irrationality".

Professor Burnham weaves insightful personal anecdotes from his vast array of experiences (i.e., as an academic, entrepreneur, investment banker, day-trader, biologist, and United States Marine), and combines them with sound analytical economic thinking (i.e., as a PhD economist from Harvard with up-to-date knowledge of the latest thinking on irrationality). The result is a detailed description of the basis for our poor instincts in financial decision-making, as well as a prescription for improving our performance in this context. Everyone wants to make money by investing wisely, and yet few of us are able to rise above our "Lizard Brain" tendencies. This book goes beyond describing our shortcomings; it teaches us how to think for ourselves in over-riding those "Lizard Brain" inclinations.

I once described "Mean Genes" as the best book I ever read. "Mean Markets and Lizard Brains" challenges that bold assertion. By simplifying a complex topic (i.e., managing your money) with new insights drawn from disparate learnings, Terry Burnham has written a most unusual kind of "how-to" book -- one that does not promise vast riches with little or no effort, but rather vast insight coupled with always practical and realistic advice. If your are looking to learn as you rebalance your portfolio, read this book.