Financial Success Goes Through the Limbic System

The human limbic system controls our emotion, behavior and long-term memory, among other functions. To the extent you succeed in finance, you succeed by suppressing the limbic system,” says William J. Bernstein, this week’s guest on the Masters in Business podcast. “If you cannot suppress that, you are going to die poor.” 

A Ph.D., M.D., retired neurologist and principal in the money management firm Efficient Frontier Advisors, Bernstein is the author of several best-selling books on finance. His latest, “The Delusions Of Crowds: Why People Go Mad in Groups” gave us an excuse to delve more deeply into the human brain, and how its evolutionary development can lead us astray in modern capital markets. (We last spoke with Bernstein in 2019.) Bernstein’s new book focuses on three of our key characterizations: Humans are the apes that tell stories, imitate others and seek status. This combination ultimately leads to group dynamics where an entire population can become deeply entrenched in a belief system before it is revealed as false.

Bernstein discusses the vectors and mediums of “infections” that lead to mass delusions. Humans are “cognitive misers,” relying on simple narratives instead of complex analytical thinking. The more compelling a narrative, the more corrosive it becomes to our analytical abilities. The two most compelling causative agents are apocalyptic “end of days” narratives and “effortless riches.” Hence, both money and religious narratives can create frequent and substantial crowd delusions.

There is little cost to seeing a pattern where none exists. Jumping out of the way at the sight of a stick that looks like a venomous snake – the “false positive” - carries almost no cost. But the “false negative” – ignoring something that looks like a snake and is a deadly viper – carries a much higher cost. This is in part why we attend to bad news and ignore good news. Investors should understand why the evolutionary traits that helped us survive on the savannah can counter-intuitively lead us to make expensive errors today.

A list of his favorite books are here; A transcript of our conversation is available here.

You can stream and download our full conversation, including the podcast extras on iTunesSpotifyStitcherGoogleBloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our Masters in Business next week with Jeff Immelt, the chief executive officer of General Electric Co. from 2001 to 2017. He joined GE in 1982, and worked in the company’s plastics, appliances and healthcare businesses. Immelt has a new book out called “Hot Seat: What I Learned Leading a Great American Company.”

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Barry Ritholtz is a Bloomberg Opinion columnist. He is chairman and chief investment officer of Ritholtz Wealth Management, and was previously chief market strategist at Maxim Group. He is the author of “Bailout Nation.”

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.