By Jason Zweig | Mar. 31, 2009 11:14 am ET
Image credit: Pixabay
If you’re wondering why you’ve ever listened to dubious advice from your broker or financial planner, neuroeconomist Gregory S. Berns of Emory University may have an answer.
Dr. Berns, who works at the intersection of neuroscience, economics and psychology, has just published a study that illuminates what happens when you listen to an “expert” you trust.
In their experiment, Dr. Berns and his colleagues asked people to pick between a sure win and a series of gambles. A functional magnetic resonance imaging (fMRI) scanner tracked the changes in blood flow in their brains as they made their choices. In half of the instances, an “expert economist” with impressive credentials suggested which option was better; otherwise, people made up their own minds.
When the “investors” had to think for themselves, two networks in their brains activated: One that determines the payoff from a sure win, and one that that calculates the likely gain from a gamble. These are the areas of our brain that normally make decisions by triangulating the value of what you have, the fear of loss and the hope of gain.
But when the “investors” listened to the expert’s advice, these activations faded – a result that Dr. Berns calls “off-loading,” or letting the expert’s brain do the work that yours would otherwise have done. Strikingly, these valuation circuits stayed quiet even when the expert’s advice was bad.
I asked Dr. Berns: Isn’t “off-loading” a pretty incendiary metaphor for describing these findings? “I wasn’t being that metaphorical; I was being fairly literal about it,” he said.
When you make financial decisions on your own, your brain’s regions for evaluating risk and reward are active. When you take advice from an expert, however, two things happen: Activation tails off in those areas, and your choices move toward whatever the expert recommends.
Thus, concludes Dr. Berns, “Your decisions are being driven by the advice, not by your own valuation structures,” he said.
In short, the mere act of seeking an expert’s opinion may erase your own. In the presence of a financial adviser, your brain can empty out like a dump truck. (Just think of all those sophisticated clients who were mesmerized by Bernie Madoff.) As Dr. Berns puts it: “You should beware of people offering advice not only because they might be wrong, but because [that advice] may inhibit your own ability to form judgments.”
To be sure, none of this means that consulting with a financial adviser is an inherently bad idea.
However, if you have strong beliefs about what investing strategy is right for you, you should write down your reasons for those beliefs before you sit down with an adviser. When meeting or speaking with the adviser, commit to no course of action that makes you uncomfortable. Only after you have had a chance to review it later, away from the direct influence of the adviser, should you accept or reject any major change of strategy.
Experts are often right, but you should determine whether you agree with them once your brain is clicking again, not while it is offloading.
Source: The Wallet blog, WSJ.com http://on.wsj.com/1avi63r
For further reading: So That’s Why Investors Can’t Think for Themselves