The triune brain model was developed by neuroscientist Paul MacLean in the 1960s. Neuroscience has progressed over the last 60 years and parts of his theory have since been invalidated. But the triune brain model is simple and useful enough for a layman to gain some understanding about how our brains work.
The triune brain has 3 parts:
- the reptilian brain is in charge of our survival instinct,
- the mammalian brain handles our emotions, and
- the neocortex helps us analyse with logic.
The so-called survival instinct is associated with this brain. The reptilian brain has helped our ancestors survived their environment. Facing a danger, be it a tiger or a human assailant, the brain would signal to the heart to pump more blood, the lungs to increase its intake and the muscles to tense up, getting ready to either to fight or flight.
Today, we no longer need to fend off attacks from tigers but this survival instinct is still pretty much ingrained in us even though we are not aware of it. Threats have manifested into other forms in our modern society. For example, a lack of money will become a survival issue because one would not be able to purchase food or afford a shelter. Some of these individuals may resort to aggression (fight), engaging in robberies to mass protests. Some may choose to flight, running away from the problem and live like a recluse, scraping by with leftover food.
This survival instinct affects the more affluent ones too. When it comes to investing, the reptillian brain can take control when we see losses in our investments. We may even perceive as it as a threat to our survival such that we react with a fight or flight response. We may ‘fight’ by averaging down, refusing to bow to the markets, believing that we can win back all our money. We may also ‘flight’ by selling everything and take whatever left with us to rebuild for another day.
The action is too extreme either way. Betting everything that we have against the market direction usually end up losing more. Famed economist, John Maynard Keynes, has a famous saying, “the market can stay irrational longer than you can stay solvent.” Selling everything at a market low is foolish as well. Some of the investments may still possess their merits and would make good long term investments. Selling them prematurely and at the lows wouldn’t realise the full profit potential.
The reptilian brain could also explain some of the biases we witness in investing. This brain often perceives familiarity as safety. Investors have the tendency to buy stocks from their home country (home bias) and well-known stocks that they are exposed to in the media more often (availability bias).
Hence, we need to prevent our reptilian brain from acting up – it is easy to say but very hard to do.
Mammalian brain is where our emotions are regulated and dictates how we respond to pain and pleasure. Most of us believe that we are rational most of the time but unfortunately we are not. We make many daily choices based on emotions. We prefer to eat fried chicken (pleasure) than salad (pain). We prefer to watch Netflix (pleasure) than to study for a test (pain). We prefer to sleep (pleasure) than to exercise (pain). We should expect the mammalian brain to extend its influence to our investments.
We were told that investors buy on greed and sell on fear. This is detrimental because buying on greed usually means that investors are jumping in late in the game when the share prices have gone up considerably. This has been witnessed throughout the history of financial markets, from the tulip mania in the 1600s to the bitcoin craze in 2017. Hence, we are likely to go into an investment because we feel ‘excited’ (as told by our mammalian brains). There’s no logic behind it except that the imagination of a windfall is too pleasurable to give up.
On the other hand, we feel pain when we see our investment go crashing down with the markets. Again, logic doesn’t apply here and the desire to avoid pain can be so great that we just want to sell everything to feel better.
In fact, we may experience various types of emotion at any point in the markets (see diagram below) and our mammalian brain would decide which action we take.
We see dangerous market booms and catastrophic crashes because the mammalian brains are in charge en masse. The emotions can be transferred and reinforced by more market participants, becoming a virtuous buying cycle on the way up and a vicious selling cycle on the way down.
It doesn’t take a neuroscientist to know you should be using the neocortex when you are investing.
The neocortex processes all our logical and analytical thinking activities. We are using our neocortex whenever we are studying for our tests, solving a mathematical problem or writing an essay.
I am a strong advocate of developing a set of investment principles to guide an individual investor’s decisions. Applying this set of principles will force us to ‘think’, essentially using our neocortex as much as possible to make our buy, hold and sell decisions. This is clearly not the case as most investors whom I have met do not use a clear set of guidelines or principles. They have a tendency to use their reptilian and mammalian brains to invest.
A Nobel prize awardee for Economic Sciences, Daniel Kahneman, talked about system 1 and system 2 thinking. System 1 thinking is a snap decision making process where we do not spend a lot of time to think. We simply use rule of thumb or emotions to decide. System 2 thinking, on the other hand, is slower as it takes time to analyse a situation to make a decision. System 2 is akin to using our neocortex to process information. He added that most humans are cognitive misers whereby we like to conserve energy, and system 2 thinking sucks a lot of brain power and resources. That’s why we feel hungry when we study. It is easier for us to use system 1 thinking most of the time, and in fact, we do, even when we are investing.
Use the neocortex as much as possible!
Now that you know that we have different parts of the brain which we can use to carry out our investments, and we should use our neocortex as much as possible. We should think about how we are thinking – meta thinking. Are our reptilian and mammalian brains in charge? This would provide some check and balance to make sure we are not falling prey to ourselves. One of the best ways to ensure logic in our investment process is to develop and apply a set of investment principles. It will force us to think through each investment before making a decision.
And don’t get me wrong. It has nothing to do with intelligence. Even Isaac Newton wasn’t able to save himself from losing a fortune during the South Sea Bubble despite his intelligence. It is so easy for our reptilian and mammalian brains to hijack our decision making process. Use the correct brain when it comes to investing because
survival money is at stake!