Behavioral and Market Anomalies aka Your Lizard Brain & Your Money © Terence C. Burnham Director of Economics Acadian Asset Management October 2010 2 Lizard Brains & Money I. What is a Lizard Brain? II. All People Have “Lizard Brains” III. Our Lizard Brains Cost Us Money IV. How to W.I.N. 3 The Lizard Brain Lizard Brain Prefrontal cortex 4 Lizard vs. Pre-frontal Cortex • Pre-frontal cortex, rational, small, apparent, newer. • Lizard Brain, emotional, large, hidden, older. 5 Lizard characteristics • Powerful: – Many (most?) decisions are made by the lizard brain. – My gut told me to stay away – Just didn’t get the right feel • Opaque – Difficult to understand the source or reason • Impossible to turn off – Activated automatically 6 Take Home Message I • There is more than one you. • Pre-frontal cortex – rational, executive functions, human • Lizard Brain – emotional, animalistic. 7 Lizard Brains & Money I. What is a Lizard Brain? II. All People Have “Lizard Brains” III. Our Lizard Brains Cost Us Money IV. How to W.I.N. 8 The Lizard Brain Lizard Brain Prefrontal cortex 9 Chinese Baby Puzzle • Assume: – Every family keeps having babies until they have a boy. – Exactly 50% chance that a baby will be a boy. • What % of the babies are boys. • A) more than 50% boys • B) 50% boys • C) less than 50% boys • Hint: • 1/2 of families: 1 boy, 0 girls • 1/4 of families: 1 boy, 1 girl • 1/8 of families: 1 boy, 2 girls 10