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Index Universe: Part of the reason the book seemed like an indirect argument for index funds was that you give a lot of advice about the right way to pick stocks in a way that is as free of personal biases as possible, and it's really a very labor-intensive process.
Zweig: Absolutely, it is a lot of work, and I happen to believe that there are great investors. I'm not positive we could identify them in advance, nor do any of them have any of my investment dollars, but there are any number of active managers running mutual funds whom I have a lot of respect for and who I believe are very, very good at what they do and may well continue to beat the market in the future. I'm just not sure enough about it to give them my money, and in many cases, I'm not sure it's worth paying the premium management fee in the first place. But the one thing all have in common is they really work hard and they think very hard about what they're doing. They have a lot of second-guessing and a lot of checks and balances built into their policies and procedures. That's what most individual and professional investors lack, and it's why most of them don't do very well-other than the fact that they trade too much.
Index Universe: Is part of the problem that human beings are simply not evolved to operate in the stock market?
Zweig: Why would we be? Evolution has worked to address a very specific problem, which is the survival of the species. Evolution really has only one objective for a species, which is to maximize its reproductive fitness. Evolution customizes us to survive long enough to have offspring. That's what evolution cares about. It doesn't care about option-adjusted spreads or exchange-traded funds or long-term capital management.
The brain has been built to make basic decisions about risk and reward. We don't have financial circuitry in the brain. We haven't evolved to make decisions specifically about money. That's one of the really interesting things about neuroeconomics: It shows very clearly that when you make a decision about a profit, it's processed in the same part of your brain that processes everything else that feels rewarding, like chocolate cake, Cheetos and drugs, sex and rock ‘n roll. When you make a decision about risk and losing money, that's handled by the same kind of circuitry that responds when you face physical risk and mortal danger. There's not much difference in the brain between having a rattlesnake slither across your living room carpet and having some stock you own go down 40 or 50 percent. Basically it's the same response, which is, "I'm in trouble; how do I get out of here alive?" It's incredibly rapid.
Index Universe: Malcolm Gladwell wrote a best-selling book not too long ago called Blink that was about the importance of our immediate and instinctive reactions. A lot of your book was about how our immediate and instinctive reactions can get us in trouble when we're investing. Is your book a kind of anti-Blink?
Zweig: The beef I would have with that sort of argument is that there are circumstances under which intuition or gut feelings are a very good guide. For example, let's say you and I meet in a coffee shop, and we're deciding whether to go into business together. I'm a Web designer, and you want to build a Web site for yourself and you don't want to get into business with somebody who's fishy. Your gut feelings about me would be quite reliable, because if I don't seem trustworthy to you, I'm probably not. That's an example of an intuition or a gut feeling that's very useful.
But if you have a gut feeling about whether you should buy Google stock, that's not useful at all, because intuitions are only reliable in the areas of life where you get good feedback. And you know just from being a human being and from interacting with people your whole life what the cues are for trustworthiness. Am I sitting there with my eyes shifting all over the place? Am I drumming my foot on the floor? Do I not look at you when I talk to you? Do I immediately ask you for your credit card number? Those kinds of things just set off fire alarms in your head, as they should, but there's no way to do that in the stock market-it's just much too complicated an organism. And every time you think you've got some cue that predicts something, the problem is there are a hundred million other people combing through the same data looking for it, and they've already been there. By the time you notice it, it either isn't really there or other people have already used it. In either case it's not useful to you, but you'll think it will be.
Index Universe: You make the point in the book about how making money produces a similar reaction in the brain to when an addict takes drugs or gambler wins. Did you see any studies or experiments along these lines with fund managers or other financial professionals who are dealing with other people's money?
Zweig: Well, there's very little reason to believe that professionals and individual investors' brains are much different. There's been a lot of psychological research done on this. There isn't much in neuroeconomics yet, but based on 20 years of observing the financial markets I certainly don't see any evidence that professionals are more rational investors than individuals. There's certainly a fair amount of anecdotal evidence that they're less rational, but they're certainly not more. And there's no real reason why you would expect them to be.
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