Directly behind your forehead is a region of the brain known as the frontopolar cortex. Much larger in humans than in other primates, this area is critical to such advanced mental functions as memory, exploring new environments and making decisions about the future.
My friend Jason Zweig had a killer Intelligent Investor column this weekend about a study in the Journal of Neuroscience in which people are shown to use past rewards to predict future payoffs…
Among the mutual funds that were in the top half of performers in late 2009, according to Standard & Poor’s, only 49% of them still remained in the upper half a year later; a year after that, only 24% were left. That is just about what you would get if you flipped a coin. Trying to find the winners is futile if victory is determined largely by luck.
When confronted with the unpredictable, however, the frontopolar cortex refuses to admit defeat. It draws on all your computational abilities to search for patterns in random data.
Zweig has written more about behavioral investing than any mainstream financial journo I can think of. This article is yet another worthy addition to the canon.