This is your brain. This is your brain on money
Extract: How does it work? The way the hypothesis works is pretty simple. You start by recognizing that individuals have two components to their decision-making process. There’s a rational component and an emotional component. Generally, when those two are properly balanced, you have what we observed as rational economic interactions [among investors]
And when they’re not? The balance becomes tilted to one extreme or the other. The tilt is really a function of wealth creation. When too much wealth is created or too much is lost, that’s when you lose this difference of opinions. That’s when everybody wants to be on one side of the trade. That’s when markets break down or become highly erratic.
**Ironically, this article was published at the Trough of the Global Financial Crisis. And we’ve been on a Bull run since then.