How investors can trick their 'big dumb lizard brain'

A version of this post first appeared on TKer.co

Something I love about Barry Ritholtz’s writing is how he often surprises you with unexpected insights.

Sure, he advances well-known — but still underappreciated — wisdom like how index fund investing is hard to beat and why making short-term market forecasts is futile.

But he offers much more than that.

Take this excerpt on psychology from his new book, "How Not To Invest," which he shared in a recent piece for Bloomberg:

Trick Your Lizard Brain

Nobel laureate Paul Samuelson once said, "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." While the dopamine hit that comes from a risky stock bet paying off may be enjoyable, passive management is the better option for most investors looking to grow long-term wealth.

The catch is that you must take steps to protect yourself from, well, yourself. To do so, set up a "mad-money account" — or a cowboy account, as it’s sometimes called. Add less than 5% of your liquid capital, so maybe $5,000 if you’re liquid enough to have $100,000 as a safety net. Now you can indulge your inner hedge fund manager without jeopardizing anything too material.

If it works out, you’re more likely to let those winners run because it’s for fun and not your real money. If it’s a debacle, appreciate the terrific lesson that should remind you that this is not your forte.

In his book, Barry shares a little more on what he personally does:

In my cowboy account, using 2% of my liquid net worth, I play the dumbest game possible: Market timing with out-of-the-money stock option calls…

He discusses specific trades he’s made. I’ll let you buy the book if you really want the details.

Here’s his bottom line.

Regardless of the results, it allows my inner junkie to leave my main portfolio alone. That is the true value of the cowboy account — my real money remains unmolested by me and my big dumb lizard brain.

Like most of us, Barry is not a machine. He is a human with a brain. And when your brain is mismanaged, it can be your worst enemy.

The idea of having a "cowboy account" is not without its issues. Some of you might say it could be a slippery slope towards costlier risk taking. This advice certainly isn’t for everybody. But let’s also not pretend like living in denial of your instincts and biases isn’t risky either.

As TKer subscribers know, my investing mostly consists of buying and holding passively managed index funds. But while I may have lost my taste for picking stocks and timing the market a long time ago, I haven’t lost my appetite for risk.