played just one time between anonymous counterparts who will never see each other again. A decision to reject an offer under such conditions means a loss of money that will never be recouped.

In many financial situations, we are faced with taking a small loss now or digging in our heels. The best course, especially if one wants to earn money, is to admit to small defeats and move on.

I interpret Paul Tudor Jones sign as a note to his lizard brain from his prefrontal cortex. Here is my interpretation: Dear Mr. Lizard Brain, I know that you are built to be stubborn and proud. Although you like to behave that way, I (Mr. Prefrontal Cortex) prefer money. Therefore Im going to force you to take the profitable and not the proud path.

New ultimatum game research in the field of neuroeconomics shows us exactly what part of the brain operates to make people lose money. Professor Alan Sanfey and colleagues had people play the ultimatum game while their brains were scanned by an fMRI machine. People confronted with small offers ($1 or $2 out of $10) had greater brain activity in the bilateral anterior insula (not part of the prefrontal cortex), and subjects with higher activation levels in this area were more likely to reject these small offers.26

These ultimatum game results provide us with direct, scientific evidence that parts of the human brain outside the prefrontal cortex push people down a path that costs them money. As I write this, we dont have similar evidence for the brain location of most other economic biases, but we soon will. My prediction is that most irrational behavior will be found to be located outside the prefrontal cortex.

Finally, in my own research, I have found that men who reject small ultimatum game offers have much higher levels of testosterone than those who accept.27 Often associated with muscle mass, testosterone plays a crucial role in the maintenance of dominance hierarchies. For example, I measured the testosterone levels of Howard Stern and others on his team. Howard, the socially dominant male in the group, had by far the highest testosterone. My friend Vinnie Favale, a big shot at CBS and a frequent guest on the show, had the second highest testosterone level.

Both Howard and Vinnie came in above younger men (Gary, KC, John) who are lower down in the shows hierarchy.

These results suggest that the lizard brain is not so crazy after all. In natural settings where people meet over and over again, it pays high-testosterone people to use conflict as a tactic to achieve their goals. Testosterone activates the lizard brain and makes some people more willing to be confrontational. In the unnatural setting of the laboratory, however, confrontation in the ultimatum game is costly, not beneficial. Like laboratories, financial markets are unnatural environments, and this explains why our instincts often cost us cash.

What do you think happened to my offer of $10 out of $100? After learning that many people prefer no money to a small percentage, I feared all was lost. Furthermore, our group results showed that pride flowed strongly among these graduate students. Three of my fellow students had faced $10 offers, and two had rejected them. One person had even rejected $30 out of $100! By good chance, however, my puny offer of $10 had been accepted.

Irrationality #2: Fear of Losses Causes Losses

Consider your willingness to participate in the following risky gamble. A coin toss decides if you win or lose. If you lose, you pay $5. If you win, the jackpot is yours. Professor Kahneman asked people to tell him the smallest jackpot that would make this gamble worth the potential loss of $5.

What is your answer? If your answer is more than $5, you hate losses. In fact, the average answer to this question is more than $10. Professor Kahneman interprets this to mean that people hate losses much more than we enjoy equal gains. We are not willing to lose $5 for the possibility of gaining just $5; we need a bigger jackpot to justify the risk.28

Professor Kahneman calls our answers to this question, and the results from related research, loss aversion. Among all the findings that led to

his Nobel Prize, loss aversion is one that Professor Kahneman rates as among the most significant. While hating to lose money might seem like a good thing, it can cause us to lose money.

The infamous trader Nick Leeson exemplifies the troubles that loss aversion can cause. Leeson was the Rogue Trader who brought about the collapse of Barings Bank. Interestingly, Leeson himself wrote a book detailing his mistakes that was made into a movie starring Ewan McGregor.29 (I suppose Id be tempted to commit some misdeeds if I could be sure to be portrayed by a dashing actor.)

Barings Bank was one of Britains most prestigious financial institutions. It was destroyed when Leeson lost nearly 1 billion British pounds in a failed speculation. Although there are many reasons for the behavior, it is consistent with that caused by loss aversion.

At first glance, loss aversion sounds rational. Who likes losing money? No one. But consider what happens when you have lost a little bit of money. Now, the strong hatred of losses creates perverse incentives. That is to take big, stupid risks with the possibility of avoiding the label of loser.

Nick Leeson didnt lose his billion pounds in one go. In fact, he made a financial bet that lost a relatively small amount of money. Rather than accept his small loss, Leeson dramatically increased his bet. He continued to add to his losing position, hoping that he could get back to even. In the end, it was precisely his hatred of losses that led him to massive and destructive losses.

More than loss aversion caused the Nick Leeson blowup, but the general lesson is valid. Our hatred of losing money can push us toward taking bad risks, which in turn causes us to lose money.

Irrationality #3: Finding Patterns in Random Walks

One of B.F. Skinners most famous experiments created what he labeled superstitious pigeons.30 The experiment provided food to the pigeons