have been tested in this manner and also came up overconfident. Before I viewed my 10 questions, I resolved to make my lower and upper guesses extremely wide. Even with that preparation, only 8 of my 10 upper and lower bounds contained the correct answer. Back to Wal-Mart: In January 2004, the firm had 1.5 million employees.

The summary is that we come to the investing game with an analytic tool kit that lacks some of the key tools required for investment analysis. To add further insult to injury, our overconfidence makes us believe we have the required skills for investing.

Split-Brain Investing

Even though our analytic investing tool kit is not complete, it is our best hope to make good choices. An amazing fact is how rarely we use analysis to make our decisions.

During the early 1990s my biggest investment was in Microsoft. One evening I was standing outside my Harvard graduate dormitory chatting with my buddy Matt. I said, Matt, I have a puzzle that I want to discuss with you. The puzzle is that Microsofts business is doing great, yet the stock has not gone up in months. Matt allowed me to blather on about the fantastic business of selling software to the world, and then he asked, What is the price to earnings ratio of Microsoft?

Silence fell as I realized that I didnt have even a rough estimate of the P/E for Microsoft. I was ignorant of a key fact in spite of spending many hours a day reading financial papers. Furthermore, the P/E for any stock is readily available. With 1993 technology it would have taken me about 5 minutes to walk to my room and find the Microsoft P/E in the Wall Street Journal. With twenty-first century technology, such information is available instantaneously on the Internet.

Because I am a curious person, I didnt just hide my head after my ignorance had been exposed. I started asking people about their investments. One person whom I spoke with (who was a financial professional) owned Apple computer stock, and he extolled the virtues of the easy to

use operating system. I then asked him, not about the stock price (which he felt was low), but about the number of shares of stock that existed. His answer was, Geez, I dont know. It must be millions.

The number of shares is equally as important as the stock price in figuring out the total value of the company. It is impossible to evaluate a stock if one is ignorant of the number of shares. In other words, this finance professional was as ignorant about his Apple computer investment as I had been in my Microsoft selection.

If you try this quizzing game with your friends, I suspect you will find that most of them dont know much about at least some of their investments.

These sorts of financial blind spots are, at least in theory, easily corrected. The information is available, and I am in favor of everyone making sure that they have done a solid analysis before making decisions. The investing game is more subtle, however, than these stories suggest. The reason is that human behavior, including investment choices, is influenced to a surprisingly large extent by the lizard brain.

Many rational calculations are carried out in part of the brains pre-frontal cortex, which is located above the eyes. When we think about our investments in analytic terms, the prefrontal cortex is the boss. Compared to other animals, humans have extremely large prefrontal cortexes, which explains our superior reasoning ability.12 While we are therefore uniquely able to make rational decisions, the lizard brain is also involved, and more involved than we suspect.

Psychiatry has long examined the different parts of the brain and how they interact. Sigmund Freud is most famously associated with his split-brain view of the world, consisting of ego, superego, and id. Freuds view, of course, built on a long tradition that dates back at least to Plato. Marvin Minsky is a modern scholar who postulates a brain filled with more than Freuds three competing forces. His opinion of many mental entities is exemplified in the title of his book Society of Mind.13

When I was in one of his courses at MIT, Professor Minsky told a funny story about his own brain. He said, I was once scheduled to have breakfast with President Gerald Ford. Although I dont normally miss

appointments, I slept through this breakfast. Ive never been prouder of my subconscious.

Professor Minsky was making a number of important points. First, his prefrontal cortex was not in complete control of his behavior. Second, the subconscious often has goals that are different from, and perhaps in conflict with, the goals of the prefrontal cortex. Third, and finally, the subconscious is sometimes smarter than the prefrontal cortex.

My grandfather, who was known in our family by his nickname Mandy, gave me my first lessons in the power of my own subconscious. Mandy was a moderately famous psychiatrist who trained with Sigmund Freud himself and who maintained a friendship with Sigmunds daughter Anna for many years. As a part of his training, Mandy was an accomplished hypnotist.

I was never hypnotized, but Mandy used the power of suggestion whenever I had the hiccups. He would say to me-in a particular manner that I have never been able to replicate-if you hiccup three more times, Ill give you a quarter. In all the times that he did this to me, I was never able to produce more than one additional, pathetic hiccup. Ive tried the trick on other people, and it does not work for me. Apparently, something in Mandys training allowed him to speak to my subconscious and alter my behavior.

During the Korean War, the Chinese used knowledge of the subconscious in their treatment of U.S. prisoners of war. The Chinese wanted the U.S. soldiers to collaborate with them and used a variety of extremely successful tactics ranging from brutal to cunning. In the excellent book Influence, Robert Cialdini describes these tactics in detail, including an incremental approach that I believe manipulated the subconscious. Almost no one was willing to collaborate fully and immediately, but over time people were pushed to more and more extreme behaviors. In the end, one in three American P.O.W.s committed some serious form of collaboration, and some went so far as to abuse other Americans.14

For Americans who completely resisted, the Chinese would sometimes make a simple request. They would say, We know that you are unwilling to make statements against the United States, but would you