unpleasant world, or dry powder for those moments when prices become irrationally low. Such framing is useful, but the problem of decreasing risk is not so easily solved because our lizard brains create fundamental, psychological barriers.

The Barrier to Low-Risk Investing

Near the end of his career, a group of students allegedly played a joke on the famous behaviorist, Professor B.F. Skinner. During a lecture the students agreed upon the following secret plan. Every time Professor Skinner moved to his left, the students would smile at him. In contrast, whenever he took a step to his right, the students would frown and look at their notes.

By the end of the lecture, Professor Skinner was standing at the side of the room with his left arm essentially pinned against the wall. He had been induced to move to his left by the subtle signals sent by the students.

A central view of Professor Skinners approach is that all animals, including people, learn to repeat pleasurable acts and to avoid those that are painful. Human brains are built with a stimulus-response mechanism that helps us navigate through the world.

Im reminded of my own stimulus-response behavior whenever I drive to the Boston airport. As I enter the tunnel that leads under the harbor, my mind invariably flashes to the state trooper who pulled me over at that spot for speeding. As I recall the unpleasant memory of turning the corner and seeing him with a radar gun, I slow down. I may get ticketed for speeding again in my life, but never in the same spot as this previous ticket.

Professor Skinners students played a trick on him. Stimulus-response behavior modification can be more subtle than a state trooper with a siren or a burned hand on a hot stove. Humans are social creatures, and we get pleasure and pain from our interactions with each other. With their facial expressions, Skinners students rewarded him for his moves to the left

and punished him for moves to the right. Unconsciously, he began to do more of the rewarded behavior and less of the punished, thus leading him to be pinned against the wall.

Professor Skinner was extreme in focusing on the conditioning effects of rewards and punishments, and ignoring the mental processes driving behavior. Even though the world now has a more nuanced and better understanding of behavior than Professor Skinner, no one denies the importance of stimulus-response. We humans share with other animals the brain machinery that teaches us to do again that which rewarded us in the past.

Our human stimulus-reward system can produce destructive behavior. A reformed crack addict whom I chatted with described his previous lifestyle as follows: A typical night begins with a group of friends all carrying as much money as they can scrounge up. The group drives (at least in California) to a crack house and smokes some drug.

The evening alternates between bouts of consuming crack and down time. The group generally travels between crack houses. The journey only ends when every penny has been spent. Almost every crack house includes women who will trade sex for drugs. Early in the night, when money is relatively easy, crack plus sex is better than crack without sex and worth the expenditure. Later in the night, when money is tight, the extra pleasure of sex is not worth the cost. The binge ends when everyone is broke, and the addicts find someplace to sleep. When they wake, they seek money to begin the process again.

One night after dropping off his buddies by car, my source told me that he chanced upon a big rock of crack that had somehow been left in the backseat. He couldnt believe his good fortune and enjoyed this unexpected final high for the night. For years afterwards, he would always look in the same spot when he got out of his car. In a manner that would have made Professor Skinner smile, this addicts brain had been altered by a potent reward.

Like a crack addict, we are built to look for rewards in the places (both literally and metaphorically) of our past joys. Presumably this stimulus-reward system was adaptive for our ancestors who lived in their natural

environment. For rats in cages, and for humans in industrialized societies, the quest for dopamine can get us into serious trouble.

In Austin Powers, our hero, the international man of mystery, says, Only two things scare me, and one of them is nuclear war. Similarly two things scare me about our human stimulus-response system, and one of them is drug addiction. While some peoples lives are destroyed by the maladaptive activation of the stimulus-response system by drugs, almost all of us lose money because of its effects on our finances.

We are built to seek the dopamine high that comes from successes. For our ancestors, this system led them toward useful behaviors. In the financial world, however, this system is almost perfectly designed to create poverty. Investing is a changing game where the best strategy today is almost never the best strategy of yesterday. So our brains are built to replicate successful behaviors, but the financial markets punish such behavior.

Those who invest by stimulus-response will tend to do that which has worked, not that which will work. For example, after the huge stock market gains in the 1990s, investors ploughed a record $309 billion into stock mutual funds in 2000, just in time for the stock market bubble to burst. Over the two years of 2001 and 2002, investors invested a total of just $4 billion into stock funds, again timed perfectly to miss the huge stock market rally in 2003. In 2003, investors ploughed over $150 billion into equity funds.4 To date, stocks have lost ground in 2004 (through mid-July). The backward-looking, stimulus-response system of investing is not profitable.

On a far grander scale, we have been rewarded for taking financial risk for a generation. The lizard brain is built to continue this behavior. This presents a significant barrier to taking a low-risk financial strategy.

How Little Risk Can You Stand?

My Harvard retirement money is deposited with a large investment company (chosen by Harvard). On their website, the company provides