investment advice that is tailored to each individual. The investor answers a set of questions including attitudes toward risk and time until retirement. From these answers, a computer program suggests how much money to invest in stocks, bonds, and risk-free cash.

The computer advisor suggests that I invest 80% of my retirement money into stocks! I completely disagree with this recommendation, but I answered every question honestly. Why the disagreement?

Standard investing advice (and my firm is no different from most others) is based on two key premises. First, markets are efficient. Second, because markets are efficient, investors who want to make a lot of money, have to take a lot of risk. Because stocks are risky, they must be profitable. (Im not making this bizarre logic up.)

So, this mainstream view says stocks provide the highest return, with two caveats. Investors must be in the game for the long run, and they must be able to take the ups and downs of the stock market. Thus, standard investing advice asks two main types of questions. Is the investor in the game for the long run? And can the investor take the bumps along the road? If so, back up the truck and buy stocks.

If markets were efficient, what should I do? Im definitely in the investing game for the long run. Furthermore, I love volatility. The thrill of the ups and downs is so powerful for me that I even understand the wacky views of compulsive gamblers.

In Double Down, for example, Frederick and Stephen Barthelme explain how they gambled away their $250,000 inheritance. They explain that winning was better than losing, but losing was better than quitting.5 Although I dont gamble, I love risk enough to understand the Barthelme brothers odd priorities.

So if markets were efficient, then a risk-loving guy like me with a long horizon ought to buy risky stocks. If markets are not efficient, however, it is possible to make high returns without taking risk. Academic studies have found significant time periods when low-risk investments have high returns. The Mean Markets and Lizard Brains conclusion is that we are living in one of these time periods.

If the Mean Markets and Lizard Brains conclusion is correct, then it is

possible to get the highest returns along with the lowest risk. Thus, the investments that are the safest may also end up with the highest return.

Whenever somebody gives an opinion, I think of the economic concept of revealed preference. It cautions us to observe behavior and not listen to words.

Some years ago, my father-in-law, Joel, learned about revealed preference. During the early declines following the stock market bubble, I suggested that he sell the stock that he owned through a money management firm. Joel notified the firm of his decision to sell. One of the firms bosses called to ask why Joel was getting out at the bottom. Joel asked where the boss had his personal money invested and was told, Ive been in cash for quite a while. Joel hung up the phone and cursed under his breath.

A similar lesson is found in Swingers, where heartbroken Mike (played by Jon Favreau) learns dating rituals from suave Trent (a.k.a. Big-T, played by Vince Vaughn). Mike asks, After I get a womans phone number, how long do I wait to call? Big-T says, if you call too soon you might scare off a nice baby whos ready to party and concludes, three days is kind of money. Mike then asks the revealed preference question about the three-day rule: how long until Big-T will call his baby ? Big-T answers, six days.

So a fair question is whether Ive taken my own advice. The answer is not completely. In spite of truly believing that the low-risk approach is the way to go, I still have 10% of my money invested in stocks, including some high-flying Internet stocks. Why? 10% in stocks is the lowest amount of risk that I can take emotionally at this time.

A small risky investment is my effort to calm the lizard brain. During my entire investing life, risky investments have paid the highest return. Thus, my lizard brain constantly goes back to those heady days when there was easy money to be made. Although Im using my prefrontal cortex to restrain the lizard brain, 10% is the lowest amount of risk that I can stomach these days.

The acid test of an investment strategy is how one feels when the strategy isnt working. When the stock market is soaring, and my low-risk investments are earning close to zero, my lizard brain screams, you fool!

Buy stocks! On those days, I need to have some money invested in stocks or the lizard brain will break out of its cage and buy risk at precisely the wrong time.

Take as little risk as you can stand. This is precisely the opposite of the mainstream advice grounded in the view that markets are efficient. In the fantasy world of efficient markets, we should take as much risk as we can stand in order to get those high stock market returns. In the real world of todays mean markets, perhaps we should take as little risk as we can stand.

Profiting from Manias and Crashes

The Mean Markets and Lizard Brains analysis suggests that we are in the midst of a new sort of bubble. While stocks, bonds, and real estate do not appear to be in bubble mode individually, the bubble may be in risk-taking itself. A generation of reward for taking financial risk has pushed us to take too many costly gambles.

The Mean Markets and Lizard Brains conclusion is that most people should reduce their level of financial risk. Our lizard brains have extrapolated from a golden generation that rewarded risk, and pushed us toward the risky investments that worked so well for so long. Unless productivity from the information revolution saves us, these risky investments are likely to disappoint.

Thus, the Mean Markets and Lizard Brains prescription is to reduce financial risk in order to be prepared for future opportunities. This advice is, of course, tempered and customized by individual circumstance and tastes.

If humans were the rational, cool-headed robots of economic theory, then achieving our financial goals would be easy. Because we are exactly the opposite-emotional beings subject to bouts of irrational moods and crazy decisions-financial success is difficult. In particular, in several keys areas we need to lean into our human nature in order to profit from financial opportunity.