To be a successful investor, you must understand how your brain works.

What drives the stock market?

Many people think it’s money. After all, money is at the heart of every portfolio. But far more important than the money people invest are the people who invest that money in the first place. The people are the ones who make the decisions to buy, hold, and sell.

Unfortunately, those decisions are often bad. Why? Because as wonderful as our brains are, they weren’t designed to work in complex, stressful situations. So, if you want to make good financial choices, you need to realize that your brain won’t always lead you in the right direction.

The key message here is: To be a successful investor, you must understand how your brain works.

The human brain was designed to keep our prehistoric ancestors safe. And even though you probably don’t go to work facing mortal danger from saber-toothed tigers in the bush, your brain still acts as if you are.

For example, whenever you’re assessing financial risk, the brain areas responsible for avoiding attack light up. Because your brain thinks you’re being threatened, it limits its focus to these areas to keep you alive. This makes it harder for you to think clearly and makes it more likely that you’ll overlook important information.

Our brains also encourage us to be impatient. They do this by giving us a hit of dopamine – a hormone that makes us feel good – whenever we do something that results in immediate success. Because we like that feeling, we’ll do whatever it takes to get it. Sadly, that means you, as an investor, might sabotage your financial plans because you’re tempted by short-term wins instead of long-term gains.

Intellectually, you might know that it’s not a good idea to chase every opportunity to make a quick buck. But our brains are desperately money-hungry. According to Dr. Brian Knutson of Harvard University, humans are drawn to money without any reference to its actual value. This makes it difficult to resist the promise of reward.

In truth, your brain’s money-lust will always cloud your judgment. But if you’re aware of it, you’ll be better placed to overcome your brain’s impulses and stop yourself before you do the wrong thing.