coming your way at the top of the hour, we are headed live to germany where the women's soccer team, the usa team is getting ready for a shot at history in sunday as world cup finals against japan. zain vergee will bring us a report top of the hour right here on cnn. i'll be back with you at the top of the hour of course, with more live news. but right now, "your bottom line." why is it that smart people do dumb things with their money? welcome to a special edition of "your bottom line" your money and your mind. i'm christine romans. we've all splurged on something we shouldn't have, bought a stock high and then sold it low. so why can't we control ourselves? we'll get to that with our panel in a moment. first a look at the complicated relationship between what goes on in here when it comes to this. >> it's megamillions.

>> the odds of you standing there with the big check are just north of zero. so, why do we buy a ticket? >> are you ready. >> scott hotel is part of duke university's neuroeconomics team, exploring among other things why smart people make foolish decisions with their money. >> people don't buy a lottery ticket just because they have a chance of winning. they will buy a ticket because over the next couple days it allows them to fantasize what they would do if they won the lottery. in a sense they're paying for that experience rather than a chance for the lottery itself. >> it's not just the lottery. nathan zweig know is firsthand and put his brain to the test with scott's team at duke. >> it's a combination of neuroscience and economics basically using the tools of scanning and other measurement technology that neuroscientists have used for years to study how the human brain evaluates risk and reward over time, which is

what investing is all about. >> reporter: from investing to buying a home, to why and how often we go on a spending spree. what researchers are learning is that when it comes to money, our brains are in some ways stuck in the stone age. >> in modern life, if you lose your money, you've -- you may well have lost a lot more. it's not just pieces of paper you know, printed by a government somewhere. it's really -- it's the key to maintaining your lifestyle. it's safety and you know, a million years ago, it would be the equivalent of losing your cave or losing your spear. those are things that. >> or your dry wood. >> or your dry wood. money is what stands between most of us and a completely different life, which is a much more dangerous life. i mean, one of the things we've learned in the past three years is that the loss of money in a society can have just disastrous

consequences for millions of people, which a lot of americans have forgotten. and so it makes perfect sense that the modern human brain would react to the loss of money the same way it reacts to the presence of a poisonous snake. >> the brain is a big place. neurologically speaking. where exactly do the alarms go off? we asked cnn's chief medical correspondent and practicing neurosurgeon dr. sanjay gupta. >> now, the region of the brain we're talking about is something known as the insla. let me show you over here, a part of the brain largely responsible for negative emotion like disgust, pain, the sensation you get that something is not quite right. that somehow danger is lurking. some studies have shown the fear of losing everything in this case your money, your hivelihood could tap into that system and give you a real sense of fear. >> reporter: but are all brains created equal when it comes to finances and risk taking? >> there's very strong evidence that there is no such thing as a single risk-seeking person.

that is, someone who is risk seeking, for example, interpersonally, they like adrenaline sports, like to go sky diving. that same person in their invechts. >> through i tracking and gaming simulations, neuroeconomic research is shedding light on this tug of war between the physiology and psychology inside our brains. we're all still evolving, still battling our inner caveman. >> no cavemen here. jason zweig is the author of "your money your brain." has the world become tool complicated for the way our brain perceives risk and reward in terms of money? >> i think it may well have. i think one thing that's vets important for consumers and investors to bear in mind as they confront a world in which financial news is coming at us 24 hours a day, seven days a week nonstop is the key question

really is, do i need to react to this. because your natural instinct is to react to everything, to freak out about just about everything. because your brain is a reactive mechanism, and that's one of the protective aspects of the human brain is it's built to respond. and one of the keys, i think, to financial success in a complicated information overload world is to ask yourself, do i need to react. and the answer more often than not will be no. >> well, there's this joke on wall street, sanjay, don't just do something, stand there, because we like to think we make logical decisions but sometimes we don't. >> the and it's funny if you sort of like look at the way the brain, would, building on what you're saying, the brain is reactionary but it is pretty much designed as you say in the stone age in terms of pattern recognition. i mean, you recognize patterns. you start to formulate simple decisions paced on those patterns and ultimately those

simple decisions can be more complicated decisions. what i find is interesting though as was said in the piece, it's very hard to. inpoint a personality and say this is a risk-taking personality, a risk averse personality because each situation comes differently to a person based on their memorieses, based on emotion. that sky diver could be very risk averse when it comes to their money because of the way their hippocampus and their emotions into it. >> but you know, what's interesting because it's the same brain that can be derailed by the adjustable rate mortgage or by a complicated default swap that invented the ipad so the brain is so pis tierious. >> there's not as much novel thinking as we'd like to believe in the brain. again, i think it does come back to a lot of these patterns that people are building on. while they do these complicated financial transactions hors

d'oeuvre ones and inhaven't these incredible new technologies, a lot of it is building on existing knowledge. it goes back to pattern recognition again. >> doug hirsch horn trains traders at top financial institutions. it's always good to know the brain. it seems our emotional side hijacks rationale thinking. give us an example. >> he it's a common thing because people want to go for the simple stuff in a trading world where it's volatile. a great example i give to traders is that the market doesn't know if you're up or down money. so don't make your trading decisions based on information. we personalize things and try to make a decision based on what our current status is. if i told you you had a 95% chance to win in a game. >> sure would you play that game. >> i would. most people say yes, they would. some successful traders say that. every time i win, i'll give you a penny. every time you lose, you give me $1,000. you get caught up in the percentages. get caught up in i like to win

supposed to looking at the data of what's the odds me being right and how much will i make if i'm right or wrong. >> the way the brain is is pushing us to go for the win. we know the forces that play in our minds. next, how do we take that knowledge and make better decisions about our money in all aspects of our life? ♪ ♪ introducing purina one beyond a new food for your cat or dog. really? 25 grams of protein. what do we have? all four of us, together? 24. he's low fat, too, and has 5 grams of sugars. i'll believe it when i--- [ both ] oooooh... what's shakin'? [ female announcer ] as you get older,

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when it comes to investing, we know we're supposed to be rationale and objective, but often our behavior is anything but that as we saw last may. >> panic selling. the flash crash of may 6th, 2010. the dow plunges nearly 10% in less than 30 minutes. the panic leading to a suspension of logic. >> rationally, it was clear that something was amiss, something was going on. >> the human brain really does not like surprise. the reason the flash crash was so devastating is because it was so explicable. it caught people completely by surprise. >> if you choose to gamble, you have a 50/50 shot of keeping all 40 or losing all. >> it's this type of risk and reward scenario that neuroscientists like scott hatel and the team at duke university hope to better understand by

conducting experiments with real money. >> this is called a functional mri, and what does it have to do with how we save our money, how we spend our money? how we risk our money? everything because it shows what's happening right up here. >> in the mri, volunteers are presented with different choices, keep a small amount or risk it to win more. by changing the dollar amounts at risk and the dollar amounts that can be gained, scientists are able it see how different areas of the brain react as decisions are made. >> there's an area we're very interested. it's called door sal prefrontal cortex, a fancy way of saying the area in the middle, top and front of your brain. that part of the brain seems to act almost like a switch in a train yard or it's telling all the other parts of the brain that might contribute to a decision which ones are going to be active at any moment in time. what it does is it seems to switch to say a more risk averse and a risk-seeking mode, depending on what's going on in the task at any moment in time.

>> 140 and one, two, three, four. okay? that's your payment for today. thank you. >> thank you. >> that was a great winning. >> so imaging technology can tell you a lot about what your brain is doing, how you're thinking and feeling about spending your money. that's pretty hi-tech. there's also a pretty low tech way. one person goes in the mri. the saliva is going into a tube holding their saliva. what do you find in the simple tube? what does it tell you about what somebody's brain is thinking or doing about money or risk. >> the way that we use this is we take individual samples and through a test that's been available for the last 40 years, we can measure things like aspects of their dna, we can measure hormones like testosterone or could the i sol. through the mri, we can look at interactions between your

physiology so something like testosterone or cortisol and your brain activity when you're processing some of the gambles we have people do in the scanner. >> interesting. it's not just the picture of the brain. it's the picture of the brain you're taking and what you're finding in the sa lie varks the hormones and other things that are taking an entire picture of what somebody is doing financially with rick and reward? >> that's right. because really the thing we're growing to understand in neuroeconomics where you're combining the field of neuroscience and behavioral economics is that our decisions are influenced at multiple levels. so we can try to study behavior by itself and the brain by itself, but the more you account for all aspects of both behavior and physiology and neuroscience i think that's going to continue to let us you know, more completely understand our behavior. >> it's really interesting stuff. jason, given what we know about hormones, brain makeup and emotions, what's the number one mistake invests make? because you know what, we buy

high and sell low. we do it all the time. >> it's performance chasing. it's investing as if you were driving a car only by looking through the rearview mirror. you know, people, the more a stock goes up, the more people want to buy it even though none of us would buy socks the way we buy stock, right? i mean, if walmart raised the price of socks 50%, you wouldn't say oh, i want to buy more socks. you would say i'll wait till the price comes back down. but when it's stocks instead of socks, people love it. >> help me not do that. help all of us, what can we do to try to let's say override that wiring? i know it's not exactly a good metaphor. how do we do it. >> what you need is policies and procedures. you have to have a plan in place and you have to live by the plan. so you can write what's called an investment policy statement that allocates your money across different assets and sets conditions under which you will

trade or you won't trade. and you can have a simple rule that says, i will never buy an investment purely because it's gone up in price. i have to have at least three reasons that have nothing to do with recent price change. >> all right. jason zweig. next, who are the biggest risk takers and why? is it all about nature versus nurture? somewhere in america, a city comes to life. it moves effortlessly, breathes easily. it flows with clean water.

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took a big gamble and you got that. i mean, i would have taken the other one for sure. >> yeah, that kid was riskier than i am. that took place in elizabeth brandon's laboratory where they found that kids are more risk prone and people become more risk averse as they get older. interestingly the brain scans of kids that are less willing to gamble resemble adult brains. sanjay, how much of this is actual brain development and how

much isnate tour versus nurture? >> are we wired one way. wiring is a loose term when it comes to the brain because it can change certainly over time and based on your experiences. i think loosely speaking when it comes to the nature part, the frontal lobe, the area of the brain responsible for our ability to have that is responsr ability to have good judgment, be less impulsive, those develop more as you get older. having teenagers drive might be too early, but they also might become less likely to take risks or more risk averse as a result of those frontal lobe changes. but the nurture part of it, i think, is more interesting in some ways and maybe even a bigger factor. your emotions, your memories of past experiences, and how those all layer in. despite how well-developed your frontal lobe is, it can start to develop someone who is younger based on your impulsivity and the changes that are happening. >> and doug, there's age, and

there's also gender. women and men do differently on some of these tests. >> yes, there's been research over the years that looked at investment profiles of men and women. but i find there are very, very few women on wall street. and what i find remarkable, as a coach to top traders, i have to deconstruct male things. ego orientations and layer in self-awareness. the funny example i use for clients is, before gps existed, right, if a guy is driving around and gets lost, he will not stop and ask for directions. a woman would say, i would stop for directions, it would be stupid not to. men want to trade for revenge. >> so there should be more and more women on wall street. >> it's about performance. i believe there should be more women than men trading on wall street. >> who's the risk seekers, jason? is there a profile of a risk seeker? >> i don't really think so, christine. i think one thing that all investors and consumers for that matter should bear in mind is that risk is as much a product

of the situation as it is of your disposition. so you take a person who is not generally considered a risk seeker, you put that person in a risk-seeking situation, and their behavior may change completely. also, perception is very sensitive in changes, so rapidly. think about how people felt after september 11th or how people in japan are probably feeling now. the slightest little risk is enough to really get people disturbed and, you know, you're almost like a -- it's as if you're bruised all over and anything that touches you hurts. >> and that's perception and perspective, but that all is happening here in the brain. gentleman, stick bhep we've all heard that money can't buy you happiness, but if you've ever bought something on impulse, you know the high you get. what happens inside your brain at that very moment? the answer might surprise you. work faster and smarter iu so you can get back to playing "angry birds." it lets you access business forms on the go, fire off e-mails with the qwerty keypad,

and work securely around the world so you can get back to playing "angry birds." it's the android-powered phone that mixes business with pleasure. so let's get our work done, america, so we can all get back to playing "angry birds." the motorola expert from sprint. trouble hearing on the phone? visit sprintrelay.com. i don't always have time to eat like i should. that's why i like glucerna shakes. they have slowly digestible carbs to help minimize blood sugar spikes, which can help lower a1c. [ male announcer ] glucerna. helping people with diabetes find balance. [ male announcer ] glucerna. somewhere in america, a city comes to life. it moves effortlessly, breathes easily. it flows with clean water. it makes its skyline greener and its population healthier.

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one of the things we learned at duke university, our happiness is somewhat set, and while earning or losing money can make it go up or down, it's not a long-lasting effect. sanjay, we get a temporary high from buying an expensive pair of shoes, for example. it's been compared to actually taking a hit if you're a drug addict. why do we get a rush from spending money? >> there's a couple of things that are happening, that are interesting. one is, this might be surprising, but it's more in some ways the anticipation of actually buying something. so the idea that you, as was said in your piece, of fantasizing about those nice new shoes or a new gadget -- >> it's the journey, not the destinati destination? >> in some ways, it is. and even getting the shoes or whatever it may be may seem like a little bit of a letdown, because the reward system in your brain changes. and there is a reward system in your brain. it's a little bit of a diffuse area, but let me show you. we're looking at the inside of the brain. there's a few structures along

the midline. it's a really important part of your brain when it comes to the reward. more transmitters fire there, and you feel good. but that's a short-term thing. it's hard to think of happiness as temporary, but it is. emotion as a chemical is true. >> and it explains what millions of people already know. they went out, bought the thing, and there was the letdown. the impulse buy was not worth the impulse, but you cannot stop yourself. >> we think of that psychologically, maybe it wasn't as good a pair of shoes as you thought they were going to be. >> it's not the shoes, it's in your head. >> the dopamine systems start to drop, the reward system isn't as bright, and that letdown is almost visible. >> losses have a bigger impact than gains? >> for traders, it's more about the process than the experience. there was research done a while ago that shows the average person losing a dollar felt some degree of bad and you had to

make $2.50 to offset that. losing money is actually more of an adrenaline rush to people than making money. and as a result, they push themselves to strive to make more money and offset it. again, the emotion is about the dollars and it makes them have a skewed perception. >> outside of the trading world, that's something that holds true for consumers and others. you're so worried about losing. and you talked about gender earlier. a lot of studies show that women are much more afraid of losing money than men are. there's a psychological effect here as well. i prpd in an experiment looking at how we value things. whether it's stocks or ipods or shoes. are we really -- what are we buying into? are we buying status, acceptance? what is it? >> well, i mean, reward is definitely social, christine, for most of us. we don't live on a desert island, we don't live in the middle of, you know, the sahara or something. we live among our peers. and we compare ourselves to other people all the time.

unfortunately, what with i think all too many, especially american consumers, get caught up in is the notion, if i just had one more "x," whatever "x," is an ipad, you name it, a big car, then i would feel happy. it's not how much money you have that really determines your happiness, it's how you spend the money you have. and if you spend money on social experiences, bringing yourself together with friends and family to create new memories that you can look back on later, you really will optimize your happiness with your money. >> but don't you think that advertisers and the whole way the consumer world works are all geared to try to get us to part with our money, to try to play into those impulses. because those impulses are real and they're deep-seated. >> absolutely. and one of the best things you can do is you can schedule ahead. you can say, i'm going to plan a family reunion for next june or something. and you put it ahead, mark it on your forward calendar, and