Snap Judgment: When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes with Your Money

Part IThe Psychology of Financial Decisions

1. Money Is a Drug

In the summer of 2008, Rob Arnott’s research indicated there were problems ahead in the commodities boom. Arnott, founder of Research Associates, Inc., the giant Newport Beach-based money manager, is a quantitative investor as well as a contrarian who goes against the herd. His entire career has been built on finding ways to counter human emotions, including his own. His research but not his gut instincts told him that prices in commodities, including oil, had gone too far, and the future held more downside than upside.

This was not the conventional wisdom: Oil prices had surged by 300% between 2003 and 2007, and their climb upward seemed to only be accelerating. In 2008, prices ...