In their classic book Why Smart People Make Big Money Mistakes, Thomas Gilovich and Gary Belsky looked at the psychology of financial decisions.

In his new book Your Money & You Brain, Jason Zweig goes a step further, looking at both behavioral economics and the neurological side of it. The result is a fascinating look at the tricks that our minds play on us, and how they keep us from investing as well as we could.

As Zweig writes, a mile long time-line of human history would not show the first financial markets until about four inches from the end. Evolution has given us brains that are very well-equipped for fleeing from gazelles but, alas, prone to a lot of stupid mistakes when it comes to investing. And this applies to "sophisticated professionals" as well as rank amateurs.

Extensively researched -- Mr. Zweig took part in numerous experiments -- this book will give you new and profound insight into how you think about money. Every serious investor should read this book, although few will because it offers no get-rich-quick scheme or concrete tips on how to beat the market.

But it's very readable and funny in parts, and definitely one of the more entertaining investment books to come out in recent memory.

Steven Syre's "Boston Capital" column in the Boston Globe has selected a winner for this year's manager of the year distinction: Maura Shaugnessy with the MFS Utilities fund. The fund has earned 31% so far for 2006, and has averaged 28% per year over that past 3 years.

Shaughnessy attributes her success to flexibility: "If they're in Argentina, Massachusetts, or wherever, it doesn't really matter to me. It's about finding the best relative idea." Shaughnessy says that good new investment ideas are harder to find right now.

Shaughnessy's ideas about the importance of flexibility in investing are good lessons for any investor. As Jim Cramer has said you have to be "willing to vote for something...before you vote against it." Flexibility and a willingness to adjust to new information is key to success in financial markets. Lack of flexibility in thinking is the enemy of sound investment decisions. Confirmation bias, the natural tendency to interpret new evidence in terms of previously held convictions, can lead to disaster for stock pickers. It's a cognitive bias that may have prevented many investors from selling stocks like Enron at the first sign of trouble.

For more about how cognitive bias and bad reasoning can interfere with investment decisions, pick up a copy of Why Smart People Make Big Money Mistakes . It's a terrific introduction to the study of behavioral finance, and how our genetic imperfections effect our investment decisions.

Photo: Boston.com