Sometimes we just can't help ourselves from doing dumb things. And it's not really our fault.
In his recent book, Your Money & Your Brain, author Jason Zweig discusses why we're motivated by the prospect of reward, whether it comes in the form of money, food, drink, or other primal, feel-good desires. Our brains reflexively light up when we're presented with the possibility of big financial gains, regardless of the odds. (Zweig--who will be speaking at this year's Morningstar Investment Conference--humorously points out that the brain scans of someone high on cocaine and someone who's thinking about making money look identical.) And if you hit it big, even just once, you'll still keep trying to strike gold again. That explains why people buy lottery tickets and why jackpot winners keep buying more.
You may not play the lottery or gamble otherwise, but if you've taken a flier on a red-hot sector fund or bought a stock with iffy prospects, you probably were motivated by some of the same biological impulses. If you're like most people, though, letting your base instincts rule probably won't lead to successful results. Just ask the folks who poured billions of dollars into technology funds in 2000, lured by the gaudy gains they posted in 1999, only to lose most of their money in the ensuing bear market. When you take a roll of the dice, don't be surprised when your number doesn't come up.