Thanks to the 2008 crash, your IRA and/or 401(k) is hardly any bigger than it was a decade ago. That is truly discouraging ... but, hey, look at the bright side! Consider that human beings have been around for maybe 200,000 years, but we were pretty much full-time hunter-gatherers for the first 190,000. As sickly as it may be, your 401(k) beats any of those guys' retirements. More to the point, if you break a leg, you aren't likely to die. If you have a nice cooking pot or warm clothes, the next strong guy who happens by is less likely to take them away, and you don't have to spend most of your time scrounging up your next meal.

Heck, back then those guys couldn't catch a break. They invested a lot of effort over a long period of time in getting really good at mastodon hunting which, for a comparatively brief while, meant more common times-of-plenty -- and then the dang mastodons went extinct.

So that's the good news: things aren't as bad as you think they are
But it gets better. There's a new interdisciplinary field of study combining psychology, economics, genetics, and neuroscience that focuses on the state of your 401(k) and how it could be improved.

OK, not your portfolio per se, but more generally on how people make value choices. And there could be some help for us there. Because the latest research indicates that our choices are influenced by built-in value decision mechanisms that have been shaped by those 200,000 years of human experience -- during most of which time, the ability to make superior value choices concerning immediate risks and benefits was much more useful than long-range analysis. This could be helpful because if you decide -- now that we have civilization -- that deliberately accepting some short-term risk for potential long-term gains makes more sense. And if you know your brain is biased against doing that, you can compensate.

Traditional behavioral analysis as applied to value choices (behavioral economics) has noted that humans make a disturbingly high number of "irrational" decisions -- that is, choices that are obviously suboptimal given the available information. The pioneering work of the Nobel-prize-winning Daniel Kahneman and Amos Tversky -- most notably in their 1979 paper, "Prospect Theory" -- laid the basis for this line of analysis. Their conclusion, essentially, is that when you make bad value choices you are failing to behave rationally.

In their 1983 paper, "Extension Versus Intuitive Reasoning: The Conjunction Fallacy in Probability Judgment," Kahneman and Tversky cited a study in which college students had been presented with the following:

Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.

Which is more probable?

  1. Linda is a bank teller.
  2. Linda is a bank teller and is active in the feminist movement.

Overall, 85% of respondents indicated that option 2 was more probable than option 1. This is, of course, illogical. While it is probably more likely Linda is a feminist than a bank teller -- and if she is a bank teller, more likely she is also a feminist than not one -- she is obviously (slightly) more likely to be a bank teller and either a feminist or not one (option 1) than she is to be both a bank teller and a feminist (option 2).

So according to traditional behavioral economists, if you picked option 2 above, you are bad at making rational value choices; no wonder your 401(k) is down!

But the new generation of behavioral economists demur! According to them -- let's call them "BENGs," as in "behavioral economist/next generation" -- it is a mistake to measure the rationality of any behavior irrespective of the context in which that behavior occurs. Given the descriptive information in the example cited by Kahneman and Tversky, it is evident that Linda is highly likely to be a feminist and not particularly likely to be a bank teller. Therefore, given what we know about her, whether she is a bank teller is orthogonal data and not important; but we can say with assurance that it is probable Linda is active in the feminist movement. Therefore, in common sense terms, option 2 is a perfectly rational choice.

It gets even more interesting when the BENGs focus on value choices. CalTech Professor of Economics Antonio Rangel, director of the Neuroeconomics Laboratory and a leading BENG, co-authored the 2010 paper, "MAOA-L carriers are better at making optimal financial decisions under risk," which suggests that there may be a genetic component to the ability to make value choices under pressure. According to study data, genetic factors appear to influence two mechanisms your brain utilizes to process risk-laded options: both the way value is assigned to different options, and the way in which selections among these options are made. The bottom line: Carriers of genes encoded for monoamine oxidase-A (MAOA-L) are able to make better financial decisions under risk and are more likely to select options entailing financial risk.

Rangel's Neuroeconomics Laboratory is also conducting research using fMRI, TMI, and EEG technology to map out what areas of the brain are employed in making value choices.

This research is cutting-edge stuff and there is still a lot to learn. But it seems highly likely that the mechanisms our brains utilize to process value choices have evolved in the light of 200,000 years of human experience -- and for the first 95% of those years, there was virtually no agriculture, a nomadic lifestyle, no laws or police or private property, and relatively short life spans, during which most of the time folks were foraging for food.

In those circumstances, the relative benefits of what we might term long-range investing behavior -- e.g., perfecting an improved method of making knife blades or searching for better hunting grounds -- probably seemed pretty paltry compared with the potential risk consequences of not spending enough time storing food for the winter or sustaining a serious injury while far from your clan's campsite. And just as short-term risk seemed to outweigh long-term benefits, short-term benefits were much easier to grasp than long-term risks.

So here we hapless humans are, fecklessly speculating on overpriced real estate, revenue-challenged dot-coms, and tulip bulbs in hopes of a quick killing while undervaluing genuine long-term investments because our brains are not wired to expect to live that long. And even if we do, expending all that effort evaluating and effecting long-term decisions is futile because as soon as we figure out how to hunt them successfully, we expect the mastodons will go extinct. Traditional behavioral economists evolved, but they were not much help, spending most of their time devising measurements to rate more precisely how "irrational" our bad choices were.

But the BENGs have now arrived, and according to them, our choices are perfectly sensible when considered in the context of the totality of human experience and the way our brains have evolved to cope with it. While this doesn't magically transform bad choices into optimal decisions, it is encouraging because if we can perfect an understanding of how our brains process value choices, being as clever and adaptable as we are, it is more likely we can effectively compensate for the fact that life is no longer nasty, short, and brutish.

It's not all bad news
It's too late to improve the mastodon situation, but there is hope yet for your 401(k) performance ... not to mention other value choice-pertinent situations such as living together and coping with limited resources.

To overcome 190,000 years of experience whereby long-term analysis was of little use, we have to develop the discipline to consciously consider long-term risks and benefits in making our value choices. Exactly how to do that effectively varies from person to person, but a good way to start is to review your long-term financial goals. (Here is one of my favorite little toys to get you in the proper frame of mind.) Once you are satisfied those are both adequate for your needs and realistic, then you need to consider significant financial decisions in the light of their potential effect on achieving your goals.

Then all we have to do is get politicians to think past the next election cycle and CEOs to think past the next quarterly report and everything will be hunky-dory!

If you're interested in learning more about what the BENGs are doing, check out these links:

Brad Hessel is a guest contributor to We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.