Zbigniew Piekarski warns against following the collective sensibilities of the herd when investing.

"Scientists say that you only use one-tenth of your brain. You can develop your mind and wake up your true potential."

If you believe the above statements and wish to improve your intellect, then I have some bad news for you. That 10% figure was invented in the 1930s by ad men who sold self-help pamphlets in the United States.

Modern scans show that the entire brain is active, so if you are "intellectually challenged" today, resign yourself to the fact that you will remain "thick" forever.

In the 19th century, scientists determined that certain parts of the brain did not seem to have any obvious function (such as moving a limb) when stimulated by an electrode. They called these regions "the silent cortex" and later learned that they were responsible for language and abstract thought.

Current knowledge reveals that our brains consist of three interconnected parts: the primal, the emotional and the rational.

We share the primitive brain stem, called the basal ganglia, with reptiles. It controls the impulses that are basic to our survival. Surrounding this, we have the limbic system, which we share with all mammals. This controls our emotions. Enfolding both, we have the neocortex, the seat of reason, which we share with other human beings regardless of race, color or creed.

In the human fetus, each portion of the brain develops in this order: first, the basal ganglia; then the limbic system; and then the neocortex. The neural development in children follows the same sequence.

The basal ganglia control basic instincts or innate drives, such as the desire for security, reaction to fear, need for territory and the impulse for herding.

Your limbic system produces powerful emotions to spur the objectives originating from the basal ganglia. Neither the ganglia nor the limbic system learn from new experience. The behavior elicited from them is impulsive and not reasoned. Emotion and corresponding reaction occur both independently of, and prior to, thought. We do not react to considered ideas but to perceptions relayed by the senses.

The limbic system is the most powerful. The limbic system is where we live, and the neocortex is virtually a slave to it. Imagine your reaction if someone suddenly dumped a couple of writhing snakes or a few large spiders in your lap. Would you take the time to contemplate whether they were harmless or not before you reacted?

As a primitive tool of survival, emotional impulses from the limbic system impel a desire among individuals to "belong," to be part of a group. Whether the group is defined in terms of territory, profession or belief is irrelevant.

Dependence substitutes for reason when knowledge or logic is lacking. As uncertainty increases, conformity does too, together with the urge to escape from individual responsibility.

In areas such as investing, where so few are knowledgeable, or in the realm of fashion, where logic is inappropriate, the tendency towards dependence is pervasive. Trends in such activities are steered not by the rational decisions of the vital few, but by the emotions of the trivial many - by the collective sensibilities of the herd.

Most people get their ideas about financial markets from other people, mainly from the Jabberwockies in the media and the Bandersnatches who promote them, without checking anything. This dependence is universal, and financial markets tend to induce a form of slavish hypnosis, particularly in the "intelligent" private investor, who repeatedly invests just before market peaks.

Numerous independent surveys, for as long as I can remember, show that the majority of private investors invest in the "best performing" sector of the past and cling to the investment in hope as the market or sector crashes. Bear market rallies keep this hope alive.

It is not only private investors who fall into line. The majority of professionals herd just like the naive majority.

Analysts and economists, just like most other individuals, forecast on the basis of the current sentiment of the herd, on the present social mood, not on the probable course of future events. As the difficulty in forecasting increases, their herding behavior intensifies, which in turn multiplies the aggregate bias of their estimates and results in their predictions being less accurate than before. This is a self-reinforcing system with failure as the motivator of future failure.

When the herd "thinks," the result is not reason but an emotional, interpersonal, "Other." This creation is mapped by the most dispassionate measure of human emotions - the stock market index. Stock market indexes are important because they record man's valuation of his own productive endeavor, a perception that is influenced by the prevailing social mood.

The Elliott Wave Theory identifies turning points in this social mood that result in future trends before they happen. It enables the practitioner to be in front of the herd rather than a part of it and to take advantage of the probable outcome.

If you wish to survive and prosper from the continuing global economic instability, then log onto www.elliottwave.com and learn how to avoid using the 66% of your brain that compels you to be part of the herd.

On the WSE: Not even pension funds can prop up a losing proposition.

Zbigniew Piekarski is a portfolio manager based in Warsaw. He can be reached at zbigp@bipnet.pl.