Discover how to remove behavioral bias from your investment decisions For many financial professionals and individual investors, behavioral bias is the largest single factor behind poor investment decisions. The same instincts that our brains employ to keep us alive all too often work against us in the world of finance and investments. Investing Psychology + Website explores several different types of behavioral bias, which pulls back the curtain on any illusions you have about yourself and your investing abilities. This practical investment guide explains that conventional financial wisdom is often nothing more than myth, and provides a detailed roadmap for overcoming behavioral bias. Offers an overview of how our brain perceives realities of the financial world at large and how human nature impacts even our most basic financial decisions Explores several different types of behavioral bias, which pulls back the curtain on any illusions you have about yourself and your investing abilities Provides real-world advice, including: Don't compete with institutions, always track your results, and don't trade when you're emotional, tired, or hungry Investing Psychology is a unique book that shows readers how to dig deeper and persistently question everything in the financial world around them, including the incorrect investment decisions that human nature all too often compels us to make.
Preface xiii CHAPTER 1 Sensory Finance 1 Beating the Bias Blind Spot 1 Illusory Pattern Recognition 4 Superstitious Pigeons--and Investors 6 The Super Bowl Effect: If It Looks Too Good to Be True, It Is 9 Your Financial Horoscope: Forecasting and the Barnum Effect 10 Uncertainty: The Unknown Unknowns 12 Illusion of Control 13 Stocks Aren't Snakes 15 Herding 16 Availability 19 Assuming the Serial Position 21 Hot Hands 23 Financial Memory Syndrome 25 Attention! 27 The Problem with Linda 29 Representation 31 The Seven Key Takeaways 33 Notes 34 CHAPTER 2 Self-Image and Self-Worth 37 The Introspection Illusion 37 Blind Spot Bias, Revisited 39 Rose-Colored Investing 40 Past and Present Failures 41 Depressed but Wealthy 43 Disposed to Lose Money 44 Loss Aversion 45 Anchored 46 Two Strangers 48 Hindsight's Not So Wonderful 50 Deferral to Authority 51 Emotion 52 Black Swans 54 Dirty Money, Mental Accounting 55 A Faint Whisper of Emotion 56 Psychologically Numbed 57 Martha Stewart's Biases 58 Retrospective 60 Annual Returns 60 Nudged 61 Mindfulness 62 The Seven Key Takeaways 65 Notes 66 CHAPTER 3 Situational Finance 69 Disposition vs. Situation 69 Beauty Is in the Eye of the Investor 70 Angels or Demons? 71 Merely Familiar 73 Lemming Time 74 Story Time 76 Wise Crowds? 78 Adaptive Markets 79 George Soros's Refl exivity 81 Grow Old Quickly 82 Speaking Ill 83 The Power of Persuasion 85 SAD Investors 86 Sell in May ... 87 The Mystery of the Vanishing Anomalies 89 Tweet and Invest 90 Fire! 92 The Rise of the Machines 93 The Seven Key Takeaways 94 Notes 95 CHAPTER 4 Social Finance 99 Conform--or Die 99 Groupthink 100 Motivated Reasoning 101 Polarized 103 A Personal Mission Statement: Social Identity and Beyond 104 Gaming the System 106 You've Been Framed 108 Behavioral Portfolios 110 Dividend Dilemmas 112 The Language of Lucre 113 Embedded Investing 114 Financial Theory of Mind 116 Trust Me, Reciprocally ... 118 Akerlof's Lemons 119 The Peacock's Tail 122 Facebooked 123 Be Kind to an Old Person 124 The Seven Key Takeaways 126 Notes 127 CHAPTER 5 Professional Bias 131 Mutual Fund Madness 131 Is Passive Persuasive? 133 Losing to the Dark Side 134 Forecasting--The Butterfl y Effect 136 Forecaster Bias 138 Feminine Finance 140 Trading on a High 141 Marriage and Money 142 Muddled Modelers 144 CEO Pay--Because They're Worth It? 145 Corporate Madness 146 Buyback Brouhaha 148 Oh No, IPO 149 Your 6 Percent Self-Infl icted Trading Tax 150 Expert Opinion? 151 Avoid the Sharpshooters 153 The Seven Key Takeaways 154 Notes 154 CHAPTER 6 Debiasing 159 Numbers, Numbers, Numbers 159 Losing Momentum 160 Mean Reversion 162 Short Shift 163 Diworsification 165 Disconfirm, Disconfi rm 167 Reverse Polarization 168 Expected Value 170 Investing in the Rearview Mirror 172 Living with Uncertainty 174 Sunk by the Titanic Effect 175 Changing Your Mind 177 Love Your Kids, Not Your Stocks 178 Cognitive Repairs 180 Satisficing 181 The Seven Key Takeaways 182 Notes 183 CHAPTER 7 Good Enough Investing 187 #1: The Rule of Seven 187 #2: Homo Sapiens, Tool Maker 188 #3: Meta-Methods 189 #4: Be Skeptical 189 #5: Don't Trust Yourself 190 #6: Self-Control Is Key 191 #7: Get Feedback 191 A Behavioral Investing Framework 192 Step #1: Making It Personal 193 Step #2: Build an Investing Checklist 195 Step #3: Write It Down 196 Step #4: Diarize Reviews 197 Step #5: Get Feedback 198 Step #6: Do Autopsies 199 Step #7: Update Adaptively 200 The Worst Offenders 201 Tools 203 The Mechanics of Investing 204 The Seven Key Takeaways 206 Notes 207 CHAPTER 8 A Few Myths More 209 Myth 1: Money Makes Us Happy 210 Myth 2: Everyone Can Be a Good Investor 211 Myth 3: Numbers Don't Matter 212 Myth 4: Financial Education Can Make You a Good Investor 213 Myth 5: I Won't Panic 214 Myth 6: Debt Doesn't Matter 215 Myth 7: I Can Get 7 Percent a Year from Markets 216 Myth 8: Infl ation Doesn't Matter 217 Myth 9: Everyone Has Some Good Investing Ideas, Sometime 217 Myth 10: I Don't Need to Track My Results 218 The Seven Key Takeaways 219 Notes 219 CHAPTER 9 The Final Roundup 221 Notes 224 About the Companion Website 227 About the Author 229 Index 231
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