Psychology of Investing

The Psychology of Money by Morgan Housel. Investing is the study of how people behave with money. And behavior is hard to teach, even to really smart people. You can’t sum up behavior with formulas to memorize or spreadsheet models to follow. Behavior is inborn, varies by person, is hard to measure, changes over time, and people are prone to deny its existence, especially when describing themselves.

Behavioral Finance: What Good Is It, Anyway? (jasonzweig.com). Here’s another speech from my archives, in which I suggested that many people who try to apply psychological findings to the financial markets do it backwards: instead of studying their own biases and failings, they focus on those of other people.

How you, the amateur investor, can beat the pros by Barry Ritholtz. People who are not professional investors — those Mom and Pop investors I refer to all the time — have enormous advantages of their own.

Ten Behavioural Advantages Amateur Investors Hold Over Professionals (behaviouralinvestment.com). If we think about some of the main challenges encountered by investors around issues such as time horizons, over-trading, overconfidence, misaligned incentives and benchmark obsession, these problems are often exacerbated when investing in a professional context. Amateur investors* therefore have a number of behavioural advantages.

The Thrill of Uncertainty by Morgan Housel. There’s a reason the stock market has 24-7 news coverage but coffee roasting, pedicures, and pretty flowers do not; One has variable rewards, the others have fixed rewards. Same reason the iPhone comes preloaded with a stock market app but not a book-a-massage app.

Making History By Doing Nothing by Morgan Housel. Most of history is made by those who mastered the art of doing nothing when nothing needed to be done. This is especially true for business leaders and investors.

The Personal Success Equation by Ben Carlson. Success in life should be very personal, yet it seems that our society is dead set on using other people’s definitions of success. That’s a game you can never win.

Solving Hard Problems With Simple Ideas by Morgan Housel.

If you’re going to act on a problem that is monstrously complex and uncertain, the stripped-down, rules-of-thumb response is not only good enough. It can be superior to tripping over yourself in pursuit of something that appears marginally more accurate.

We see it in investing, where dollar cost averaging with index funds beats most active strategies. Indexing is not dumbed down or giving up. It’s a rule-of-thumb approach that incorporates the complexities of diversification, weighting, power laws, bear-market predictions, and portfolio selection into a run-with-the-ball-in-your gaze strategy.

My Friend is Beating Me by Michael Batnick. There is nothing you can say to convince your friend that having 100% of his account in Facebook is a bad idea. Everyone learns at their own speed and through their own experience. Some of this stuff just can’t be taught, so trying to change somebody’s mind is largely a waste of time.

Books