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The Behavioral Investor
From the New York Times bestselling author of the book named the best investment book of 2017 comes The Behavioral Investor , an applied look at how psychology ought to inform the art and science of investment management.
In The Behavioral Investor , psychologist and asset manager Dr. Daniel Crosby examines the sociological, neurological and psychological factors that influence our investment decisions and sets forth practical solutions for improving both returns and behavior. Readers will be treated to the most comprehensive examination of investor behavior to date and will leave with concrete solutions for refining decision-making processes, increasing self-awareness and constraining the fatal flaws to which most investors are prone.
The Behavioral Investor takes a sweeping tour of human nature before arriving at the specifics of portfolio construction, rooted in the belief that it is only as we come to a deep understanding of “why” that we are left with any clue as to “how” we ought to invest. The book is comprised of three parts, which are as
- Part One – An explication of the sociological, neurological and physiological impediments to sound investment decision-making. Readers will leave with an improved understanding of how externalities impact choices in nearly imperceptible ways and begin to understand the impact of these pressures on investment selection.
- Part Two – Coverage of the four primary psychological tendencies that impact investment behavior. Although human behavior is undoubtedly complex, in an investment context our choices are largely driven by one of the four factors discussed herein. Readers will emerge with an improved understanding of their own behavior, increased humility and a lens through which to vet decisions of all types.
- Part Three – Illuminates the “so what” of Parts One and Two and provides a framework for managing wealth in a manner consistent with the realities of our contextual and behavioral shortcomings. Readers will leave with a deeper understanding of the psychological underpinnings of popular investment approaches such as value and momentum and appreciate why all types of successful investing have psychology at their core.
Wealth, truly considered, has at least as much to do with psychological as financial wellbeing. The Behavioral Investor aims to enrich readers in the most holistic sense of the word, leaving them with tools for compounding both wealth and knowledge.
In The Behavioral Investor , psychologist and asset manager Dr. Daniel Crosby examines the sociological, neurological and psychological factors that influence our investment decisions and sets forth practical solutions for improving both returns and behavior. Readers will be treated to the most comprehensive examination of investor behavior to date and will leave with concrete solutions for refining decision-making processes, increasing self-awareness and constraining the fatal flaws to which most investors are prone.
The Behavioral Investor takes a sweeping tour of human nature before arriving at the specifics of portfolio construction, rooted in the belief that it is only as we come to a deep understanding of “why” that we are left with any clue as to “how” we ought to invest. The book is comprised of three parts, which are as
- Part One – An explication of the sociological, neurological and physiological impediments to sound investment decision-making. Readers will leave with an improved understanding of how externalities impact choices in nearly imperceptible ways and begin to understand the impact of these pressures on investment selection.
- Part Two – Coverage of the four primary psychological tendencies that impact investment behavior. Although human behavior is undoubtedly complex, in an investment context our choices are largely driven by one of the four factors discussed herein. Readers will emerge with an improved understanding of their own behavior, increased humility and a lens through which to vet decisions of all types.
- Part Three – Illuminates the “so what” of Parts One and Two and provides a framework for managing wealth in a manner consistent with the realities of our contextual and behavioral shortcomings. Readers will leave with a deeper understanding of the psychological underpinnings of popular investment approaches such as value and momentum and appreciate why all types of successful investing have psychology at their core.
Wealth, truly considered, has at least as much to do with psychological as financial wellbeing. The Behavioral Investor aims to enrich readers in the most holistic sense of the word, leaving them with tools for compounding both wealth and knowledge.
280 pages, Hardcover
Published October 16, 2018
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2008 people want to read
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December 31, 2018
This is a book with great ambitions. In the first sentence Daniel Crosby says that the aim for The Behavioral Investor is to be the most comprehensive guide to the psychology of asset management ever written. Dr. Crosby, a psychologist by training, is the Chief Behavioral Officer at Brinker Capital and a leading blogger and podcaster on the subject of behavioral finance – this is his forth book on different topics in this discipline.
Some fifteen years ago I fell in love with behavioral finance as it so obviously described aspects of investing and financial markets that traditional finance and economics didn’t. Over time the interest has however started to wane since the academics in the area devoted their energy towards adding yet another insult towards the previously dominant efficient market hypothesis creating an ever growing list of interesting and quirky behavioral biases but no real practical applications for investors. According to the author “[…] all this ends today, as we will take [these biases] and speak to the particulars of what they mean in the context of making money.” I would argue that the aim of being the most comprehensive guide is reasonably well met for a book of “only” about 250 pages. With regards to fulfilling my wish of an applied behavioral finance investment method The Behavioral Investor unfortunately only gives fairly broad guidelines.
The author is well read in both academic literature and more practical investing books. Despite the author’s learnedness the language is very readable and clear as Crosby’s writing comes with a humorous and personal touch. This is a finance book without most of the technical finance jargon – although at times it instead contains some psychology terminology. Nevertheless, it’s undoubtedly a very readable book.
The book is structured in four parts with the first outlining the sociological, neurological and physiological foundations to the biases investors exhibit. Then the author summarizes the many documented psychotically based follies of investors into four primary tendencies regarding ego, conservatism, attention and emotion. Part three tries to list practical measures to overcome the previously described problems and finally the book ends with the author’s “third way” of investing (as opposed to passive investing and active investing) called rules-based behavioral investing (RBI). Hence, the first half gives a background and the second half tries to apply the learnings in real life. Throughout The Behavioral Investor Crosby discusses most of all the psychological experiments and subsequent findings that a frequent reader of behavioral finance literature will ever have heard of but without it ever getting tedious.
RBI is as the name suggests rules based with a high base allocation to equities implemented through a combination of value and momentum quant based equity portfolios and with an overlay of valuation (Tobin’s Q, CAPE etc.) and momentum (200-day or 10 month moving averages etc.) based rules for when to very occasionally lower the allocation of equities. The focus is to find a rational and evidence based methodology where the room for behavioral biases is kept to a minimum. Although this is only one of several good ways to manage money I personally think this is a great setup, but regrettably Cosby only gives a very fleeting description of what his RBI actually looks like. Further, the Achilles heal of the rational quantitative strategy is that it needs permanent money or else it will suffer redemptions at the exact wrong moment from its less than rational human investors.
If this is one of the first books you read on behavioral finance you are to be congratulated as it will surely be mind-blowing. If you have followed the area during its development, The Behavioral Investor is a very good inventory of current knowledge but it adds relatively little new. And perhaps it’s a good thing that a best selling book cannot deliver a detailed best practice behavioral finance investing method as it is then up to me to develop it myself.
Mats Larsson, December 31, 2018
Some fifteen years ago I fell in love with behavioral finance as it so obviously described aspects of investing and financial markets that traditional finance and economics didn’t. Over time the interest has however started to wane since the academics in the area devoted their energy towards adding yet another insult towards the previously dominant efficient market hypothesis creating an ever growing list of interesting and quirky behavioral biases but no real practical applications for investors. According to the author “[…] all this ends today, as we will take [these biases] and speak to the particulars of what they mean in the context of making money.” I would argue that the aim of being the most comprehensive guide is reasonably well met for a book of “only” about 250 pages. With regards to fulfilling my wish of an applied behavioral finance investment method The Behavioral Investor unfortunately only gives fairly broad guidelines.
The author is well read in both academic literature and more practical investing books. Despite the author’s learnedness the language is very readable and clear as Crosby’s writing comes with a humorous and personal touch. This is a finance book without most of the technical finance jargon – although at times it instead contains some psychology terminology. Nevertheless, it’s undoubtedly a very readable book.
The book is structured in four parts with the first outlining the sociological, neurological and physiological foundations to the biases investors exhibit. Then the author summarizes the many documented psychotically based follies of investors into four primary tendencies regarding ego, conservatism, attention and emotion. Part three tries to list practical measures to overcome the previously described problems and finally the book ends with the author’s “third way” of investing (as opposed to passive investing and active investing) called rules-based behavioral investing (RBI). Hence, the first half gives a background and the second half tries to apply the learnings in real life. Throughout The Behavioral Investor Crosby discusses most of all the psychological experiments and subsequent findings that a frequent reader of behavioral finance literature will ever have heard of but without it ever getting tedious.
RBI is as the name suggests rules based with a high base allocation to equities implemented through a combination of value and momentum quant based equity portfolios and with an overlay of valuation (Tobin’s Q, CAPE etc.) and momentum (200-day or 10 month moving averages etc.) based rules for when to very occasionally lower the allocation of equities. The focus is to find a rational and evidence based methodology where the room for behavioral biases is kept to a minimum. Although this is only one of several good ways to manage money I personally think this is a great setup, but regrettably Cosby only gives a very fleeting description of what his RBI actually looks like. Further, the Achilles heal of the rational quantitative strategy is that it needs permanent money or else it will suffer redemptions at the exact wrong moment from its less than rational human investors.
If this is one of the first books you read on behavioral finance you are to be congratulated as it will surely be mind-blowing. If you have followed the area during its development, The Behavioral Investor is a very good inventory of current knowledge but it adds relatively little new. And perhaps it’s a good thing that a best selling book cannot deliver a detailed best practice behavioral finance investing method as it is then up to me to develop it myself.
Mats Larsson, December 31, 2018
December 4, 2018
Mention the word behavioural pscyhology and a few well-known names come to mind. Kahneman, Baumeister, and Thaler are just a few examples. So it was a bit surprising when I came across a book with a relatively unknown author. But given that investing is a passion, and books are my weakness, I had to read this book.
Although I have devoured path breaking books such as Thinking, Fast and Slow, Misbehaving, etc. I had found these books to be quite dense. I had to conjure up all my willpower (no pun intended - Willpower Baumeister) to keep from falling asleep. But I found this book by Daniel Crosby to be a much more accessible read, and because it directly dealt with how behavioural psychology links with the stock market, it was much more relevant as well.
The book is divided into four parts. The first part of the book talks about how non-rational cues affect the way an average retail investor chooses to invest in the stock market. Various affecting factors such as sociology, physiology are discussed. Many of these factors prevent an investor from buying into the right stocks, as well as buying them at the right time. According to the author, All exceptional investing is, at its core, behavioural investing.
As with all books on behavioural psychology, there is a justification to explain the way we are by comparing us with the way our ancestors on the savannah have dealt with dangers. And here comes a small but passionate rant. No matter how many books on anthropology, evolution or behavioural psychology I read, I cannot bring to myself the fact that justifying all our present day behaviour by saying that this is what our ancestors on the jungle plains used to do, is correct. I am no expert in the subject and I may be very well completely wrong. But my brain refuses to believe that this is so. Maybe one of my ancestors was equally cynical about why he felt the hair on the back of his neck rise up whenever there was a predator lurking around. End rant. And so I have to be patient while reading lines such as...
Our brains have remained relatively stagnant over the last 150,000 years, but the complexity of the world in which they operate has exponentiated (sic). It would be a gross understatement to say that our mental hardware has not caught up to the times. We are simultaneously the most evolved species on the planet and wholly unprepared for the demands of modern life.
But the way that the author explains the various fallacies that the human brain is capable of is quite enlightening, and quite true from my own short experience in the stock market. As a side note, the author quotes many famous experiments that were the pioneered the way for behavioural ecnomics/pschyhology as a discipline. But in case you've read the books by any of the authors I mentioned earlier, you would be familiar with these experiments. The Milgram, Stroop test, Stanford prison experiments, are just a few well known and oft-repeated studies in these areas.
In the second part, the author groups all the various biases and fallacies that one normally encounters into four groups. According to him, each of these biases can be classified into one of these categories - Ego, Conservatism, Attention, and Emotion. Quite a convenient classification.
In the next part of the book, the author lays down how one can fight each of these biases in order to make better decisions, especially as far as investment in the stock market is concerned. This is something quite good and useful because as the author mentions at the beginning of this part, that is largely what behavioral finance has given the investing public: a long list of biases with very few solutions. And by including the possible solutions to these biases, the author goes one step further in helping out the average Joe in how he can overcome these behavioural fallacies.
Many of the well-known best practices about investing have been presented from a behavioural perspective. For example, one of the ways in which the ill-effects of ego can be overcome is to diversify. Diversification has become such a broadly accepted good in asset management that it seems many have forgotten the underlying reasons for doing it. Considered from a behavioral lens, diversification is humility made flesh, the embodiment of managing ego risk. Diversification is a concrete nod to the luck and uncertainty inherent in money management and an admission that the future is unknowable.
In my own personal experience, emotion can play a very detrimental role in proper investing. Anger, fear and greed are just some examples under the influence of which thousands of people have lost their savings in the stock market. Hence it becomes imperative to redirect this powerful force in the correct manner. This approach of working with a powerful force and not against a powerful force is instructive to investors seeking to manage emotion en route to making wise investment decisions. It can be tempting to want to stop emotion in its tracks, but, oftentimes, the more adaptive approach is to repurpose it for more favorable outcomes.
The fourth part of the book talks about building a Behavioural Portfolio (whatever that means) as an alternate way to investing. For some reason, the author chooses to discuss the pros and cons of value investing and momentum investing in this part as well. In the end what is prescribed is a combination of both. This was quite surprising and unexpected that the author would simply prescribe such a incompatible investment strategy.
Is this book useful to the beginner investor? Definitely. This may not teach you about which stocks to select or how to read price charts but it will definitely help you understand how to keep your mind clear whenever you're starting to use whichever investing methodology you follow. And it will help you keep a clear and stable mind as you ride the ups and downs of the stock market, watching the value of your portfolio fluctuate in ever-greater volatile times.
One thing I particularly liked about the book is the way all the references are listed at the end of each chapter. This provides a useful list of further reading. And the best ideas of the chapter presented at the end provide a ready made summary for when you want to revisit the ideas given in the book.
Yes. many of the ideas given in the book are already discussed by the famous scientists/authors mentioned in the opening paragraph. But the book does a decent job to link them to a specific activity - stock market investing and provide a basic framework to keep in mind. The book is maybe a little too fluffed up and the editor could have done with a much short fourth part. But all in all, you can simply skip or skim these parts while keeping the gist of the book well intact.
In closing, I would like to share the importance of keeping a behavioural perspective in the stock market, no matter how intelligent (you think) you are. After all, the stock market is something that even the best of us can get up in.
Isaac Newton, a scientist without equal, lost his fortune in the South Sea Bubble through a fundamental misunderstanding of the nature of markets and human behavior. Smarts, it would seem, are no guarantee of being a rational actor.
Even once we are aware of our biases, we must recognize that knowledge does not equal behavior. -Nassim Taleb
===
Read more such reviews at our website - https://www.fewpagesmore.com
Although I have devoured path breaking books such as Thinking, Fast and Slow, Misbehaving, etc. I had found these books to be quite dense. I had to conjure up all my willpower (no pun intended - Willpower Baumeister) to keep from falling asleep. But I found this book by Daniel Crosby to be a much more accessible read, and because it directly dealt with how behavioural psychology links with the stock market, it was much more relevant as well.
The book is divided into four parts. The first part of the book talks about how non-rational cues affect the way an average retail investor chooses to invest in the stock market. Various affecting factors such as sociology, physiology are discussed. Many of these factors prevent an investor from buying into the right stocks, as well as buying them at the right time. According to the author, All exceptional investing is, at its core, behavioural investing.
As with all books on behavioural psychology, there is a justification to explain the way we are by comparing us with the way our ancestors on the savannah have dealt with dangers. And here comes a small but passionate rant. No matter how many books on anthropology, evolution or behavioural psychology I read, I cannot bring to myself the fact that justifying all our present day behaviour by saying that this is what our ancestors on the jungle plains used to do, is correct. I am no expert in the subject and I may be very well completely wrong. But my brain refuses to believe that this is so. Maybe one of my ancestors was equally cynical about why he felt the hair on the back of his neck rise up whenever there was a predator lurking around. End rant. And so I have to be patient while reading lines such as...
Our brains have remained relatively stagnant over the last 150,000 years, but the complexity of the world in which they operate has exponentiated (sic). It would be a gross understatement to say that our mental hardware has not caught up to the times. We are simultaneously the most evolved species on the planet and wholly unprepared for the demands of modern life.
But the way that the author explains the various fallacies that the human brain is capable of is quite enlightening, and quite true from my own short experience in the stock market. As a side note, the author quotes many famous experiments that were the pioneered the way for behavioural ecnomics/pschyhology as a discipline. But in case you've read the books by any of the authors I mentioned earlier, you would be familiar with these experiments. The Milgram, Stroop test, Stanford prison experiments, are just a few well known and oft-repeated studies in these areas.
In the second part, the author groups all the various biases and fallacies that one normally encounters into four groups. According to him, each of these biases can be classified into one of these categories - Ego, Conservatism, Attention, and Emotion. Quite a convenient classification.
In the next part of the book, the author lays down how one can fight each of these biases in order to make better decisions, especially as far as investment in the stock market is concerned. This is something quite good and useful because as the author mentions at the beginning of this part, that is largely what behavioral finance has given the investing public: a long list of biases with very few solutions. And by including the possible solutions to these biases, the author goes one step further in helping out the average Joe in how he can overcome these behavioural fallacies.
Many of the well-known best practices about investing have been presented from a behavioural perspective. For example, one of the ways in which the ill-effects of ego can be overcome is to diversify. Diversification has become such a broadly accepted good in asset management that it seems many have forgotten the underlying reasons for doing it. Considered from a behavioral lens, diversification is humility made flesh, the embodiment of managing ego risk. Diversification is a concrete nod to the luck and uncertainty inherent in money management and an admission that the future is unknowable.
In my own personal experience, emotion can play a very detrimental role in proper investing. Anger, fear and greed are just some examples under the influence of which thousands of people have lost their savings in the stock market. Hence it becomes imperative to redirect this powerful force in the correct manner. This approach of working with a powerful force and not against a powerful force is instructive to investors seeking to manage emotion en route to making wise investment decisions. It can be tempting to want to stop emotion in its tracks, but, oftentimes, the more adaptive approach is to repurpose it for more favorable outcomes.
The fourth part of the book talks about building a Behavioural Portfolio (whatever that means) as an alternate way to investing. For some reason, the author chooses to discuss the pros and cons of value investing and momentum investing in this part as well. In the end what is prescribed is a combination of both. This was quite surprising and unexpected that the author would simply prescribe such a incompatible investment strategy.
Is this book useful to the beginner investor? Definitely. This may not teach you about which stocks to select or how to read price charts but it will definitely help you understand how to keep your mind clear whenever you're starting to use whichever investing methodology you follow. And it will help you keep a clear and stable mind as you ride the ups and downs of the stock market, watching the value of your portfolio fluctuate in ever-greater volatile times.
One thing I particularly liked about the book is the way all the references are listed at the end of each chapter. This provides a useful list of further reading. And the best ideas of the chapter presented at the end provide a ready made summary for when you want to revisit the ideas given in the book.
Yes. many of the ideas given in the book are already discussed by the famous scientists/authors mentioned in the opening paragraph. But the book does a decent job to link them to a specific activity - stock market investing and provide a basic framework to keep in mind. The book is maybe a little too fluffed up and the editor could have done with a much short fourth part. But all in all, you can simply skip or skim these parts while keeping the gist of the book well intact.
In closing, I would like to share the importance of keeping a behavioural perspective in the stock market, no matter how intelligent (you think) you are. After all, the stock market is something that even the best of us can get up in.
Isaac Newton, a scientist without equal, lost his fortune in the South Sea Bubble through a fundamental misunderstanding of the nature of markets and human behavior. Smarts, it would seem, are no guarantee of being a rational actor.
Even once we are aware of our biases, we must recognize that knowledge does not equal behavior. -Nassim Taleb
===
Read more such reviews at our website - https://www.fewpagesmore.com
February 18, 2023
Key takeaways:
1. To be a successful investor, you must understand how your brain works.
As wonderful as our brains are, they weren’t designed to work in complex, stressful situations. So, if you want to make good financial choices, you need to realize that your brain won’t always lead you in the right direction.
The human brain was designed to keep our prehistoric ancestors safe. And even though you probably don’t go to work facing mortal danger from saber-toothed tigers in the bush, your brain still acts as if you are.
For example, whenever you’re assessing financial risk, the brain areas responsible for avoiding attack light up. Because your brain thinks you’re being threatened, it limits its focus to these areas to keep you alive. This makes it harder for you to think clearly and makes it more likely that you’ll overlook important information.
2. You’re not as rational as you think.
Our human need for comfort makes us prefer the familiar to the unfamiliar, even if the familiar is boring or bad. And because we have such a strong fear of loss, we hold on to what we already have, even at the expense of potential gain. This leads to all kinds of strange situations.
To succeed as an investor, you need to get used to being uncomfortable. Because the markets are constantly in flux, you’ll always face potential losses and regrets. But if you accept this, you can move forward with the best course of rational action instead of letting your emotions keep you stuck in the past or paralyzed by fear.
3. Overconfidence is a liability.
Our human tendency to be optimistic about our circumstances can fuel a positive mind-set, it can also go too far. That’s when overconfidence leads to destructive, ego-driven behavior.
Typically, when investors experience wins, they believe their success is due to their unique skills and might fail to see that the whole market is up as well. Their overconfidence could cause them to keep buying, even if stock prices are already high. This goes against the “buy low, sell high” rule-of-thumb that every investor should follow.
Overconfidence is often the reason investors fail to diversify their portfolios. When a company’s wealth is growing, investors can be fooled into believing they’ve found a sure winner. But even if a company’s stock is strong, it’s never a good idea to put all your eggs in one basket. Instead, your portfolios should have around 20 stocks each. This is crucial since the market involves lots of uncertainty and a fair amount of luck.
Diversification doesn’t just reduce the odds of catastrophic loss by spreading risk. It’s also useful when you’re trying to make market predictions. That’s because pooled judgments that take many opinions into consideration are far more successful at predicting outcomes than individual guesses.
4. To invest successfully, you must embrace the unfamiliar.
Because it takes a lot of energy for your brain to make difficult decisions, it looks for ways to cut corners by defaulting to what it already knows. Sadly, when it comes to investing, this tendency puts your portfolio at risk.
5. To invest successfully, you must broaden your views.
In a high-risk situation, it’s easy to become blind to simple solutions. That’s why many investors looking for an edge in the financial market end up with overly complicated strategies
And yet data analysis company Morningstar discovered that it isn’t a brilliant manager or a state-of-the-art process that predicts a fund’s performance. It’s investment fees. But if you’re consumed by a desire to succeed – and a fear of failure – you’re at risk of overlooking this simple evaluation tool.
To be a behavioral investor, you need to take the long view. The first step is to examine your portfolio for any stocks at risk of bankruptcy or fraud and get rid of them. Next, diversify to avoid catastrophe. Finally, place your trust in time. This will help you through any short-term failures.
6. To invest successfully, you must manage your emotions.
Every day, while you’re making financial decisions, the array of emotions you’re experiencing is at play. It’s important not to underestimate how powerful they are and how much they can influence the choices you make. Because, when it comes to investing, emotions are a serious liability.
So, even though you may think of yourself as a well-regulated individual, remember that emotions are so universal that most of the time, you don’t even notice them. But if you can pay attention to your emotions, you’ll know when to be guided by them and when to regulate them instead.
7. To be a successful investor, you must understand how influential your intuition is.
As an investor, you’ll be exposed to constant financial news, endless opinions, as well as the greed of others and yourself. Without a solid model in place to help you make good decisions, you’ll inevitably crack under the stress. But if you’ve committed to following a model, your investment decisions won’t be at the mercy of how you feel.
Luckily, you can turn to model-based approaches – like using extrapolation algorithms – to compensate for your brain’s shortcomings.
8. To be a successful investor, you must manage your fear of market bubbles.
Although few investors want to acknowledge it, bubbles are a natural part of capital markets. And yet bubbles also aren’t as common as you might think.
Unfortunately, knowing the truth about bubbles doesn’t remove the widespread fear of them. In fact, fear of bubbles is powerful enough to paralyze investors, which is why it’s so important that you learn how to manage your emotions. Otherwise, you’ll end up stuck when you’d be better off embracing opportunity instead.
To navigate through the inevitable rise and fall of the market, create a rules-based system that will guide you to becoming more conservative when things are unstable. That way, you can focus on being patient and acting infrequently, rather than behaving reactively based on how you feel on any given day.
A common system to achieve this is a momentum-based model with a 200-day moving average. Following this model means holding assets when their price is above their 200-day average and selling them when it drops below that number. A similar model is based on a ten-month moving average.
1. To be a successful investor, you must understand how your brain works.
As wonderful as our brains are, they weren’t designed to work in complex, stressful situations. So, if you want to make good financial choices, you need to realize that your brain won’t always lead you in the right direction.
The human brain was designed to keep our prehistoric ancestors safe. And even though you probably don’t go to work facing mortal danger from saber-toothed tigers in the bush, your brain still acts as if you are.
For example, whenever you’re assessing financial risk, the brain areas responsible for avoiding attack light up. Because your brain thinks you’re being threatened, it limits its focus to these areas to keep you alive. This makes it harder for you to think clearly and makes it more likely that you’ll overlook important information.
2. You’re not as rational as you think.
Our human need for comfort makes us prefer the familiar to the unfamiliar, even if the familiar is boring or bad. And because we have such a strong fear of loss, we hold on to what we already have, even at the expense of potential gain. This leads to all kinds of strange situations.
To succeed as an investor, you need to get used to being uncomfortable. Because the markets are constantly in flux, you’ll always face potential losses and regrets. But if you accept this, you can move forward with the best course of rational action instead of letting your emotions keep you stuck in the past or paralyzed by fear.
3. Overconfidence is a liability.
Our human tendency to be optimistic about our circumstances can fuel a positive mind-set, it can also go too far. That’s when overconfidence leads to destructive, ego-driven behavior.
Typically, when investors experience wins, they believe their success is due to their unique skills and might fail to see that the whole market is up as well. Their overconfidence could cause them to keep buying, even if stock prices are already high. This goes against the “buy low, sell high” rule-of-thumb that every investor should follow.
Overconfidence is often the reason investors fail to diversify their portfolios. When a company’s wealth is growing, investors can be fooled into believing they’ve found a sure winner. But even if a company’s stock is strong, it’s never a good idea to put all your eggs in one basket. Instead, your portfolios should have around 20 stocks each. This is crucial since the market involves lots of uncertainty and a fair amount of luck.
Diversification doesn’t just reduce the odds of catastrophic loss by spreading risk. It’s also useful when you’re trying to make market predictions. That’s because pooled judgments that take many opinions into consideration are far more successful at predicting outcomes than individual guesses.
4. To invest successfully, you must embrace the unfamiliar.
Because it takes a lot of energy for your brain to make difficult decisions, it looks for ways to cut corners by defaulting to what it already knows. Sadly, when it comes to investing, this tendency puts your portfolio at risk.
5. To invest successfully, you must broaden your views.
In a high-risk situation, it’s easy to become blind to simple solutions. That’s why many investors looking for an edge in the financial market end up with overly complicated strategies
And yet data analysis company Morningstar discovered that it isn’t a brilliant manager or a state-of-the-art process that predicts a fund’s performance. It’s investment fees. But if you’re consumed by a desire to succeed – and a fear of failure – you’re at risk of overlooking this simple evaluation tool.
To be a behavioral investor, you need to take the long view. The first step is to examine your portfolio for any stocks at risk of bankruptcy or fraud and get rid of them. Next, diversify to avoid catastrophe. Finally, place your trust in time. This will help you through any short-term failures.
6. To invest successfully, you must manage your emotions.
Every day, while you’re making financial decisions, the array of emotions you’re experiencing is at play. It’s important not to underestimate how powerful they are and how much they can influence the choices you make. Because, when it comes to investing, emotions are a serious liability.
So, even though you may think of yourself as a well-regulated individual, remember that emotions are so universal that most of the time, you don’t even notice them. But if you can pay attention to your emotions, you’ll know when to be guided by them and when to regulate them instead.
7. To be a successful investor, you must understand how influential your intuition is.
As an investor, you’ll be exposed to constant financial news, endless opinions, as well as the greed of others and yourself. Without a solid model in place to help you make good decisions, you’ll inevitably crack under the stress. But if you’ve committed to following a model, your investment decisions won’t be at the mercy of how you feel.
Luckily, you can turn to model-based approaches – like using extrapolation algorithms – to compensate for your brain’s shortcomings.
8. To be a successful investor, you must manage your fear of market bubbles.
Although few investors want to acknowledge it, bubbles are a natural part of capital markets. And yet bubbles also aren’t as common as you might think.
Unfortunately, knowing the truth about bubbles doesn’t remove the widespread fear of them. In fact, fear of bubbles is powerful enough to paralyze investors, which is why it’s so important that you learn how to manage your emotions. Otherwise, you’ll end up stuck when you’d be better off embracing opportunity instead.
To navigate through the inevitable rise and fall of the market, create a rules-based system that will guide you to becoming more conservative when things are unstable. That way, you can focus on being patient and acting infrequently, rather than behaving reactively based on how you feel on any given day.
A common system to achieve this is a momentum-based model with a 200-day moving average. Following this model means holding assets when their price is above their 200-day average and selling them when it drops below that number. A similar model is based on a ten-month moving average.
January 8, 2021
Published in 2018 by a gent with a PhD in psychology and a behavioral finance expert.
The book is focusing as promised on how to manage yourself emotionally and psychologically as an investor and businessman in a professional setting. Classic advice is offered: don't be overconfident, broaden your views, understand when you're being emotional and focus on being rational, manage your fear, don't be impatient etc. Through understanding ourselves we will also extend that knowledge and skill into understanding how others operate and use it to our advantage.
I think this book is way more about psychology and various biases than it is about investing, but it does try it self to relate to investing scenarios as much as possible.
It's up to you if it'll be your cup of tea. I advise trying an excerpt first before purchasing.
The book is focusing as promised on how to manage yourself emotionally and psychologically as an investor and businessman in a professional setting. Classic advice is offered: don't be overconfident, broaden your views, understand when you're being emotional and focus on being rational, manage your fear, don't be impatient etc. Through understanding ourselves we will also extend that knowledge and skill into understanding how others operate and use it to our advantage.
I think this book is way more about psychology and various biases than it is about investing, but it does try it self to relate to investing scenarios as much as possible.
It's up to you if it'll be your cup of tea. I advise trying an excerpt first before purchasing.
January 16, 2023
One of my favorite entry books into finance. A pillar of any good strategy. Where it lacks in actionable systems, it compensates for with solid evidence to back good investing principles, and why most of the others things you know will limit your potential to outperform.
What's left for you to do is to create your system with the few remaining important things.
What's left for you to do is to create your system with the few remaining important things.
January 8, 2021
Хөрөнгө оруулалтын чиглэлд сахилга бат, зөв стратеги ямар чухал гэдгийг дэлгэрэнгүй танилцуулжээ. Зохиогчийн хэлж байгаагаар хүн олон төрлийн Bias-д автдаг. Энэ нь санхүүгийн шийдвэр гаргахад нөлөөлдөг ба дэлхийн эдийн засгийн өнөөдрийн төлөв байдалд ч ихээхэн нөлөөлсөн гэж үздэг. Жишээ болгоход бүүдгэр бүрхэг өдрүүдэд арилжаа жирийн үеийнхээс бага хийгддэг ба үүнийг орчин үед автоматжуулалснаар шийдэж байгаа аж. Хөрөнгө оруулалтын гол суурь нь мөнгө гэж харагддагч үнэндээ хүн гэдгийг бодох нь амжилттай хөрөнгө оруулахад дэмтэй байдаг юм байна.
January 9, 2021
The Behavioral Investor (2018) explores the subconscious thought patterns and emotions that influence financial investors.
Author Daniel Crosby provides insight and guidance that will help you overcome your natural inclinations so that you can make better financial decisions.
Author Daniel Crosby provides insight and guidance that will help you overcome your natural inclinations so that you can make better financial decisions.
September 17, 2020
I don't care for investing, but this is a wonderful introduction to human behaviour ideas and research in the domain of investing.
March 15, 2023
Erudite, informative, actionable. I need to apply and practice what I learn here.
May 21, 2021
To be a successful investor, you must understand how your brain works.
Because your brain thinks you’re being threatened, it limits its focus to these areas to keep you alive. This makes it harder for you to think clearly and makes it more likely that you’ll overlook important information.
Our brains encourage us to be impatient. They do this by giving us a hit of dopamine – a hormone that makes us feel good – whenever we do something that results in immediate success. Because we like that feeling, we’ll do whatever it takes to get it. Sadly, that means you, as an investor, might sabotage your financial plans because you’re tempted by short-term wins instead of long-term gains.
You’re not as rational as you think.
When it comes to making decisions, we humans are experts at justifying our choices. This helps us maintain the belief that we’re capable of doing the right thing. We’re also good at demonizing the option we didn’t take. This reassures us that we made the right choice.
this ego-driven desire to preserve our self-identity makes it difficult to change course if a decision doesn’t pay off. It’s the reason people cling to failing investments instead of cutting their losses and moving on.
To succeed as an investor, you need to get used to being uncomfortable. Because the markets are constantly in flux, you’ll always face potential losses and regrets. But if you accept this, you can move forward with the best course of rational action instead of letting your emotions keep you stuck in the past or paralyzed by fear.
Overconfidence is a liability.
Typically, when investors experience wins, they believe their success is due to their unique skills and might fail to see that the whole market is up as well. Their overconfidence could cause them to keep buying, even if stock prices are already high. This goes against the “buy low, sell high” rule-of-thumb that every investor should follow.
Because it takes a lot of energy for your brain to make difficult decisions, it looks for ways to cut corners by defaulting to what it already knows. Sadly, when it comes to investing, this tendency puts your portfolio at risk.
To invest successfully, you must broaden your views.
To invest successfully, you must manage your emotions.
To be a successful investor, you must understand how influential your intuition is.
As an investor, you’ll be exposed to constant financial news, endless opinions, as well as the greed of others and yourself. Without a solid model in place to help you make good decisions, you’ll inevitably crack under the stress. But if you’ve committed to following a model, your investment decisions won’t be at the mercy of how you feel.
To be a successful investor, you must manage your fear of market bubbles.
because the experience of them is so traumatizing, they tend to dominate public memory.
To navigate through the inevitable rise and fall of the market, create a rules-based system that will guide you to becoming more conservative when things are unstable. That way, you can focus on being patient and acting infrequently, rather than behaving reactively based on how you feel on any given day.
A common system to achieve this is a momentum-based model with a 200-day moving average. Following this model means holding assets when their price is above their 200-day average and selling them when it drops below that number. A similar model is based on a ten-month moving average.
Manage stress using the R.A.I.N. model
In moments of acute stress, turn to Michele McDonald’s R.A.I.N model to return to a calm state of mind. Start by Recognizing what is physically happening to you, like an increase in your heart rate. Next, Accept what you’ve observed, even if you don’t like it. Then Investigate any narratives you’re telling yourself about the situation and identify other thoughts you’re having. Once you’ve done that, you’re ready for the final step – Non-identification – where you acknowledge that feeling stress doesn’t mean you have to be defined by it.
Because your brain thinks you’re being threatened, it limits its focus to these areas to keep you alive. This makes it harder for you to think clearly and makes it more likely that you’ll overlook important information.
Our brains encourage us to be impatient. They do this by giving us a hit of dopamine – a hormone that makes us feel good – whenever we do something that results in immediate success. Because we like that feeling, we’ll do whatever it takes to get it. Sadly, that means you, as an investor, might sabotage your financial plans because you’re tempted by short-term wins instead of long-term gains.
You’re not as rational as you think.
When it comes to making decisions, we humans are experts at justifying our choices. This helps us maintain the belief that we’re capable of doing the right thing. We’re also good at demonizing the option we didn’t take. This reassures us that we made the right choice.
this ego-driven desire to preserve our self-identity makes it difficult to change course if a decision doesn’t pay off. It’s the reason people cling to failing investments instead of cutting their losses and moving on.
To succeed as an investor, you need to get used to being uncomfortable. Because the markets are constantly in flux, you’ll always face potential losses and regrets. But if you accept this, you can move forward with the best course of rational action instead of letting your emotions keep you stuck in the past or paralyzed by fear.
Overconfidence is a liability.
Typically, when investors experience wins, they believe their success is due to their unique skills and might fail to see that the whole market is up as well. Their overconfidence could cause them to keep buying, even if stock prices are already high. This goes against the “buy low, sell high” rule-of-thumb that every investor should follow.
Because it takes a lot of energy for your brain to make difficult decisions, it looks for ways to cut corners by defaulting to what it already knows. Sadly, when it comes to investing, this tendency puts your portfolio at risk.
To invest successfully, you must broaden your views.
To invest successfully, you must manage your emotions.
To be a successful investor, you must understand how influential your intuition is.
As an investor, you’ll be exposed to constant financial news, endless opinions, as well as the greed of others and yourself. Without a solid model in place to help you make good decisions, you’ll inevitably crack under the stress. But if you’ve committed to following a model, your investment decisions won’t be at the mercy of how you feel.
To be a successful investor, you must manage your fear of market bubbles.
because the experience of them is so traumatizing, they tend to dominate public memory.
To navigate through the inevitable rise and fall of the market, create a rules-based system that will guide you to becoming more conservative when things are unstable. That way, you can focus on being patient and acting infrequently, rather than behaving reactively based on how you feel on any given day.
A common system to achieve this is a momentum-based model with a 200-day moving average. Following this model means holding assets when their price is above their 200-day average and selling them when it drops below that number. A similar model is based on a ten-month moving average.
Manage stress using the R.A.I.N. model
In moments of acute stress, turn to Michele McDonald’s R.A.I.N model to return to a calm state of mind. Start by Recognizing what is physically happening to you, like an increase in your heart rate. Next, Accept what you’ve observed, even if you don’t like it. Then Investigate any narratives you’re telling yourself about the situation and identify other thoughts you’re having. Once you’ve done that, you’re ready for the final step – Non-identification – where you acknowledge that feeling stress doesn’t mean you have to be defined by it.
May 12, 2021
A pop-psychology book but with a specific aim to markets. It gives no definitive solutions as it takes great care to prove all definitive opinions wrong but for the self-conscious it can frame into words what others may have felt intuitively. The thing about markets is that everyone has an opinion and a guru with numbers to back them up. Unless you have it in you to fine tune yourself and shut the infernal noise of the markets, this book is worthless.
Full of great quotes from wise men, it can put you on the path towards your proper answer. For me the answer was enter on value, exit on momentul, now to build on it is another matter.
Full of great quotes from wise men, it can put you on the path towards your proper answer. For me the answer was enter on value, exit on momentul, now to build on it is another matter.
Read
November 24, 2018Awesome Reference Book
The Behavioural Investor is a real treasure with innumerable quality references. This book clearly laid down the traits of "The Investor'. After reading it twice, i am placing it in my reference folder.
The Behavioural Investor is a real treasure with innumerable quality references. This book clearly laid down the traits of "The Investor'. After reading it twice, i am placing it in my reference folder.
December 30, 2019
The book itself has good content and ideas, however, the editor didn’t do a very good job, and the incorrect sentences, or misplaced words made it hard to breeze through an otherwise straightforward read.
April 17, 2022
Well structured. You start relating to each of the concepts, you smile thinking why someone shows that kind of behavior in a particular situation. This book definitely brings more awareness that you can use while making investing decisions.
July 11, 2025
Let me start with a confession—I’ve always been drawn to books that decode human nature. Especially when they mix psychology with something as nerve-wracking as investing. So when I came across The Behavioral Investor by Dr. Daniel Crosby, I was instantly intrigued. Here's a psychologist-turned-investment-expert claiming that your biggest enemy in the stock market isn’t the economy, inflation, or geopolitical drama—it’s you.
Crosby isn’t just any author. He’s the Chief Behavioral Officer at Brinker Capital and a familiar voice in the behavioral finance space. Having already written bestselling books like The Laws of Wealth, he now takes a bolder step with this one—aiming to write the most comprehensive book on investor behavior. That’s quite a tall claim, but does he live up to it? Let's dig in.
The Behavioral Investor dives deep into why we behave the way we do with money—and more importantly, how that behavior often sabotages us. The book is structured in four parts: starting with the psychological and sociological forces shaping us, moving into four major behavioral tendencies (Ego, Conservatism, Attention, Emotion), then offering solutions to overcome them, and finally, proposing a framework called Rules-Based Behavioral Investing (RBI).
Think of it less like a “how-to” on picking stocks and more like a mirror reflecting your inner investor—flaws, fears, instincts, and all.
I’ll admit, when I first picked it up, I braced myself for jargon and charts. But Crosby surprised me. His tone is witty, warm, and often personal. He quotes everything from ancient philosophy to pop culture and makes heavy concepts feel light. It's like being taught by your favourite college professor who’s funny and knows his stuff. At times, the psychology terms do pop up, but they're explained well enough for a lay reader to grasp.
There aren’t “characters” in the traditional sense, but the real protagonists here are your biases. Crosby’s classification—Ego, Conservatism, Attention, and Emotion—feels almost like a cast of internal villains each trying to hijack your portfolio. The ideas he presents aren’t necessarily brand-new (if you’ve read Kahneman or Thaler, you’ll recognize many), but Crosby re-frames them in a way that ties directly into money decisions. It’s practical, and more importantly, personal.
The structure is logical and builds well. The first half sets up the problem—our messy, biased brains—and the second half tries to offer solutions. The transition from theory to practice is smooth, although I did feel the last section on RBI was a bit rushed. For something so central, I wanted more meat on what the actual investing framework looks like.
The heart of this book beats with one timeless theme: self-awareness. Crosby argues that all great investing is behavioral. That managing money is really about managing yourself. He dives into timeless psychological truths—our fear of loss, overconfidence, herd mentality—and how these can wreck even the best investment strategies. But rather than just listing our flaws, he focuses on acceptance and self-mastery.
Reading this book felt like therapy at times. I found myself nodding (and occasionally cringing) as I recognized my own past investing mistakes. The way he weaves in human emotion—fear during market crashes, greed during booms, the paralysis of overthinking—makes the book hit home. One moment that stuck with me was Crosby’s reminder that even Isaac Newton got burned in the stock market. If Newton couldn't beat behavioral bias, what chance do we have without self-awareness?
The biggest strength of The Behavioral Investor is how approachable it is. Crosby makes complex behavioral finance not only understandable but enjoyable. His analogies are sharp, his research is deep, and his humor gives just the right balance to some otherwise heavy truths. Plus, the “best ideas” summaries at the end of each chapter are gold for revisits.
The main shortfall? The practical investing section could’ve been more detailed. His RBI model is promising, but we only get a teaser. For a book that wants to be “the most comprehensive,” I hoped for a more in-depth walkthrough of how to actually apply those behavioral principles in portfolio building.
As someone who reads both investment and psychology books, this one hit a sweet spot. It doesn’t give you hot stock tips—but it gives you tools to stop sabotaging yourself. And let’s be real, for most retail investors, that’s where the real work lies. I wish I had read this earlier in my investing journey—it would’ve saved me a few sleepless nights and poor choices.
So, would I recommend The Behavioral Investor? Absolutely. Especially if you’re just starting out or find yourself second-guessing every market move. It doesn’t promise riches—but it does promise clarity. And in the chaotic world of investing, that’s priceless.
Final Verdict: 4.2/5 stars
Readable, relevant, and refreshingly honest. Crosby has done a commendable job reminding us that the market isn’t our biggest risk—we are.
March 6, 2021
The first two parts of the book described how psychology, sociology and physiology are related affect our ability to make decisions. In his view you can classify the investing mistakes we make into four categories: Ego, Conservatism, Attention and Emotion.
Ego: The mind economizes on the intellect. It believes in narratives and seeks out information that confirms its prior beliefs (especially those confirming our own superiority) and is highly skeptical of information that runs counter to our beliefs. To overcome this be open minded about new information, have a learners mindset, be analytical about beliefs and accept that we are fallible. Create a system or process to uncover assumptions and to challenge your views. Risk is ultimately about the likelihood we are wrong, or unable to implement our intentions.
Conservatism: We have a propensity to go with the status quo, which likely stems from loss aversion. We have more regret for outcomes that result from action than inaction and will bend our preferences to rationalize inaction. Create a system to avoid fear inducing situations and try to come up with measures of actual risk and reward that can be compared rather than letting the mind (and its biases) guide you.
Attention: We are faced with too much information on a complex system, and believe in stories to help us make sense of it. Use simple models based on a combination of data and theory to make decisoins.
Emotion: Emotional situations distort the way we see the world, and physiology can impact our emotional state. Avoid emotion-inducing states and follow a model that you can relegate decision making to if those moments do occur.
In short, we seek gains and want to avoid losses even more. Especially the loss of that which forms our identity: our beliefs. We need to recognize the impact this has on our psychology and create processes to prevent us from realizing these cognitive and behavioral shortfalls.
I found the first three parts very useful but I am irked by his insistence that the human brain is not made for investing. I think that is most likely wrong and instead we just need to unlearn patterns of thought and behavior that prevent us from being good. There are some investors out there whose ability to let go of their ego, combined with their analytical rigor and detachment from narrative, make them great at investing. We can all be like this it just takes time and effort to (un)learn.
The last part of the book describes an investment strategy that is coherent with his ideas on investor psychology from the first two parts. I enjoyed what he was trying to do because so far there are no practical frameworks from the behavioral finance school (that I know of - besides the list of do's and don'ts). I am sympathetic to his efforts because I am also trying to do the same thing - that's why I am reading his book!
However, I don't agree with most his analysis and conclusions on how to manage portfolios or make investments. His framework is riddled with contradictions and ironically probably the result of his own psychology. He believes that active strategies should be concentrated and based on momentum or value. He also believes that you should be long most of the time unless momentum and value are absent. In effect he is saying these are the only two valid edges one can have in the market. To be clear, I agree that this are good strategies but they are clearly not the only ones. Just to give a counter example, Renaissance's models result in a portfolio that is not concentrated nor based on value or traditional momentum, and (from what I've heard) is likely based on exploiting investor behaviour. Is this not a sound investment strategy for the behavioral investor?
I have thought about these issues a lot and in my opinion it comes down to: having models that give you an edge on the expected value of future outcomes vs expectations. The models are theoretically sound and based on data, but don't necessarily have to conform with some historical market data (e.g. if the event has never occurred before). Psychology comes into play in the analysis stage where our mind plays games with us, influencing and biasing the analysis towards our desires (e.g. to protect our ego, to avoid perceived loss, or towards perceived gains). We need to work to weed out assumptions and be honest about ourselves so that we have sound analysis. The analysis leads us to models that give us an edge, and it can be based on almost anything not just value or momentum.
The first two parts of the book was incredible with respect to elucidating the impact of psychology. The last part on how to invest with behavior in mind was average.
Ego: The mind economizes on the intellect. It believes in narratives and seeks out information that confirms its prior beliefs (especially those confirming our own superiority) and is highly skeptical of information that runs counter to our beliefs. To overcome this be open minded about new information, have a learners mindset, be analytical about beliefs and accept that we are fallible. Create a system or process to uncover assumptions and to challenge your views. Risk is ultimately about the likelihood we are wrong, or unable to implement our intentions.
Conservatism: We have a propensity to go with the status quo, which likely stems from loss aversion. We have more regret for outcomes that result from action than inaction and will bend our preferences to rationalize inaction. Create a system to avoid fear inducing situations and try to come up with measures of actual risk and reward that can be compared rather than letting the mind (and its biases) guide you.
Attention: We are faced with too much information on a complex system, and believe in stories to help us make sense of it. Use simple models based on a combination of data and theory to make decisoins.
Emotion: Emotional situations distort the way we see the world, and physiology can impact our emotional state. Avoid emotion-inducing states and follow a model that you can relegate decision making to if those moments do occur.
In short, we seek gains and want to avoid losses even more. Especially the loss of that which forms our identity: our beliefs. We need to recognize the impact this has on our psychology and create processes to prevent us from realizing these cognitive and behavioral shortfalls.
I found the first three parts very useful but I am irked by his insistence that the human brain is not made for investing. I think that is most likely wrong and instead we just need to unlearn patterns of thought and behavior that prevent us from being good. There are some investors out there whose ability to let go of their ego, combined with their analytical rigor and detachment from narrative, make them great at investing. We can all be like this it just takes time and effort to (un)learn.
The last part of the book describes an investment strategy that is coherent with his ideas on investor psychology from the first two parts. I enjoyed what he was trying to do because so far there are no practical frameworks from the behavioral finance school (that I know of - besides the list of do's and don'ts). I am sympathetic to his efforts because I am also trying to do the same thing - that's why I am reading his book!
However, I don't agree with most his analysis and conclusions on how to manage portfolios or make investments. His framework is riddled with contradictions and ironically probably the result of his own psychology. He believes that active strategies should be concentrated and based on momentum or value. He also believes that you should be long most of the time unless momentum and value are absent. In effect he is saying these are the only two valid edges one can have in the market. To be clear, I agree that this are good strategies but they are clearly not the only ones. Just to give a counter example, Renaissance's models result in a portfolio that is not concentrated nor based on value or traditional momentum, and (from what I've heard) is likely based on exploiting investor behaviour. Is this not a sound investment strategy for the behavioral investor?
I have thought about these issues a lot and in my opinion it comes down to: having models that give you an edge on the expected value of future outcomes vs expectations. The models are theoretically sound and based on data, but don't necessarily have to conform with some historical market data (e.g. if the event has never occurred before). Psychology comes into play in the analysis stage where our mind plays games with us, influencing and biasing the analysis towards our desires (e.g. to protect our ego, to avoid perceived loss, or towards perceived gains). We need to work to weed out assumptions and be honest about ourselves so that we have sound analysis. The analysis leads us to models that give us an edge, and it can be based on almost anything not just value or momentum.
The first two parts of the book was incredible with respect to elucidating the impact of psychology. The last part on how to invest with behavior in mind was average.
May 2, 2022
Since I now have money invested in the market, it’s time to face my humanity. Behavioral finance studies how psychology affects investors, and in “The Behavioral Investor” psychologist and asset manager Daniel Crosby investigates the ways in which our brains interfere with our investing success.
AAII Journal editor Charles Rotblut interviewed Crosby in 2019 and made me much more interested in how investors “ought to drive out emotion at every turn.”
Crosby covers sociology, how investing affects the brain, physiology; ego, conservatism, attention, emotion and how investors can overcome all four; and how behavioral investing is rules-based. Each chapter ends with a “What’s the big idea?” section that summarizes main concepts.
Every time I go to check my Schwab account just to take a quick peek at my investments, I hear Vanguard founder John Bogle’s voice in my head: “When you get those regular retirement plan statements … don’t open them. Don’t peek. And when you do peek … be sure you have a cardiologist standing by. Because you will be so amazed at how much money you’ve accumulated over 20 or 30 or 40 or 50 years that you won’t believe it. You’ll probably faint, or something worse, and there will be a doctor there to revive you.”
I saw this sentiment echoed in “The Behavioral Investor,” as I suspected it would be: “Greg Davies shows that if you check your account daily, you’ll experience a loss just over 41% of the time. Pretty scary when we consider that human nature makes losses feel about twice as bad as gains feel good! Look once every five years and you would have only experienced a loss about 12% of the time and those peeking every 12 years would never have seen a loss. Twelve years may seem like a long time, but it’s worth remembering that the investment lifetime for most individuals is likely in the range of around 40 to 60 years.”
I used to think this was a more complicated idea, but it simply means that if you don’t look at your account constantly, you’re less likely to see your account in the red. I’ve read enough AAII articles—specifically on behavioral finance—to know that my emotions aren’t going to change the direction of the market, so why even get them involved? Don’t my emotions have enough work to do already? I’ll save it all up for 20, 30 or 40 years and then let it all out when I see how much money I’ve made!
Crosby also provides a helpful lesson on diversification: “Left to our own devices, we create portfolios in our own image. Americans buy American stocks. Steel workers are overweight manufacturing, while financiers double down on bank stocks. The timid fail to allocate to equities and the overconfident hold large positions in single stocks. Like an old married couple, our holdings start to look just like us, and there is great danger in that similarity.” He also encourages investors to avoid mutual fund manager Peter Lynch’s famous strategy of “buying what you know” in order to combat the tendency to make our portfolios “overweight [in] what we know.” Instead, he counsels us to “put in place a plan that diversifies across geographies and asset classes, both familiar and foreign.”
To really drive this strategy home, Crosby says, “By buying a diversified basket of index funds that covers a variety of asset classes, know nothing investors (who often know a great deal) are likely to beat more than 90% of active managers and have time to focus on pursuits more meaningful than compounding wealth.” I like those chances, especially as a “know nothing” beginning investor! (OK, maybe I know like three things now.)
Though Crosby doesn’t say specifically how often I should be checking my Schwab account, I’ll probably limit it to once a week as I start and then build up to once a month. I still want to know how my investments are doing, even if it’s just to say: Not great Bob!
If you’re just getting started in investing, I wouldn’t recommend for this book to be number one on your reading list. I’m glad I worked up to it after reading more books on the basics, because if it was the first investing book I picked up I wouldn’t have been able to apply the lessons as well as I can now.
Check out https://investingdiscoveries.blog for more investing book reviews!
AAII Journal editor Charles Rotblut interviewed Crosby in 2019 and made me much more interested in how investors “ought to drive out emotion at every turn.”
Crosby covers sociology, how investing affects the brain, physiology; ego, conservatism, attention, emotion and how investors can overcome all four; and how behavioral investing is rules-based. Each chapter ends with a “What’s the big idea?” section that summarizes main concepts.
Every time I go to check my Schwab account just to take a quick peek at my investments, I hear Vanguard founder John Bogle’s voice in my head: “When you get those regular retirement plan statements … don’t open them. Don’t peek. And when you do peek … be sure you have a cardiologist standing by. Because you will be so amazed at how much money you’ve accumulated over 20 or 30 or 40 or 50 years that you won’t believe it. You’ll probably faint, or something worse, and there will be a doctor there to revive you.”
I saw this sentiment echoed in “The Behavioral Investor,” as I suspected it would be: “Greg Davies shows that if you check your account daily, you’ll experience a loss just over 41% of the time. Pretty scary when we consider that human nature makes losses feel about twice as bad as gains feel good! Look once every five years and you would have only experienced a loss about 12% of the time and those peeking every 12 years would never have seen a loss. Twelve years may seem like a long time, but it’s worth remembering that the investment lifetime for most individuals is likely in the range of around 40 to 60 years.”
I used to think this was a more complicated idea, but it simply means that if you don’t look at your account constantly, you’re less likely to see your account in the red. I’ve read enough AAII articles—specifically on behavioral finance—to know that my emotions aren’t going to change the direction of the market, so why even get them involved? Don’t my emotions have enough work to do already? I’ll save it all up for 20, 30 or 40 years and then let it all out when I see how much money I’ve made!
Crosby also provides a helpful lesson on diversification: “Left to our own devices, we create portfolios in our own image. Americans buy American stocks. Steel workers are overweight manufacturing, while financiers double down on bank stocks. The timid fail to allocate to equities and the overconfident hold large positions in single stocks. Like an old married couple, our holdings start to look just like us, and there is great danger in that similarity.” He also encourages investors to avoid mutual fund manager Peter Lynch’s famous strategy of “buying what you know” in order to combat the tendency to make our portfolios “overweight [in] what we know.” Instead, he counsels us to “put in place a plan that diversifies across geographies and asset classes, both familiar and foreign.”
To really drive this strategy home, Crosby says, “By buying a diversified basket of index funds that covers a variety of asset classes, know nothing investors (who often know a great deal) are likely to beat more than 90% of active managers and have time to focus on pursuits more meaningful than compounding wealth.” I like those chances, especially as a “know nothing” beginning investor! (OK, maybe I know like three things now.)
Though Crosby doesn’t say specifically how often I should be checking my Schwab account, I’ll probably limit it to once a week as I start and then build up to once a month. I still want to know how my investments are doing, even if it’s just to say: Not great Bob!
If you’re just getting started in investing, I wouldn’t recommend for this book to be number one on your reading list. I’m glad I worked up to it after reading more books on the basics, because if it was the first investing book I picked up I wouldn’t have been able to apply the lessons as well as I can now.
Check out https://investingdiscoveries.blog for more investing book reviews!
November 9, 2021
There are hundreds of biases that impact our investment decision making and our daily life in general. This book aims to be the definitive guide to behavioural investing.
While the book starts of decently strong in identifying all the various biases, it then stumbles in putting them into concrete action. Knowing about biases doesn’t necessitate that they will be overcome them. Stating things like “value investing” has proven to outperform in the medium-term and makes behavioral sense (you tend to buy stocks that are often unloved at the moment of purchase) is nonsensical. The author defines value investing through cheap valuation metrics (P/E and P/B are specifically highlighted), and by that definition, value investing has underperformed during the last 15 years or so. While it is very much possible that the next 15 years might be different, just stating that this kind of value investing outperforms is just wrong.
For individuals that have never read anything about behavioral finance before, this book is a solid 3 (liked it). For individuals that already know some stuff about behavioral finance, it is closer to a 2 (it’s ok).
Summary:
Ego: Tendency toward overconfidence and behaving in ways that maintain feelings of personal competency over clear-eyed decision-making. How to fight it:
• Luck is unfortunately a critical factor in medium-term performance -> Adhering to rules trumps personal genius.
• Forecasts are mostly useless -> Projections about the future, if they must be proffered at all, should be based on an assumption around base rates on long-term averages, not stories.
• Investors often think their performance was much better than it actually was -> Keep a log of trading decisions and monitor hit rate, performance and external variables that might negatively impact financial decision-making. Also, ignore braggarts at cocktail parties.
• Investors tend to be overconfident in their stock picks -> Diversification is the lived embodiment of humility and its primary good is the preservation of capital.
• While everyone thinks they are contrarian, most follow the herd -> True contrarianism is painful and should cause considerable self-doubt.
Conservatism: Asymmetrical preference for gain relative to loss and for the status quo relative to change. How to fight it:
• The perceived riskiness of an asset class often has more to do with its short-term than long-term performance (e.g. you have a much better chance beating inflation with stocks than bonds over a 20y horizon) -> Load up on assets that fit your investment horizon and are less risky than perceived by the market.
• Risk taking is more situationally than personally determined. Bubbles are natural occurrences -> Avoid fear inducing situations and ensure that portfolio management processes are rules-based rather than discretionary
Attention: Disposition to evaluate information in relative terms and let salience trump probability when making decisions. How to fight it:
• Complicated macro narratives are seldom correct/useful -> ignore them.
• The likelihood of an event and the intensity of its impact are both important considerations -> the default state of a strategy should be bullishness, but ought to include a contingency for low-likelihood-high-intensity events.
• Data without theory and theory without data both produce spurious results -> An investable factor must be empirically evident, theoretically sound, and have roots in behavior.
Emotion: Perceptions of risk and safety that are coloured by both our transitory emotional state and personal level of emotional stability. How to fight it:
• Intuition exists, but only proves valuable in situation that provide quick, reliable feedback -> Listen to your gut is profoundly dumb advice for investors.
• Our body experiences urges to act that are only later interpreted mentally -> Build a model and follow it slavishly.
While the book starts of decently strong in identifying all the various biases, it then stumbles in putting them into concrete action. Knowing about biases doesn’t necessitate that they will be overcome them. Stating things like “value investing” has proven to outperform in the medium-term and makes behavioral sense (you tend to buy stocks that are often unloved at the moment of purchase) is nonsensical. The author defines value investing through cheap valuation metrics (P/E and P/B are specifically highlighted), and by that definition, value investing has underperformed during the last 15 years or so. While it is very much possible that the next 15 years might be different, just stating that this kind of value investing outperforms is just wrong.
For individuals that have never read anything about behavioral finance before, this book is a solid 3 (liked it). For individuals that already know some stuff about behavioral finance, it is closer to a 2 (it’s ok).
Summary:
Ego: Tendency toward overconfidence and behaving in ways that maintain feelings of personal competency over clear-eyed decision-making. How to fight it:
• Luck is unfortunately a critical factor in medium-term performance -> Adhering to rules trumps personal genius.
• Forecasts are mostly useless -> Projections about the future, if they must be proffered at all, should be based on an assumption around base rates on long-term averages, not stories.
• Investors often think their performance was much better than it actually was -> Keep a log of trading decisions and monitor hit rate, performance and external variables that might negatively impact financial decision-making. Also, ignore braggarts at cocktail parties.
• Investors tend to be overconfident in their stock picks -> Diversification is the lived embodiment of humility and its primary good is the preservation of capital.
• While everyone thinks they are contrarian, most follow the herd -> True contrarianism is painful and should cause considerable self-doubt.
Conservatism: Asymmetrical preference for gain relative to loss and for the status quo relative to change. How to fight it:
• The perceived riskiness of an asset class often has more to do with its short-term than long-term performance (e.g. you have a much better chance beating inflation with stocks than bonds over a 20y horizon) -> Load up on assets that fit your investment horizon and are less risky than perceived by the market.
• Risk taking is more situationally than personally determined. Bubbles are natural occurrences -> Avoid fear inducing situations and ensure that portfolio management processes are rules-based rather than discretionary
Attention: Disposition to evaluate information in relative terms and let salience trump probability when making decisions. How to fight it:
• Complicated macro narratives are seldom correct/useful -> ignore them.
• The likelihood of an event and the intensity of its impact are both important considerations -> the default state of a strategy should be bullishness, but ought to include a contingency for low-likelihood-high-intensity events.
• Data without theory and theory without data both produce spurious results -> An investable factor must be empirically evident, theoretically sound, and have roots in behavior.
Emotion: Perceptions of risk and safety that are coloured by both our transitory emotional state and personal level of emotional stability. How to fight it:
• Intuition exists, but only proves valuable in situation that provide quick, reliable feedback -> Listen to your gut is profoundly dumb advice for investors.
• Our body experiences urges to act that are only later interpreted mentally -> Build a model and follow it slavishly.
May 9, 2020
This is one more addition to my series of investment and finance reads and this book is a pure gem! If only I could have given this book more than 5 stars. I remember picking up this book in a store in CP, surfing through its pages, I felt quite sure that its content appealed to me.
Maybe the author is still unknown about the true worth of this book because this particular work should be selling atleast twice its current price.
I pay my respect to the author for writing and documenting such a deep researched book. Just to tell you, this book mentions atleast 50 books from which it quotes surveys, experiments and insightful information. It feels like knowledge of 5-10 books has been squeezed into one and has been gifted to you. Not a single page goes by without adding immense value to you and you may have read it again and then maybe once more so that you are able to absorb the plethora of details available.
This book is like a knowledge packed 'Snickers', really rich in content and small in size.
'The Behavioral investor' talks about the rules that one needs to follow as an investor in the stock market. It documents various theories proposed by researchers who have devoted their life demystifying the movement of 'market'. It draws upon various proven rules that can be applied in other aspects of your life as well. 'Contrarian investor', 'law of averages', 'confrontational bias', 'value and momentum', 'reflexivity', 'H.A.L.T' and many more theories have been described that will provide you a comprehensive picture about human psychology which affects the way an investor behaves. This book is a crash course on stock market investment. I would strongly recommend you to get your hands on this book!
Maybe the author is still unknown about the true worth of this book because this particular work should be selling atleast twice its current price.
I pay my respect to the author for writing and documenting such a deep researched book. Just to tell you, this book mentions atleast 50 books from which it quotes surveys, experiments and insightful information. It feels like knowledge of 5-10 books has been squeezed into one and has been gifted to you. Not a single page goes by without adding immense value to you and you may have read it again and then maybe once more so that you are able to absorb the plethora of details available.
This book is like a knowledge packed 'Snickers', really rich in content and small in size.
'The Behavioral investor' talks about the rules that one needs to follow as an investor in the stock market. It documents various theories proposed by researchers who have devoted their life demystifying the movement of 'market'. It draws upon various proven rules that can be applied in other aspects of your life as well. 'Contrarian investor', 'law of averages', 'confrontational bias', 'value and momentum', 'reflexivity', 'H.A.L.T' and many more theories have been described that will provide you a comprehensive picture about human psychology which affects the way an investor behaves. This book is a crash course on stock market investment. I would strongly recommend you to get your hands on this book!
April 29, 2020
I really liked this book. I've never been very interested in finances or investing, but decided to give this a go. I would describe it as largely a psychology book written with applications to investing in mind. It discusses into many weird quirks of human behavior that presumably served us well in the past, but make us terrible investors. There's lots of interesting psychology experiments and studies cited, which not only make the arguments more convincing but enable you to easily look into some of the topics in more detail. The book reminded me of how much I enjoyed psychology when I was an undergrad.
The author's writing style is extremely readable and he has a good sense of humor, however the editing is far from perfect. I noticed a number typographical errors in the text, though not so many as to take away from the reading.
The main point of the book is to encourage the development of a systematic approach to investment that minimizes our human tendency towards poor financial decisions. I found it super useful, and would recommend it to anyone who has limited understanding of financial decision making, or is not familiar with the psychology of it.
The author's writing style is extremely readable and he has a good sense of humor, however the editing is far from perfect. I noticed a number typographical errors in the text, though not so many as to take away from the reading.
The main point of the book is to encourage the development of a systematic approach to investment that minimizes our human tendency towards poor financial decisions. I found it super useful, and would recommend it to anyone who has limited understanding of financial decision making, or is not familiar with the psychology of it.
Read
January 8, 2021There’s a huge amount of volatility in capital markets, but this is predominantly driven by investor decisions, not money itself. Unfortunately, our brains aren’t as good at making decisions as we think. Anything from the weather to how familiar a ticker name sounds can influence our investment choices without us even noticing. That’s why it’s important to develop a deep understanding of how your brain reacts to a stressful work environment and how you can consciously choose to make better investment decisions.
Actionable advice:
Manage stress using the R.A.I.N. model
In moments of acute stress, turn to Michele McDonald’s R.A.I.N model to return to a calm state of mind. Start by Recognizing what is physically happening to you, like an increase in your heart rate. Next, Accept what you’ve observed, even if you don’t like it. Then Investigate any narratives you’re telling yourself about the situation and identify other thoughts you’re having. Once you’ve done that, you’re ready for the final step – Non-identification – where you acknowledge that feeling stress doesn’t mean you have to be defined by it.
Actionable advice:
Manage stress using the R.A.I.N. model
In moments of acute stress, turn to Michele McDonald’s R.A.I.N model to return to a calm state of mind. Start by Recognizing what is physically happening to you, like an increase in your heart rate. Next, Accept what you’ve observed, even if you don’t like it. Then Investigate any narratives you’re telling yourself about the situation and identify other thoughts you’re having. Once you’ve done that, you’re ready for the final step – Non-identification – where you acknowledge that feeling stress doesn’t mean you have to be defined by it.
May 27, 2023
This is a cerebrally challenging piece of work that makes one rethink some long-held beliefs about investing in stocks. It also vindicates a few of this particular reader's convictions, which is a relief! It would have been easy to dismiss this book as another attempt at duping readers into buying outlandish theories masquerading as new-age advice. But Dr. Crosby's take on equities investment, strongly influenced by his day job as a psychologist, is surprisingly fresh and offers genuine insights into a subject that is anything but new. 'The Behavioral Investor' is an especially heartening read for long-term investors who view company fundamentals as the primary parameter while putting in their hard-earned money. Crosby is no fan of either high-level macroeconomics-driven recommendations or chart-fueled guesswork. He does not even spare holy cows such as Buffet et al for their contradictory statements on topics like market-timing etc. Given that the contents of this book are too eclectic to capture in one para, one ends by stating that all present and prospective equities investors could do much worse than reading this one.
November 14, 2021
If learning, acquiring, upgrading techno- fundamental skills is like an oxygen for a trader and an investor,then understanding the behaviour and psychology of the market and self is the NSM North Star Metrics.
With objective of understanding my own psychology and collective behaviour of the market I shortlisted the book, "The Behavioral Investor", by Daniel crosby.
There are some books which need not only to be read but rather to be chewed, digested and ruminate over again and again. I have read this book once and reading it again the second time
It's a slow read.The book opens the door for many questions and breaks deep rooted myths,fears and apprehensions.
It churns and force one to shed old skin and wings. Prepares and equips with new skills, to take a new flight, beyond defined horizon into the world beyond ....full of opportunities.
It helps in optimizing a portfolio and a plan keeping in mind the unique emotional and psychology of an individual.Assist in identifying one's own emotional and psychological makeup.
With objective of understanding my own psychology and collective behaviour of the market I shortlisted the book, "The Behavioral Investor", by Daniel crosby.
There are some books which need not only to be read but rather to be chewed, digested and ruminate over again and again. I have read this book once and reading it again the second time
It's a slow read.The book opens the door for many questions and breaks deep rooted myths,fears and apprehensions.
It churns and force one to shed old skin and wings. Prepares and equips with new skills, to take a new flight, beyond defined horizon into the world beyond ....full of opportunities.
It helps in optimizing a portfolio and a plan keeping in mind the unique emotional and psychology of an individual.Assist in identifying one's own emotional and psychological makeup.
December 10, 2024
This book is absoulutely psychologically readable for a beginners in investing like me, but not a fianancial book. The theory presented in the book is not too outdated and is pretty understandable even for a person who does not have a finance or investment background. The author gives an oustanding idea about how our behaviors affect our investment and why we should be cautious with them. However, to me, this book is more psychological than investing or financing. It merely provides us with notices about the impacts of our behaviors but not the foundation knowledge of investing. It is easily readable but for sure not for the person who wants to know how to read a financial report, company profiles, or understand the financial market.
July 12, 2021
My favorite paragraph from this book:
"Further, a team from Fidelity set out to examine the behaviors of their best-performing retail accounts in an effort to isolate the behaviors of truly exceptional investors. When they contacted the owners of the best-performing accounts, the common thread tended to be that they had forgotten about the account altogether or had died. So much for isolating the complex behavioral traits of skilled investors!"
Maybe this time is different. IT and SAS companies operating with human capital, not hard assets and with high margins might just be the new normal replacing traditional value-based investments on more traditional or historical benchmarks.
"Further, a team from Fidelity set out to examine the behaviors of their best-performing retail accounts in an effort to isolate the behaviors of truly exceptional investors. When they contacted the owners of the best-performing accounts, the common thread tended to be that they had forgotten about the account altogether or had died. So much for isolating the complex behavioral traits of skilled investors!"
Maybe this time is different. IT and SAS companies operating with human capital, not hard assets and with high margins might just be the new normal replacing traditional value-based investments on more traditional or historical benchmarks.
September 28, 2023
lot of mumbo jumbo with very little value , some valuable nuggets were lifted from noted authors like Daniel Kahneman's "Thinking Fast and Slow " , I would rather read a book like thinking fast and slow than this book had I known the content ahead of time , lot of cliches and BS , author is good at selling snake oil , wasted time reading through assuming next section would be valuable and stuff , only one good thing I saw in this book is he lifted some useful tips from notable authors like Daniel Kahneman and gave credit to him but Iam already aware of the same so didn't find much value in this book (behavioral investor)
January 8, 2021
According to this book, there is a considerable amount of capital markets volatility, but investor decisions, not money itself mainly drive this. Unfortunately, our brains are not as good as making decisions as we think. Anything from the weather to how familiar a ticker name sounds could influence our investment choices without us even noticing. That's why it is crucial to develop a deep understanding of how your brain reacts to a stressful work environment and how you could consciously choose to make better investment decisions.
April 2, 2023
The book states various behavioural anomalies and biases that the human brain is prone to with or without our knowledge.
Having the understanding of these autopilot mechanisms the author tries to explain the way in which humans can and might go wrong in the investing world.
One intriguing thought I gained through the book was, most often then not we tend to take same decision over and over again rather than changing the decision even if we have a slight understanding that the alternative might be a better choice.
A must read book for a markets enthusiast.
Having the understanding of these autopilot mechanisms the author tries to explain the way in which humans can and might go wrong in the investing world.
One intriguing thought I gained through the book was, most often then not we tend to take same decision over and over again rather than changing the decision even if we have a slight understanding that the alternative might be a better choice.
A must read book for a markets enthusiast.
April 15, 2023
Part one and Part two mind blowing details.Investment whether it related to evaluation next Endowment effect etc.Part three and part four I don’t understand the concept it leads to but the experiments details Milgram experiment and Stanford prison experiments wow.
.I didn’t understand the context it leads to from the book but I adored all the sub details and experiments it contain.Very interesting and unheard.
.I didn’t understand the context it leads to from the book but I adored all the sub details and experiments it contain.Very interesting and unheard.
January 31, 2024
This is a well-written book that summarizes many behavior tendencies of humans that lead to poor investment decisions with a good amount of scientific research cited. Personally, I prefer Poor Charlie's Almanac for investment biases as it is more comprehensive and concise. Further, I prefer Psychology of Money for more generic advice on personal finance. However, this book does a good job of bridging those two and would be a good intro book to read for anyone interested in investing.
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