James Montier writes about the many ways investors are their own worst enemies. The book concentrates on the many repeated behavioral mistakes investors inflict on themselves that negatively impact returns in the process. Also, All of these biases can be found outside of investing too — diet, exercise, shopping, and other habits. Most of our decision-making process is hardwired, having been built around survival over the past , years. Also, it tends to conflict with investing. Montier breaks decision making into two systems: the X-system is the default, quick, emotional responses or the mental shortcuts.
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That would be the historical precedent. The bat costs a dollar more than the ball. How much does the ball cost? Every day the patch doubles in size.
If it takes 48 days for the patch to cover the entire lake, how long will it take to cover half the lake?
The majority of the people who have answered them in the past have as well. Why does our brain do this to us? Why does it try to take the easy way out without taking the time to think through our problems? Montier goes through study after study to show why we have such a hard time with our decisions and gives solid advice from many of the greatest investors.
Willpower alone is unlikely to be a sufficient defense against behavioral biases. You need systems. This is the buy low portion of the oldest investment advice in the book.
People will pay four times more for a lottery ticket if they can pick the numbers, as opposed to a ticket with randomly selected numbers as if they can control the outcome.
Do not try to control that which you have no control over. Typical stock broker research: 1. All news is good news if the news is bad, it can get better , 2. Everything is always cheap even if you have to make up new valuation methodologies and 3. Assertion trumps evidence never let the facts get in the way of a good story.
Sound familiar? This sums up the majority of Wall Street research that you hear these days. Experts are even more confident than the rest of us. People prefer those who sound confident and are even willing to pay more for confident but inaccurate advisors. We need to stick to our investment discipline, ignore the actions of othe rs, and stop listening to the so called experts.
It would be sheer madness to base an investment process around our seriously flawed ability to divine the future. We tend to hang onto our views too long simply because we spent time an effort coming up with those views in the first place. This leads to confirmation bias and an anchoring to strongly held beliefs even if the evidence fails to support them anymore.
Part of the problem for investors is that they expect investing to be exciting — largely thanks to bubblevision. Investing should be boring but Wall Street tries to sell you sexy and exciting. People often judge a past decision by its ultimate outcome rather than basing it on the quality of the decision at the time it was made, given what was known at that time. This is outcome bias. We must concentrate on process. Process is a set of rules that govern how we go about investing.
When every decision is measured on outcomes, investors are likely to avoid uncertainty, chase noise, and herd with the consensus. Sounds like a pretty good description of the investment industry to me. Process over outcomes. A Wealth of Common Sense is a blog that focuses on wealth management, investments, financial markets and investor psychology. More about me here. For disclosure information please see here. Email address:. Every month you'll receive book suggestions--chosen by hand from more than 1, books.
You'll also receive an extensive curriculum books, articles, papers, videos in PDF form right away. Here are some of the lessons from this wonderful little book along with my comments: Willpower alone is unlikely to be a sufficient defense against behavioral biases. Now go talk about it. What's been said: Discussions found on the web.
Behavioural Investing : A Practitioner's Guide to Applying Behavioural Finance
Investors are their own worst enemy. This page book shows how mental biases cause most investors to perform badly, and offers remedies. It is very clearly written and easy to read. I recommend it to all experienced investors.