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Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias, + Website


Praise for Investing Psychology

"All investors are biased. The vast majority of investors are hopelessly biased. The rest could benefit from Tim Richards' well-researched book. Therein lies the opportunity for those investors willing to commit to their own 'personal investing mission statement.'"
--Tadas Viskanta, Founder and Editor of the Abnormal Returns blog and author of Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosophere

Remove behavioral bias from your investment decisions

For many financial professionals and individual investors, behavioral bias is the largest single factor behind poor investment decisions. The same instincts that our brains employ to keep us alive all too often work against us in the world of finance and investments. Investing Psychology + Website explores several different types of behavioral bias, which pulls back the curtain on any illusions you have about yourself and your investing abilities. This practical investment guide explains that conventional financial wisdom is often nothing more than myth, and provides a detailed roadmap for overcoming behavioral bias.

Some of the real-world advice in Investing Psychology includes:

  • Assume you are biased and try and recalibrate
  • Don't trade when you’re emotional, tired, or hungry
  • Don't compete with institutions
  • Seek to disprove any idea you might have
  • Always track your results

Investing Psychology is a unique book that pointedly avoids the popular approach of offering anecdotal support for plausible investment strategies and financial theories. Instead, author Tim Richards teaches readers how to dig deeper and persistently question everything in the financial world around them, including the incorrect investment decisions that human nature all too often compels us to make.

TIM RICHARDS is the creator of the Psy-Fi Blog (, a unique website dedicated to analyzing, explaining, and integrating the vast body of research on the impact of psychology in finance. As a uniquely focused resource for behavioral investing, the website attracts as many as 25,000 unique visits a month and is regularly featured in the largest information aggregators and websites in the financial industry.

Preface xiii

CHAPTER 1 Sensory Finance 1

Beating the Bias Blind Spot 1

Illusory Pattern Recognition 4

Superstitious Pigeons--and Investors 6

The Super Bowl Effect: If It Looks Too Good to Be True, It Is 9

Your Financial Horoscope: Forecasting and the Barnum Effect 10

Uncertainty: The Unknown Unknowns 12

Illusion of Control 13

Stocks Aren’t Snakes 15

Herding 16

Availability 19

Assuming the Serial Position 21

Hot Hands 23

Financial Memory Syndrome 25

Attention! 27

The Problem with Linda 29

Representation 31

The Seven Key Takeaways 33

Notes 34

CHAPTER 2 Self-Image and Self-Worth 37

The Introspection Illusion 37

Blind Spot Bias, Revisited 39

Rose-Colored Investing 40

Past and Present Failures 41

Depressed but Wealthy 43

Disposed to Lose Money 44

Loss Aversion 45

Anchored 46

Two Strangers 48

Hindsight’s Not So Wonderful 50

Deferral to Authority 51

Emotion 52

Black Swans 54

Dirty Money, Mental Accounting 55

A Faint Whisper of Emotion 56

Psychologically Numbed 57

Martha Stewart’s Biases 58

Retrospective 60

Annual Returns 60

Nudged 61

Mindfulness 62

The Seven Key Takeaways 65

Notes 66

CHAPTER 3 Situational Finance 69

Disposition vs. Situation 69

Beauty Is in the Eye of the Investor 70

Angels or Demons? 71

Merely Familiar 73

Lemming Time 74

Story Time 76

Wise Crowds? 78

Adaptive Markets 79

George Soros’s Refl exivity 81

Grow Old Quickly 82

Speaking Ill 83

The Power of Persuasion 85

SAD Investors 86

Sell in May . . . 87

The Mystery of the Vanishing Anomalies 89

Tweet and Invest 90

Fire! 92

The Rise of the Machines 93

The Seven Key Takeaways 94

Notes 95

CHAPTER 4 Social Finance 99

Conform--or Die 99

Groupthink 100

Motivated Reasoning 101

Polarized 103

A Personal Mission Statement: Social

Identity and Beyond 104

Gaming the System 106

You’ve Been Framed 108

Behavioral Portfolios 110

Dividend Dilemmas 112

The Language of Lucre 113

Embedded Investing 114

Financial Theory of Mind 116

Trust Me, Reciprocally . . . 118

Akerlof’s Lemons 119

The Peacock’s Tail 122

Facebooked 123

Be Kind to an Old Person 124

The Seven Key Takeaways 126

Notes 127

CHAPTER 5 Professional Bias 131

Mutual Fund Madness 131

Is Passive Persuasive? 133

Losing to the Dark Side 134

Forecasting--The Butterfl y Effect 136

Forecaster Bias 138

Feminine Finance 140

Trading on a High 141

Marriage and Money 142

Muddled Modelers 144

CEO Pay--Because They’re Worth It? 145

Corporate Madness 146

Buyback Brouhaha 148

Oh No, IPO 149

Your 6 Percent Self-Infl icted Trading Tax 150

Expert Opinion? 151

Avoid the Sharpshooters 153

The Seven Key Takeaways 154

Notes 154

CHAPTER 6 Debiasing 159

Numbers, Numbers, Numbers 159

Losing Momentum 160

Mean Reversion 162

Short Shift 163

Diworsification 165

Disconfirm, Disconfi rm 167

Reverse Polarization 168

Expected Value 170

Investing in the Rearview Mirror 172

Living with Uncertainty 174

Sunk by the Titanic Effect 175

Changing Your Mind 177

Love Your Kids, Not Your Stocks 178

Cognitive Repairs 180

Satisficing 181

The Seven Key Takeaways 182

Notes 183

CHAPTER 7 Good Enough Investing 187

#1: The Rule of Seven 187

#2: Homo Sapiens, Tool Maker 188

#3: Meta-Methods 189

#4: Be Skeptical 189

#5: Don’t Trust Yourself 190

#6: Self-Control Is Key 191

#7: Get Feedback 191

A Behavioral Investing Framework 192

Step #1: Making It Personal 193

Step #2: Build an Investing Checklist 195

Step #3: Write It Down 196

Step #4: Diarize Reviews 197

Step #5: Get Feedback 198

Step #6: Do Autopsies 199

Step #7: Update Adaptively 200

The Worst Offenders 201

Tools 203

The Mechanics of Investing 204

The Seven Key Takeaways 206

Notes 207

CHAPTER 8 A Few Myths More 209

Myth 1: Money Makes Us Happy 210

Myth 2: Everyone Can Be a Good Investor 211

Myth 3: Numbers Don’t Matter 212

Myth 4: Financial Education Can Make You a Good Investor 213

Myth 5: I Won’t Panic 214

Myth 6: Debt Doesn’t Matter 215

Myth 7: I Can Get 7 Percent a Year from Markets 216

Myth 8: Infl ation Doesn’t Matter 217

Myth 9: Everyone Has Some Good Investing Ideas, Sometime 217

Myth 10: I Don’t Need to Track My Results 218

The Seven Key Takeaways 219

Notes 219

CHAPTER 9 The Final Roundup 221

Notes 224

About the Companion Website 227

About the Author 229

Index 231