Inside the Investor's Brain: The Power of Mind Over Money (Wiley Trading) [Hardcover]

Richard L. Peterson (Author)

Book Description

Publication Date: July 9, 2007 | Series: Wiley Trading (Book 295)

Unique insights into how the mind of an investor operates and how developing emotional awareness leads to long-term success

Inside the Investor's Brain provides readers with specific techniques for understanding their financial psychology, so that they can improve their own performance and learn how to outsmart other investors. Chapter by chapter, author Richard Peterson addresses various mental traps and how they play a role in investing. Through examples, such as a gambling experiment with playing cards, the author shows readers how being aware of the subconscious can separate the smart investors from the average ones. This book also contains descriptions of the work of neuroscientists, financial practitioners, and psychologists, offering an expert's view into the mind of the market. Innovative and accessible, Inside the Investor's Brain gives investors the tools they need to better understand how emotions and mental biases affect the way they manage money and react to market moves.

Editorial Reviews

Review

"Exceptionally well-written, it will likely prove to be a seminal text on the influence of the human brain on investment behavior. And neurofinance, as that field is known, may provide the next great edge for savvy investors. ... Inside the Investor's Brain , written by an experienced but surprisingly young author (he's 35), is outstanding. Peterson and his first book have much to offer investors and the institutions in which they work."-- Dr. David L. Nathan, (Barron's, September 2007)

"Clear and Accessible." -- Bob Frick (Kiplinger's Personal Finance, December 2007)

"Highly recommended." -- (Kiplinger's Best Investing Reads of 2007)

"For those who want to take behaviouralism a step further, and to study the science of the brain - a subject that tells us a lot about ourselves, as well as about how we might just make some more money ... " --(Financial Times, December 2007)

From the Inside Flap

The human brain is wired to make decisions in certain ways. Unfortunately, when it comes to the financial markets, the way we've been "wired" is not conducive to making money. Nobody knows this better than author Richard Peterson. As a founder of Market Psychology Consulting, a former trader, a developer of psychology-based trading systems, and an investor coach, Peterson understands firsthand how subconscious mistakes (biases) can sabotage the financial decision-making of market participants.

Now, with Inside the Investor's Brain, Peterson wants to share his invaluable experiences in this field with you. Backed by recent research in neurofinance—the study and application of neuroscience to investment activity—psychology, and experimental finance, this detailed guide explains the fundamental "hardwired" mistakes made by most investors and reveals the simple steps you can take to overcome these obstacles and improve your financial decision-making skills.

After an introduction that illustrates some of the most basic and prevalent investor biases—through the well-documented stories of Long Term Capital Management, Sir Isaac Newton and the South Seas bubble, and Mark Twain and the 1860s silver fever—Inside the Investor's Brain moves on to:

• Part One: The Intersection of Mind and Money describes basic brain function and how it is unsuited to modern financial market dynamics

• Part Two: Feelings and Finance explains emotional states, their chemical basis, how they alter our financial judgments, and optimal investor personality characteristics

• Part Three: Thinking about Money examines the common thought-traps of investment analysis. Here, misperceptions in the evaluation of financial opportunity and risk are discussed

• Part Four: In Practice offers advice for managing your mind in the financial markets and suggestions on the use of psychology-based investment strategies

Most chapters also contain engaging real-world examples, whose lessons will help you identify subconscious biases; understand when thinking will improve your investment process (and when it won't); improve your emotional intelligence; and focus on the decision process, not the outcome.

While good investing requires a basic financial education, in order to really excel in this environment, you've got to learn how to manage yourself. With Inside the Investor's Brain as your guide, you'll quickly discover how becoming familiar with both the terrain of the markets and the topography of your mind can enhance the profitability of your overall investment endeavors.

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Product Details

• Hardcover: 416 pages
• Publisher: Wiley; 1 edition (July 9, 2007)
• Language: English
• ISBN-10: 0470067373
• ISBN-13: 978-0470067376
• Product Dimensions: 6.3 x 1.4 x 9.4 inches
• Shipping Weight: 1.4 pounds (View shipping rates and policies)
• Average Customer Review: 4.4 out of 5 stars  See all reviews (13 customer reviews)
• Amazon Best Sellers Rank: #424,239 in Books (See Top 100 in Books)

More About the Author

Richard L. Peterson MD works at the intersection of investor psychology and financial markets. Through his training firm MarketPsych LLC (www.marketpsych.com) he instructs financial professionals in the use of psychological insights to improve their investment decisions and strengthen client relationships. He is the managing director of MarketPsych Data, a psychology-based asset management and market research firm (www.marketpsychdata.com). Dr. Peterson was a portfolio manager for the quant fund MarketPsy Long Short Fund LP (www.marketpsy.com), now hibernated.

His financial psychology research has been published in leading academic journals, textbooks, and profiled in the financial media including NPR, CNBC, the Wall Street Journal, the Financial Times, and the BBC. His book, "Inside the Investor's Brain" (Wiley, 2007), was praised as "outstanding" and a "seminal text" by Barrons. With Frank Murtha PhD he co-authored "MarketPsych: How to Manage Fear and Build Your Investor Identity" (Wiley, 2010). Both books were named top financial books of their respective years by Kiplinger's.

Dr. Peterson earned cum laude degrees in electrical engineering, arts, and medicine (MD) from the University of Texas, performed post-graduate neuroeconomics research at Stanford University, and is Board-certified in psychiatry. He lives in the New York area with his family.

Most Helpful Customer Reviews

41 of 44 people found the following review helpful

5.0 out of 5 stars many practical insights that can help participants in the financial markets August 14, 2007

By C. peterson

Format:Hardcover

For most of the 17 years in which I held an endowed chair in a leading finance department. I required that my doctoral students read Fischer Black's Presidential Address to the American Finance Association titled, "Noise." In that paper, Black, a co-inventor of option pricing theory who later worked for Goldman Sachs, stated that stocks could be priced anywhere from 2 times to ˝ the value suggested by market efficiency considerations. Black attributed the large deviations from market efficiency to trading "noise." Richard Peterson's book, Inside the Investor's Brain, is important because it gives rational explanations for market inefficiencies and "noise" based upon well-documented neuroeconomics findings.

While the book has a high level of professional sophistication, fortunately, it contains a useful glossary to acquaint the reader with technical terms in medicine or finance with which the reader may be unfamiliar. Furthermore, because the author has traded extensively, worked with hedge funds, and, as a psychiatrist, has counseled financial market traders, the book contains numerous practical trading and investing examples and cases to illustrate its points, which makes it interesting and fun to read.

The book contains many practical insights that can help participants in the financial markets. By understanding and controlling their emotions, investors and traders may be able to use Peterson's insights to invest more successfully. Toward that end, Peterson explains how can monitor and control the impact of their emotions on their investment decisions.

Some of the findings presented in Peterson's book help resolve theoretical anomalies in finance. For instance, he cites research that shows that people typically weight losses twice as heavily as gains in their decision making; and, consequently, peoples' decisions are made differently if they are "framed" in a loss-taking versus gains making context. A major reason for this difference is that different parts of peoples' brains are engaged when considering potential losses rather than considering potential gains. Depending upon which part of a person's brain is engaged, people will behave differently--which can explain why people and markets typically behave differently in "bull" versus "bear" markets, and why many people both buy insurance and gamble.

Peterson also shows that the workings of the "rational" planning part of the brain, the prefrontal cortex, can be inhibited or bypassed by emotions stemming from other areas--such as greedy gain anticipations coming from the Nucleus accumbens or by "fearful" emotions emanating from the brain's amygdala. Acting under the influence of fearful emotions, people may exhibit excessive loss aversion and enhanced time preference. Acting under the euphoric input of greedy anticipation, people may make hurried, impulsive decisions and forego doing due diligence before investing. Rational decision making and asset pricing suffers in either case, and so will market efficiency when "herding" occurs and people respond similarly to market stimuli.

The book provides both trading and investing references and tips for recognizing emotional states that can affect markets or personal investment success. Market inefficiencies can be generated by the emotional states of others, while personal emotional states can be inimical to successful trading or investing. The book provides advice to help investors recognize and control their own emotions while investing.
It also may help them profit market inefficiencies generated by pervasive emotional states of other investors. The book should be valuable both to investors and academics because it contains voluminous recent references to the rapidly developing literature in behavioral finance and neuroeconomics as well as to recent literature in psychiatry and psychology with financial applications.

Chip Peterson
Professor Emeritus (Finance), Texas Tech University

19 of 22 people found the following review helpful

5.0 out of 5 stars Solid Book on the Brain's Impact on Trading and Investing November 5, 2007

By L. Masonson

Format:Hardcover

The typical investor is his/her own worst enemy, doesn't have a long-term investment strategy, cuts profits short and lets losses pile trying to break even, does not use stop loss orders, buys near the highs and sells near the lows, and likes to chase the hottest mutual funds or stocks. If you see yourself in any of these statements, then join the crowd. To become a better investor or trader it is crucial to understand how your brain impacts your decision-making. This book provides not only an exceptional insight into this process, but provides methods to deal with negative thoughts and ideas that can hamper clear thinking. The 23 chapters are presented in a logical sequence and the writing is clear and precise. This book contains critical information that investor and traders require to maximize their efforts to be profitable.

The research in this book is based on the behavioral finance field. The book answers two key questions: 1. What are the irrational fears driving my investment behavior? and 2. What can I do to better manage my fears? The key to investing is not just obtaining a solid financial and investment education, but also understanding your brain's topography. The readers will learn to recognize subconscious mistakes in their decision-making.

The author's credentials and background are impressive - not only is he an MD with a specialty in psychiatry, but also is a former trader, contributor to numerous publications, and is a seminar leader. The contents of this comprehensive 392-page book provide readers with a unique look at the workings of the mind and how they impact trading decisions. Also included is a 12-page glossary that definitely helps the uninitiated with key terms in psychology, and the 32-pages of detailed footnotes illustrating the monumental amount of work put into this project.

This book is not light reading and it cannot be read in a short time if you want to get the most out of it. I particularly enjoyed the chapters on anxiety, fear and nervousness; loss aversion; and charting and data mining as they made me recognize my own emotional reactions to these elements. Overall, the author provides a detailed view of the brain that can only help in improving our trading and investing processes.

22 of 26 people found the following review helpful

5.0 out of 5 stars Great October 3, 2007

By Mr. Wan

Format:Hardcover|Amazon Verified Purchase

I'm surprised there's not more reviews of this book, considering I am halfway done with it (it's a very big book and should be read slowly and carefully), and hav picked up a lot already. I looked ahead to see what I was in store for, and it looks like a good study of momentum investing/value investing. I have read Tharp, Kiev, Elder, Douglas, Koppel, who are pretty much the big names of investing, as well as Gilvovich and Plous. I'd say Mark Douglas and this author gave me the most insight in this topic. I plan to read Thaler next so I cannot comment on what Thaler has to offer. This author quotes Michael J. Mauboussin a few times as well, apparently this author likes his work, as do I.

In regards to this book, it is the first book I have come across that had actual psychological studies where the subjects were put to tests to see what kinds of decisions they make in the stock market. This is valuable insight that you don't find much. Usually the author is discussing studies in something other than the stock market, and they extrapolate this data on to what they probably would have done if it were the stock market. This book is full of how people behave in either gambling, or the financial markets. It does go into detail as to what portion of the brain is activated when given certain stimuli, and what effects that portion of the brain give. It is the most in depth and most well researched book I have read so far when it comes to psychology of investing. I have picked up a lot from this book, and now know why we tend to do things that are destructive to our financial health, even after all the books I have read. So we read books like this to gather useful information that we don't know yet, that can be applied successfully to make money, or prevent losing money. Does this book fit this requirement? Absolutely.

In addition to this book I might suggest you read the following I found useful.

How We Know What isn't So, by Gilvovich
Psychology of Judgment and Decision Making, by Pluous
Trading in the Zone and Disciplined Trader by Douglas
More than you Know by Mauboussin

Forget those "Zen and trading" books out there. Go for the real thing.