Customer Reviews

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

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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 ½ 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

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.

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.

Now it's clear why those Motley Fool headlines are so compelling to click on. Inside the brain of the investor, fear of loss is twice as great as the joy of gain. In the fascinating "Inside the Investor's Brain", Richard Peterson explains why and much more.

An investor is more likely to wager $1000 on a fifty-fifty coin flip if he had just lost $1000 in an investment than if he had just gained $1000. Studies have shown that people would make the risky wager more often when they were in the red (~80%) but fewer people would make the wager when they were in the black (~30%). Why? It's the same wager. But, as Peterson shows in one of his fascinating illustrations, we investors put more import into losses than gains.

This type of seemingly irrational behavior is what is going on behind every stock transaction, hedge fund decision, or institutional investment, and it's the main reason why it takes a genius (or a very lucky person) to consistently beat the market. It's also why I left specific investment advice out of my book about Credit Arbitrage. There is simply too much of a human element to trading. While the author does admit that financial advisers fare better than dartboards or the Dow Jones average for that matter, he notes that the wisdom of the collective is always smarter than its constituent parts. Citing Mauboussin, Peterson describes why it's so difficult to beat the market.

Peterson also goes on to get into the physiology of the brain and how it reacts to retail situations numerous real-world investment anecdotes to illustrate his points. The result is an entertaining look into what goes on in the minds of investors, which everyone should read.

Opinion

The book "Inside the Investor's Brain: The Power of Mind Over Money" by Richard L. Peterson is not a get rich scheme, an introductory investment guide, or any other glamorous appeal to attract budding investors. In fact, Peterson depicts investing as a difficult practice that very easily conquers the lowly average investor. To understand the book, it is important to understand Peterson's extensive academic background of being a medical doctor in psychiatry and a long time investor. The book is written at a complex level and requires devotion for those looking to avoid routine investing debacles. Peterson believes the prefrontal cortex can be inhibited by emotions and are the basis for many of the problems an investor faces. This book becomes a guide for recognizing and controlling emotional states when trying to make investing decisions.

Structure and Style

The book contains twenty-three chapters of insights that can help participants of the financial arena control their emotions to invest more successfully. The book is written at an advanced level and is not for those who do not have experience investing. The saving grace for the book is that it does contain a much-needed glossary of complex terms for those who may not be as up to date with the technical jargon used by Peterson. Peterson's advanced education shows in his writing style but also allows him to provide specific examples from his own real life experiences. The book provides chapters specific to different emotions including anxiety, fear, and nervousness. Other chapters focus on market inefficiencies and market trends, but the commonality of all them is that they are grounded in managing emotional responses to different situations.

Interesting Elements

I have read several neuroeconomic books in the last month or so and now realize the value of having a glossary similar to the one Peterson has provided. Another interesting element was the excerpt about how people weigh potential losses twice as much as potential gains and that a person acting out of greed tends to act quicker than someone motivated in loss avoidance. The book lacks some of the more interactive learning tools that other books on the topic have that I have read but is very effective in communicating Peterson's real life experiences.

Interesting Quotes

"In general, if a stressful event is predictable, than it evokes a decreased stress response."

"Gambling in the markets is more dangerous than casino gambling due to the high leverage available."

"After experiencing a recent loss, most people become more loss adverse, as if the amygdala has become primed."

Recommendation

For those considering reading this book, make sure you are an experienced investor and that you are willing to "invest" some time because the book reads longer than it is. That being said, there is no reason that this book cannot be read with enjoyment. The biggest problem that I had with the book was that it was rather one-dimensional. There are other books focusing on neuroeconomics that allow readers to understand the underlying material of this book in more open and creative formats. The book can be summed up in two main points: What emotions affect my investing decisions and how can I regulate this. If, as a potential reader, these questions do not interest you, this book is not for you. This book is written mainly for serious investors and may be above the level of the average investor.

Aside from the section that deals with the brain, serotonin and other facets of the reward system, much of this information would already be common knowledge to someone who hasn't lived under a rock most of their life in isolation from others.
But thats just the thing, some need to have it spelled out on a page to fully realise or cement the depth of certain concepts into the mind.
Anyone who day trades knows the power of ramping but unfortunately the author doesnt reveal the mindsets of the daytraders, He wouldn't be able to for the book seems as tho it is written by a learned psychologist and not a trader.
You can get most of the info regarding trader habits, biases and self delusions anywhere but the section on neurology is worth the price itself. Good addition to a traders library.

I consider myself very lucky ! I look for a book that will describe what a trader\investor feels like and how can one deal with such feelings. It turns out that on my first search through the net I came across this great, thorough, professional, up todate book. Non of the books I came across after this one could supply the goods in one cover.
1) It was published in 2007 so many examples from the financial world or researches described in the book are relevant.
2) Its not an easy book to read, however that exactly what makes it professional and thorough. The author describes a behaviour, brings examples, and backs it up with research and experimental results, sometimes he even suggests the reader how to deal with similar situations accordingly.
3) If you are an experienced trader\investor this book can be like a mirror to your feelings. I personally related to most of the behavioural examples given in the book, as if Peternon wrote it about me. Of course we are all very much the same in that sense and the difference is actually how we manage (or learn to manage) our emotions.
To conclude: the recipe for making money in the market starts with "learn to manage your emotions". This book may teach you all about those emotions, managing then is something else.

Eitzik

Richard L. Peterson's book is riveting, useful and, at times, poignant and funny. Peterson discusses a broad range of emotional and cognitive factors that influence investing. Some are common and will apply to all readers, but others are so subtle that they are sure to surprise even experienced investors. Peterson synthesizes and summarizes neuropsychology and behavioral studies, explains them in clear prose and illustrates them with examples drawn from investors' lives - and sometimes from their disasters. getAbstract recommends this work to readers interested in behavioral economics or in improving their investment practices.

Prices in the financial markets are influenced by people's emotions. The fear of losing money can drive prices low, and greed can take them to unrealistically high levels. The author of this book provides readers with a detailed analysis of how our brain works and how it affects our financial decisions. Most investors are their own enemies without the decent ability to control emotions. They buy high and sell low. The author makes readers aware of how our brain works and how it affects our financial decisions.

I will warn readers that it is a long book. The information can be very dry. It reads like a textbook. But the author is extremely knowledgeable about the subject. For those looking to learn about the psychology of investing, this book can be very helpful.

- Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market

Richard L. Peterson, Inside the Investor's Brain: The Power of Mind over Money (Wiley 2007).

Richard Peterson is a medical doctor with a residency in psychiatry, and with postgraduate training in neuroeconomics from Stanford University. He is a former stock trader, Associate Editor of The Journal of Behavioral Finance, a high-level professional economics journal. He also runs a hedge fund based on the principles laid down in this book. It would be hard to find someone better credentialed to give investment advice.

This a self-help book for people who are scientifically minded, care about managing their finances better, and are beyond the obvious, but most important, issues, such as paying the rent or mortgage on time, avoiding credit card debt, and treating Las Vegas or the state lottery as the wise man's preferred risk management strategy. The book is completely chocked with good ideas based on solid fact, and is nevertheless pleasant and enjoyable reading.

Peterson tells you right from the start the basics of investing: (a) if it sounds too good to be true, it probably is; (b) aggressive investing (churning your portfolio) is good for your broker and bad for you---pick a portfolio and then let it do its job without daily monitoring and stock switching; (c) if you think you can beat the market because you are lucky, smart, high-testosterone, physically attractive, blessed by God, or what have you, you are really just a sucker; (d) unless you have some special information (and that does mean a stock tip from your nephew in the pharmaceutical industry), stick with low overhead mutual funds and government/corporate bonds---read the prospectus to make sure there are no up front or back-loaded charges, and the yearly service charge is very, very small (expense ratio below 0.2%); (e) money that you might need in the next ten years should be put in bonds, the rest in stocks---older investors should have their retirement needs met by fixed return instruments, such as pensions, social security, and interest from bonds.

If you think anything I said in the previous paragraph is incorrect, you are a sucker and you will most likely lose money. If you follow all of the above principles, you are a wise investor, and you will make money. It is just that simple.

If you believe me, and you can actually follow this advice, you really don't need to read Peterson's book, although you may find it interesting on purely intellectual grounds. If you are a sucker, as defined above, you won't benefit from this book, but then again, you won't have gotten this far in this review, either.

Who, then, is this book for? First and foremost, it is for someone who has an open mind, does not accept uncritically my investment advice above, but is willing to be persuaded by the facts. Peterson presents all the fact you will ever need. Second, you may believe I am basically correct, but the existence of so many multi-millionaire "smart traders" suggests that there may be a "sixth sense" or a set of behavioral characteristics that allows their owners consistently to beat the market. Peterson believes there is, and he tries to show you how to develop them in this book. The three most important principles he offers are (a) if you know that lots of traders are emotionally biased in one direction, you can make money by betting on the other direction; (b) the market tends to overreact to short-term movements, and you can gain by overreacting in the other direction; and (c) if you can come to understand and correct you own emotional and behavioral weaknesses, you at least stand a chance of beating the market. As to how you come to pick future winners, I do not know, and Peterson does not explain. He talks of "intuition," "hunches", and the like. I am not convinced there is really anything there.

The behavioral economics explained in this book is very interesting in its own right, and Peterson is a wonderful teacher, always getting to the heart of the issue, and neither over- nor under-selling a particular point. As for the neuroscience in the book, it is flashy and impressive, but I think it is just window dressing.