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The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money Hardcover – Illustrated, January 3, 2012
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"Carl Richards is the anti-Jim Cramer. He doesn't pick stocks, and he doesn't shout. In wise, calm style, The Behavior Gap teaches us how to rein in the emotional saboteur within us-the voice that leads us to double-down when the market is peaking and to make a panicky exit when stocks are a bargain. Richards shows us that, when it comes to our financial security, slow and steady wins the race." — Dan Heath, coauthor of Made to Stick and Switch
"Ah, clarity! Carl Richards can see the mistakes that humans-being human- make again and again with money. Then with humor and an I've-been-there nudge he sets them on the right course." — Jean Chatzky, author of Pay It Down
"The Behavior Gap throws light on an important question: How can we think more clearly about money and its role in a happy life? Carl Richards shows how to shape our behavior to invest, save, and spend to foster greater happiness." — Gretchen Rubin, author of The Happiness Project
"Who says common sense is common? Smart, tactical, practical advice for anyone who has done dumb things with their money." — Seth Godin, author of We Are All Weird
"Carl Richards's deceptively simple sketches in The Behavior Gap will make you laugh, change your relationship with money, and leave you the wealthier for it. This one is bound to be a classic!" — William Bernstein, author of A Splendid Exchange and The Investor's
"Carl has a knack for showing-gently and with charts!-that when it comes to money, most of us are idiots. Carl prods us to master money, rather than letting it master us." — Laura Vanderkam, author of All the Money in the World
"A brilliant guide to the ways we often trick ourselves into staying poor. Read this before you make your next financial decision." — Zac Bissonnette, author of Debt-Free U
"If a picture is worth a thousand words, Carl's sketches could change a life! He captures the essence of life and money." — Marty Kurtz, president of the Financial Planning Association
About the Author
independent advisors. He contributes to the Bucks blog at The New York Times and is a columnist for Morningstar Advisor. Richards appears regularly on National Public Radio's Marketplace Money, and is a frequent keynote speaker at financial planning conferences and visual learning events. You can find more of his work at BehaviorGap.com. He lives in Park City, Utah, with his family.
- ASIN : 1591844649
- Publisher : Portfolio; Illustrated edition (January 3, 2012)
- Language : English
- Hardcover : 192 pages
- ISBN-10 : 9781591844648
- ISBN-13 : 978-1591844648
- Item Weight : 10.4 ounces
- Dimensions : 5.71 x 0.75 x 8.53 inches
- Best Sellers Rank: #70,695 in Books (See Top 100 in Books)
- Customer Reviews:
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Here are my notes from the book:
1. Cycles and other factors do cause markets to go to ‘inefficient’ high and low extremes.
2. Stocks should be treated as potentially useful, but also dangerous. And increased potential upside does generally come with increased risks (but the converse isn't true: higher risk doesn't always mean increased potential upside).
3. In the long run, the vast majority of people who attempt market timing do worse than the markets, and we shouldn’t fall prey to the hope that we can rely on others to make such predictions. So it’s best to formulate an approach which will likely work well long-term regardless of how markets fluctuate in the short and intermediate terms, since the long-term trend is up; but this does assume that the future will repeat the past in the long-term, whereas there have been bear markets of more than a year in the past, so 'riding out' long bear markets can be a painful process which wouldn't be a good situation for people nearing retirement or already retired.
4. The most effective investors are moderate and humble rather than overconfident, and recognize their inability to reliably make accurate predictions. In fact, people with the highest proportion of accurate extreme forecasts tend to do worse overall. And because of the lack of predictability, rather than trying to adhere to rigid long-term plans, we should take a more flexible approach of adapting to evolving circumstances by making small but consistent course corrections. This means that we need to pay attention to what’s happening in timeframes of weeks and months in order to make decisions which will tend to work well over years, while ignoring intraday or day to day fluctuations, and recognizing that sometimes doing nothing is the best option.
5. Following the herd and doing what’s popular will usually mean buying rather than selling when markets are high, and selling rather than buying when markets are low. Ironically, people who are relatively disciplined and really try to stick to their plans are most vulnerable to this, because they’re among the last to 'give in' and buy (near tops) and among the last to sell (near bottoms). 'Safety in numbers' isn't a valid maxim for investing.
6. Financial planning is part of life planning, and needs to be personalized – what’s suitable for one person may be unsuitable for another. Generally, we should only take as much risk as needed to meet our financial goals (rather than trying to maximize return and thereby taking on unnecessary risk), while keeping in mind that additional money has diminishing value in terms of enhancing our lives once we reach upper middle class (personal relationships, experiences, and the feeling of doing worthwhile work matter more, once our basic needs are met). The harm we suffer from a major loss is usually greater than the benefit we derive from a major gain, so loss aversion makes sense.
7. Because of regression to the mean and the role of luck, funds which performed well in the past are less likely to do well in the future. Unlike most other fields, in investing, past performance is NOT a reliable indicator of the future, and may even be a misleading indicator. The only consistent correlation is that funds with higher expense ratios tend to perform more poorly.
8. Because of good and bad luck, sometimes bad decisions will result in good outcomes, and good decisions will result in bad outcomes. Rather than being mislead by that, we need to stick to approaches which are likely to work longer term.
9. Most of what’s reported in the financial media is just noise, and is best ignored. Try to keep your models simple and robust. That doesn’t mean we should ignore important developments on large geographic scales, but we should accept that context as ‘given’ and focus our financial planning decisions on where we can have an influence.
10. A good test for evaluating a portfolio is to imagine being in cash and then asking how similar and different your portfolio would be if you reconstructed it. Don’t keep things the same just because of wanting to preserve the status quo, attachments, laziness, or wanting to ‘break even’ on an investment. A portfolio should be evaluated based on anticipated long-term future performance, not what has happened in the past to get to this point.
11. Don’t fall prey to hindsight bias and compare your current portfolio value with a previous peak, as though the portfolio is at a 'loss' compared to that. Such extremes aren’t meaningful reference points. Instead, look at rate of return over longer timeframes. (It's not mentioned in this book, but given that the long-trend of markets has been upward, buying low is a better and generally safer strategy than trying to sell high. And of course, things will usually look bleak - 'blood in the streets' - when markets reach lows.)
12. If an investment option looks too good to be true, it probably is. Scrutinize such options intensively.
13. Investing should be done dispassionately, rather than approached as an entertaining game. This will generally lead to better decisions. If you sense that you’re about to make an impulsive decision, sleep on the decision for one or more nights before deciding.
14. Take responsibility for all of your investment decisions, rather than selectively taking credit for gains and blaming others or situations for losses.
15. Don’t be penny wise and pound foolish in making financial decisions. Maintain perspective on what really matters by considering absolute dollar amounts, and prioritize your time accordingly.
Just handling greed and fear, which drive the majority of stock trades.
I didn't find this book overly useful - I would say there are a handful of much more useful books out there.
I also don't like how the author recommends hiring a Financial Advisor, which is not very necessary if you do your due diligence and research... Read the below books and you will get the majority of what you need...
JL Collins - Simple Plan to Wealth (Definitely read this one!)
Beth Kobliner - Get a Financial Life
Erin Lowry - Broke Millenial
Ramit Sethi - I will teach you to be rich
The introduction helps to set the stage with simple steps to getting what we REALLY want (financial security?). Here are a few of my favs:
Stop chasing fantasies
Protect what we have (to the best of our ability)
Accept that life (and the world of finance) is uncertain
Make decisions that make sense.
Granted, books about behavioral finance/economics and how we think, choose and blink are all the rage right now as we grapple with a struggling economy and the REAL people who are not yet back on solid ground. Our so called "new normal" didn't really take and according to Outright.com in 2011, shoppers spent an average of $704.18 per person on gifts and seasonal items. [...]
So what accounts for the gap between what we know and what we do with money? Why do people who are intelligent and capable of making good decisions in almost every area of their lives struggle with investment decisions or even basic money management?
Carl tells you the truth about financial decisions (what, you think I'm gonna let the cat out of the bag?) in this book and I will give you a hint: What matters most to you?
The book is easy to read, it will help you learn about your (or your clients) investing behavior and provide a pathway to make better choices. No shaming, no blaming...you won't be called an idiot or any other derogatory name...just some sound ACTIONABLE advice and support to make better financial (and specifically investment) decisions.
My fav line in the book? Hope is NOT a budgeting strategy!
Top reviews from other countries
Unlike many journalists Carl is a Certified Financial Planner so has a degree in financial planning - the folks writing in the personal money pages online and in newspapers are rarely (it at all) as well qualified. His back of the napkin sketches in the NY Times are the stuff of legend - pictures paint 1,000 words.
As a CFP and lifestyle financial planner myself the only thing I disagreed with is where Carl seems to suggest that you should not do (and pay for) a proper financial plan - one with personal lifetime cash-flows including catastrophe scenarios etc - as the plan goes out of date the minute you print it off. The whole point of a financial plan is that it acts as a blueprint and should be reviewed at least annually as things change - life is not a straight line. It's important to check back to make sure you are still on track.
I'd suggest you need a proper financial planner (harder to find than you might think) to challenge your assumptions and make sure you keep to your plan - even (especially when) the markets have just tanked 30%. DIY investors rarely look themselves in the eye and state 'this too will pass'. They are more likely to panic out.
This is a great read. Even if you are not that money orientated.
I work as a financial advisor and struggle with the fact that we can't control the equity markets, and the general advice for people without enough money is that they "need" to take on more risk to achieve their goals. But at the same time, these people can't really "afford" the risk that they need to take, and if things don't work out (or they give up on the plan when things don't go as expected, which is more likely) then they are in real trouble! I prefer to advocate lifesytyle planning, realistic expectations and increased savings if necessary. Reduce debt, control spending, get your home paid for (in most cases), and you can have a lot more confidence in achieving your goals than by taking on significant additional risk to (hopefully) have a higher return. In fact, this allows you to take on more risk because you can deal with it more easily if things don't go as planned.
This book covers complex concepts and makes them easy to understand, without dumbing it down. It also spends a lot of time on non-financial asepcts of investing. I highly recommend it, in fact I bought 20 copies to give to clients!
As well as being an accomplished Financial Planner, Carl's clearly an expert in human behaviour. With numerous sketches and anecdotes, he cleverly highlights how we get in our own way by repeating irrational decisions when investing. More importantly, he tells what to do to break the cycle.
This book, more than almost any other, defines the role investing plays in helping us achieve our most important goals and ultimately live a more enjoyable life. Don't make the mistake of thinking it's just for the avid investor. In fact, it's quite the opposite.
At long last, we've got a book which offers straightforward advice on how to avoid the usual investment pitfalls, why we should ignore the investment media and how to apply simple, tried-and-tested principles to building long-term wealth.
It's a very enjoyable read, written in a witty, laid-back style. If you've got a weekend to spare get your hands on a copy. Provided you take on board Carl's lessons I predict you'll be a lot wiser and wealthier as a result. Happy investing.
The book would be useful for both financial and non-financial orientated people as the basic premise is to focus on life first - a mantra we could all follow