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Behavioural Investing: A Practitioner's Guide to Applying Behavioural Finance Hardcover – October 29, 2007
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"It is quite simply the best and most comprehensive treatment of the subject to date." (Financial Times, Monday 3rd December 2007)
"The Year's most exhaustive, and often entertaining, coverage of the behavioural literature." (Financial Times, Saturday 15th December 2007)
"...one of the few 'must read' books on the topic of investing." (The Herald - Glasgow, Saturday 2nd February 2008)
"…a fantastic insight into how markets operate… [and] one of the few "must read" on the topic of investing." (The Herald, Sat 2nd February 2008)
From the Back Cover
Behavioural investing seeks to bridge the gap between psychology and investing. All too many investors are unaware of the mental pitfalls that await them. Even once we are aware of our biases, we must recognise that knowledge does not equal behaviour. The solution lies is designing and adopting an investment process that is at least partially robust to behavioural decision-making errors.
Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance explores the biases we face, the way in which they show up in the investment process, and urges readers to adopt an empirically based sceptical approach to investing. This book is unique in combining insights from the field of applied psychology with a through understanding of the investment problem. The content is practitioner focused throughout and will be essential reading for any investment professional looking to improve their investing behaviour to maximise returns.
Key features include:
- The only book to cover the applications of behavioural finance.
- An executive summary for every chapter with key points highlighted at the chapter start.
- Information on the key behavioural biases of professional investors, including The seven sins of fund management, Investment myth busting, and The Tao of investing.
- Practical examples showing how using a psychologically inspired model can improve on standard, common practice valuation tools.
Written by an internationally renowned expert in the field of behavioural finance.
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But I could not get myself to take more than one star off, because the insights are so important, and the research presented to bolster them is very compelling. This is true both in terms of the psychological research underpinning the precepts of behavioural investing, and of the empirical research that shows the practical impact on asset prices.
I would add to the criticisms that this book seems comparatively expensive, but I would say that in this case, you get what you pay for.
It is easy to read and very entertaining, nevertheless with a factual approach. But be warned: as a PM you will feel the urge to stop taking calls from sales people ;-)
(a) produce a book by pasting together previously published articles, and invest no effort into editing the material to reduce duplication or just weed out the typos. Here, editorial work has consisted of writing a short preface and collating the original bibliographies.
(b) go with a sexy title that happens to oversell the book's contents. I would make a guess of 200-250 pages that can be linked to "behavioral investing" - and most of those is surveying psychology research. It is interesting to hear the author's thoughts on investing - forecasting is out; Graham-Dodd and trailing multiples are in - but this is not what I paid for.
(c) do not always seem to know what they are talking about*. The FT review may call this book "the best and most comprehensive treatment of the subject to date" - better luck next time, Richard Thaler's "Advances in behavioral finance" and Hersh Shefrin's "Behavioral corporate finance" - but a look at those should tell you the qualitative difference.
I would advise readers interested in "behavioral" stuff to consult Thaler's and Shefrin's books - and to read "Behavioral investing" as a very entertaining introduction to the subject and a collection of fairly interesting investment-research essays.
* Type "Bayesian" into "Search inside" to navigate to page 116, and try to understand (and if you do, please explain to me) the author's concept of prior and posterior probabilities. If you prefer math, try keyword "acquirer" to get to page 65, read the exhibit and help me see why "by offering $60, Company T is assumed on average to be worth $30". Or, search for "Linda" to get to page 27, read the first three paragraphs of the new section and see if you understand the author's explanation about "people underweighting", etc. Linda comes back on page 84, and take 2 does better, but it's still not good. (By the way, Linda is only seen twice - but a piece of research by Bechara et al. comes back as often as Freddy Krueger).
Even though investing is an intellectual endeavour most investors, as in fact most people, stop to improve their theoretical skills when they leave university thinking that when they enter the real world theory doesn't really matter - "Those who can, do; those who can't, teach." This then means that their knowledge gradually becomes obsolete. Too few read books, instead the source of information is papers from investment banks. Hence there is a need for a bridge between theoretical advances and investment practitioners. For behavioural finance Montier has been this bridge and a whole generation of investment professionals is wiser as a result.
This is Montiers second book. The first one builds on a number of lectures in behavioural finance held as a visiting professor at university. This second (but also the author's third) book is really a collection of essays written while working as a sell side strategist. The essays are grouped after subject. My only objection is that it could have benefited from at least a small amount of editing. This is a very minor complaint. To me these essays are like old dear friends and I have read them over and over, even before they were published in a book. In such a way, editing would also have taken something away for me personally.
Behavioural Investing is rather an extensive book and large parts are devoted to both individual irrationality and collective behaviours and the bubbles those can create. In the introductions to his first book, Behavioural Finance, the author describes how he left university a devoted rational expectations-man. Perhaps it is his later conversion that gives Montier the enthusiasm and drive to try to make everybody see the same truth as he saw himself. Everything Montier writes is well researched, clever, unpretentious (with a twist of dry British humour), entertaining and above all important. But the content in these sections isn't too different from any academic text book on behavioural finance - just a lot more fun to read.
The real strength of the author is when he combines his knowledge of institutional investors and his theoretical knowledge, i.e. when the sell side strategist Montier looks at his own clients with his behavioural finance-goggles. Irrational illusions of how things should be done are exposed for all to see. To an outsider it is perhaps hard to realize how controversial these essays were with investment banks at start as they pointed to "faults" among Montier's clients. The clients however loved them and "The Seven Sins of Fund Management" is a classic paper. With investors as audience, what you write have to come to practical use and Montier gives extensive advice on how investment philosophy and process, organisation and incentives could be used to correct the biases investors exhibit. This could relate to anything from how they should view risk and minimize the use of forecasts to the opinion that they should become value investors. Montier in many ways gives a behavioural finance foundation for the value investing discipline.
I have long held the view that Montier and Michael Mauboussin at Legg Mason should be locked up in a room, not to be let out until they agree to co-write a book on investments. This should have the potential to become the definitive book on investments of all times.
This is a review by eqtbooks.com