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The Little Book of Behavioral Investing: How not to be your own worst enemy Hardcover – January 26, 2010
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From the Inside Flap
Ben Graham, the father of value investing, once said: "The investor's chief problemand even his worst enemyis likely to be himself." Sadly, Graham's words are still true today. Bias, emotion, and overconfidence are just three of the many behavioral traits that can lead investors to lose money or achieve lower returns. Fortunately, behavioral finance, which recognizes that there is a psychological element to all investor decision making, is now firmly embedded in the mainstream of finance. Applying behavioral principles to an investment portfolio can help investors avoid some of the mental pitfalls that so often cost them, and financial institutions, billions.
In The Little Book of Behavioral Investing, behavioral finance expert James Montier takes you on a guided tour of the most common behavioral challenges and mental pitfalls that investors encounter, and provides you with strategies to eliminate these traits. Along the way, he shows how some of the world's best investors have tackled the behavioral biases that drag down investment returns, so that you might be able to learn from their experiences.
Page by page, Montier explains the importance of learning to prepare, plan, and then commit to a strategythat is, do your investment research while you are in a "cold" rational state, when nothing much is happening in the marketsand then pre-commit to following your analysis and action steps. He also stresses the folly of trying to forecast what the markets will do, and reveals how the idea of investing without pretending you know the future gives you a very different perspective. Throughout the book, Montier stresses why the need to focus on process rather than outcomes is critical in investing. Focusing upon process, he shows, frees us up from worrying about aspects of investment that we really can't controlsuch as returns. By focusing upon process, we maximize our potential to generate good long-term profits.
The Little Book of Behavioral Investing offers a range of time-tested ways to identify and avoid the pitfalls of investor bias. By following these simple strategies, you will learn to overcome your own worst enemy when it comes to investmentsyourself.
From the Back Cover
"The Little Book of Behavioral Investing is an important book for anyone who is interested in understanding the ways that human nature and financial markets interact."
—Dan Ariely, James B. Duke Professor of Behavioral Economics, Duke University, and author of Predictably Irrational
"In investing, success means being on the right side of most trades. No book provides a better starting point toward that goal than this one."
—Bruce Greenwald, Robert Heilbrunn Professor of Finance and Asset Management, Columbia Business School
"'Know thyself.' Overcoming human instinct is key to becoming a better investor. You would be irrational if you did not read this book."
—Edward Bonham-Carter, Chief Executive and Chief Investment Officer, Jupiter Asset Management
"There is not an investor anywhere who wouldn't profit from reading this book."
—Jeff Hochman, Director of Technical Strategy, Fidelity Investment Services Limited
"James Montier gives us a very accessible version of why we as investors are so predictably irrational, and a guide to help us channel our 'Inner Spock' to make better investment decisions. Bravo!"
—John Mauldin, President, Millennium Wave Investments
Top Customer Reviews
A sample of the first few chapters and mental traps are as follows: (seventeen chapters in total)
Chapter 1 - Paralysis Of Empathy Gap
Chapter 2 - Fear/Risk Aversion
Chapter 3 - Overoptimism
Chapter 4 - Authority Respect/Overconfidence
Chapter 5 - Anchoring
Chapter 6 - Information Overload
Chapter 7 - Reason Respecting
Chapter 8 - Conformational Bias
As a side note: I have pointed out in other reviews of additional books below that are in the same genre and which are some of my favorites. So if you like this very good introductory book, then you may be interested in other social influences and hidden traps our minds fall into. If so, I provide the following recommendations: Think Twice (introductory), Influence: The Psychology of Persuasion (polymath classic), How We Know What Isn't So (very good), Mean Markets and Lizard Brains (Hidden Gem), The Psychology of Judgment & Decision Making (Classic), and Poor Charlie's Almanack (Charlie's Insights).
Think Twice: Harnessing the Power of Counterintuition by Michael J.Read more ›
More to the point, I found the constant use of previous behavioral studies a distraction that ended by simply getting in the way Montier's message. That would have been easily survivable, however, had the book included a closing summary of the author's points. As it is, I felt compelled to go back reread parts of the book 2 or 3 times to attempt to sort out what was essential and what was merely an effort to display the author's cleverness.
In the end, the writing style tends to defeat the book's purpose leaving the reader with an almost invaluable investment guide. Almost doesn't make it...
1. Prepare, plan and commit to an approach ahead of time when the alternatives can be clearly analyzed instead of deciding on an approch in the heat of the moment.
2. Human mind can factor in a handful of variables; with more data accuracy remains the same but we're overconfident of our accuracy
3. Avoid forecasts
4. Look for evidence that refutes rather than confirms your hypotheses
5. Separate the facts; resist human tendency to follow a theme / story
6. Focus on improving underlying process / methodology; occassional wrong outcomes are expected and shouldn't derail one from its pursuit
If you're serious about avoiding all the common pitfalls the typical investor makes, you absolutely should grab a copy of this book; I only wish it had been written about ten years ago, but better "late than never"!
Most Recent Customer Reviews
Fascinating. Lots of studies to support his reasoning. Psychology used in this book explains a lot of other human behavior too. Read morePublished 1 month ago by RR
Outstanding little book. I'm in the investment business and have appreciated more the psychology of the investor versus the pursuit of total return performance. Read morePublished 4 months ago by 30ABeachBum
Interesting book, I'm a fan of Montier's approach to investing.Published 6 months ago by Michael Phelan
This little book is well worth a read not only for investors but for every one.
It certainly opened my eyes and confirmed why I dont like Financial advisers and Fund managers.