Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias (Wiley Finance) by Tim Richards, discusses a behavioral approach to saving for retirement which Capital Ideas Online posted. First a little xcerpt from Capital Ideas Online and then a description of the book…
Investing Psychology: Saving For Retirement
In a wonderful book, well worth reading, “Investing Psychology”, the author, Tim Richards (who runs a must-visit website www.psyfitec.com), writes about a behavioral approach to saving for retirement.
“Our social interactions with our future selves. One of the many interesting facets of our social interconnectedness is that most of us are imbued with a sense of social responsibility. We are inclined, all things being equal, to help people in need when we can.
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This doesn’t always play out the way you’d want. Famously, Kitty Genovese was repeatedly attacked in New York within earshot of lots of people who could have helped her but didn’t. The theory was that everyone left it to someone else to do something about it, the so-called bystander effect. In fact, there’s quite a lot of doubt as to what really happened, sufficient to cast doubt on the whole theory, but there’s absolutely no doubt at all about what you should do if you ever find yourself in trouble in a crowd and need help: you need to focus on one person and appeal directly to them. If one person comes to your aid others will follow, but otherwise everyone may leave it to someone else.
More generally it seems that we’re naturally imbued with an instinct to connect with others. There are lots of studies about the connection between happiness and money, the general idea being that buying lots of consumer goods doesn’t promote any lasting improvement in general well-being but that investing in experiences does. Supplementary to this Elizabeth Dunn, Lara Aknin, and Michael Norton suggest that spending money on other people makes us more happy than spending it on ourselves – and follow-up research indicates that spending that money on people with whom we have strong social ties makes us happier still.
Coming from a world in which social links are everything, it’s not hard to imagine that this type of behavior is generally beneficial in strengthening the social bonds. So the closer we feel connected to someone the more likely we are to act on their financial behalf (and in lots of other ways too, but we’ll stick to the knitting on this one). This leads to a puzzling observation – that we often fail to act in our own financial interests because we don’t seem to relate very well to our future selves.
Full article via Capital Ideas Online
Investing Psychology – description
Investing Psychology, + Website: The Effects of Behavioral Finance on Investment Choice and Bias (Wiley Finance) by Tim Richards
- Offers an overview of how our brain perceives realities of the financial world at large and how human nature impacts even our most basic financial decisions
- Explores several different types of behavioral bias, which pulls back the curtain on any illusions you have about yourself and your investing abilities
- Provides real-world advice, including: Don’t compete with institutions, always track your results, and don’t trade when you’re emotional, tired, or hungry
Investing Psychology is a unique book that shows readers how to dig deeper and persistently question everything in the financial world around them, including the incorrect investment decisions that human nature all too often compels us to make.
From the Inside Flap
As we move forward into the 21st century, fraught with global economic uncertainties and disruptions, it is more important than ever to understand the fundamental realities of behavioral finance and the inherent human biases that drive so many of our investment decisions. In Investing Psychology, + Website: The Effects of Behavioral Finance on Investment Choice and Bias, renowned behavioral investment expert and blogger Tim Richards provides a plain-language guide for understanding the perils of the financial world that have evolved around us and teaches us how to defend ourselves against our most dangerous financial enemy – our brain.
Starting with an overview of how the brain perceives realities of the financial world at large and how human nature impacts even our most basic financial decisions, the author walks you through many of the preconceived notions that haunt individual investors and professional financial advisors alike. As humans, we tend to have an overly optimistic belief in our ability to assess risk and opportunity and to make the right decisions when it comes to our financial futures. And, unbeknownst to most of us, we are often being influenced by situational factors in our lives, as well as the pervasive group think of major financial media outlets and corporate marketing campaigns. All of it conspires to push us toward decisions that can have disastrous financial consequences.
The key to overcoming the most common investment pitfalls, according to Tim Richards, is to learn to identify and overcome the fact that our tendency is often to make poor investment decisions because of our innate behavioral bias. When we understand how and why our brains consistently fool us, we gain the power to avoid bias in our decisions and maximize our investment returns.
From the Back Cover
Praise for Investing Psychology
“All investors are biased. The vast majority of investors are hopelessly biased. The rest could benefit from Tim Richards’ well-researched book. Therein lies the opportunity for those investors willing to commit to their own ‘personal investing mission statement.'”
—Tadas Viskanta, Founder and Editor of the Abnormal Returns blog and author of Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosophere
Remove behavioral bias from your investment decisions
For many financial professionals and individual investors, behavioral bias is the largest single factor behind poor investment decisions. The same instincts that our brains employ to keep us alive all too often work against us in the world of finance and investments. Investing Psychology, + Website explores several different types of behavioral bias, which pulls back the curtain on any illusions you have about yourself and your investing abilities. This practical investment guide explains that conventional financial wisdom is often nothing more than myth, and provides a detailed roadmap for overcoming behavioral bias.
Some of the real-world advice in Investing Psychology includes:
- Assume you are biased and try and recalibrate
- Don’t trade when you’re emotional, tired, or hungry
- Don’t compete with institutions
- Seek to disprove any idea you might have
- Always track your results
Investing Psychology is a unique book that pointedly avoids the popular approach of offering anecdotal support for plausible investment strategies and financial theories. Instead, author Tim Richards teaches readers how to dig deeper and persistently question everything in the financial world around them, including the incorrect investment decisions that human nature all too often compels us to make.