The Behavioral Investor

we will take the four pillars of behavioral risk management identified in Part Two and speak to the particulars of what they mean in the context of managing money. By way of quick reminder, they are: Ego – tendency toward overconfidence and behaving in ways that maintain feelings of personal competency over clear-eyed decision-making. Conservatism

the outside view means a more dispassionate appraisal that depends more on probability and facts than convenience and personal experience. In Think Twice, Michael Mauboussin sets forth four steps to taking an outside view of a problem. They are: Select a reference class – compare your problem to other problems like it. Assess the distribution of ou

Systematic risk, also known as “market risk,” is the chance that you will lose money as a result of moves in the broad market as opposed to factors relating to any business in particular. Unsystematic risk, also referred to as “business risk,” is the chance that an investment in an individual security will depreciate in value due to factors pertain

Complex problems yield noisy results that can only be understood using big-picture, simplifying frameworks.

If inhibiting emotion is good, is it possible that doing away with it altogether is even better? This is the line of thought pursued in a Stanford University study titled, ‘Investment Behavior and the Negative Side of Emotion’. Within, the researchers pitted 15 individuals with brain damage to their emotional processing centers against 15 “neurotyp

Learning to score your investment wins and losses based on the quality of your decisions and not on the quality of the outcome is the key to managing your emotions, appropriately measuring your own performance and living to fight another day.

egosyntonic satisficing is the process of making easy decisions that support a belief in a self that is good, kind and generally above average. So much of human behavior – political, religious, financial – can be explained by the fact that we want to think the best of ourselves and don’t want to work very hard to do it.

To avoid this misuse of knowledge, the behavioral investor should be sure to apply extra scrutiny to matters that are personally meaningful to us or that we wish deeply to be true or false. We must also consistently seek feedback from those with diverse viewpoints, track our own decisional efficacy and examine the deepest motivations behind our tho

This exercise is commonly referred to as the Feynman Technique and is named for the theoretical physicist of the same name. Richard Feynman, known for his work in quantum mechanics, set forth a simple, three-part formula for gaining greater knowledge: Figure out what you don’t know. Educate yourself. Teach it to a child or novice.