Equity investing activates our “story brain” in the direction of both greed and fear because there are salient examples throughout history of both great wealth creation and wealth destruction. But risk, real risk, is the probability of permanent loss, not the bumps and bruises along the way.

The irony of obsessive loss aversion is that our worst fears become realized in our attempts to manage them. Behavioral investors take a clear-eyed view of risk and uncertainty in a world that distorts them out of fear, and their lives are richer for it.

The problem with the levees was one that is often observed in finance: they were designed to manage the greatest storm that had ever been and not the greatest storm that could ever be.

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

Hardcore passive management enthusiasts overemphasize the overarching pull toward efficiency and mistake the general trend for the Gospel Truth. In so doing, they overlook valuable opportunities for return enhancement that are available to behavioral investors. Advocates for traditional active management are quick to point out the behavioral

the human mind is a happiness preservation machine and facilitates that by remaining superficial when things are going well. Nothing kills your buzz like having to think in nuance or, in the case of an investor, read an in-depth analysis of company financials.

As news outlets become more and more partisan and specialized, the value of information can become so diminished that it can actually become harmful. Those who ought to be selling signal have by and large become purveyors of noise. What’s more, the coming glut of information means that we will be compelled to rely more and more heavily on

Probability confirms that optimism ought to be the de facto position of the well-informed investor: markets usually go up. But there are two things that begin to give investors pause and would warrant taking a more defensive position. The first is flagging momentum, which increases the probability that the market will fall in value. The second is

Arbitraging the national psyche The Minnesota Multiphasic Personality Inventory (MMPI) is a widely used assessment of mental disorders that provides interesting insights into the American national psyche. Between 1938 and 2007, the levels of psychopathology in the US, as measured by the MMPI, have risen greatly. Specific areas on the rise include: