The Behavioral Investor

It is heartening to think of the sort of noble people we would be if we adhered to the expectations of neoclassical economic theory. We would make prudent nutritional choices that nurtured our long-term health. We would ignore the daily ups and downs of the stock market in favor of a longer-term view aligned with our personal goals and needs. And w

Humans are wired to act; markets tend to reward inaction.

Money and capital markets are shared hallucinations whose value is more psychological than physical. The human mind gave rise to financial markets and to seek to understand them without an appropriate understanding of their genesis is folly in the extreme. There is no understanding markets without understanding people.

When asked how he survived the horrors of the Holocaust, renowned Austrian psychiatrist (and my personal hero) Viktor Frankl said, “Between stimulus and response there is a space. In that space is our power to choose our response. In that response lies our growth and freedom.” The experience of Frankl, who lost everything and everyone he loved in t

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

While we tend to think of bear markets as risky, true risk actually builds up during periods of prosperity and simply materializes during bear markets. During good times, investors bid up risk assets, becoming less discerning and more willing to pay any price necessary to take the ride. Risks compound during such periods of bullishness, but this es

Making money feels good, all right; it just doesn’t feel as good as expecting to make money.”

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.

“If you don’t know who you are, Wall Street is an expensive place to find out.” — Adam Smith, The Money Game