The Little Book of Behavioral Investing: How not to be your own worst enemy

by James Montier

A detailed guide to overcoming the most frequently encountered psychological pitfalls of investing Bias, emotion, and overconfidence are just three of the many behavioral traits that can lead investors to lose money or achieve lower returns. Behavioral finance, which recognizes that there is a psychological element to all investor decision-making, can help you overcome this obstacle. In The Little Book of Behavioral Investing , expert James Montier takes you through some of the most important behavioral challenges faced by investors. Montier reveals the most common psychological barriers, clearly showing how emotion, overconfidence, and a multitude of other behavioral traits, can affect investment decision-making. Written in a straightforward and accessible style, The Little Book of Behavioral Investing will enable you to identify and eliminate behavioral traits that can hinder your investment endeavors and show you how to go about achieving superior returns in the process. Praise for The Little Book Of Behavioral Investing " 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

Genres: Finance, Business, Psychology, Nonfiction, Economics, Money, Personal Finance

240 pages, Hardcover

First published January 1, 2010

About the author

James Montier is an expert in behavioral finance, argues that investors would have a greater chance of spotting the formation of bubbles if they could only brush up on their history and have a greater awareness of human psychology. He has been a top-rated strategist in the annual Thomson Reuters Extel survey for the last five years. When not reading, writing, or speaking, Montier can usually be found swimming with sharks and blowing bubbles at fishes.

Reviews

[David Villegas · Rating 5 out of 5]

Short and deep. Great lecture.

Take away:

Why should i own this investment?
Learn to say no!

Stick to your investment discipline.

"Analysis should be penetrating non prophetic" B. Graham

Focus on what really matters to make a decision

Look for info against your hypothesis (falsification) WRITE IT DOWN. George Soros diary.

B.Berkowitz "kill the company ":
1- No cash generation
2- Burn cash
3- Over leveraged
4- Play Russian Roulette
5- Management, bad or idiots.
6- you De-worsify
7- Buy stock too high
8- Accounting fraud.

Sunk cost: Hard to change what we adquired with efforts.
Use a Blank sheet of paper, start over!! ("Sell all!! M Steinhardt)
Present thesis to colleagues.
Devil's advotate: present negative case.

Good story & Siren Songs: FOCUS ON COLD HARD FACTS!!

Take the big picture.

" If something can't go on for ever, it won't." Herb Stein

WRITE DOWN YOUR DECISIONS AND WHY.
analyze results: right for the good reason? Luck?

Wait, just wait.

Ted Williams Red Sox player 0.344% carrer batting average:
He divided strike zone into 77 cells of the size of baseball.
He ONLY would swing within best cells--> CIRCLE OF COMPETENCE.
Until then, wait in cash. DO NOTHING.

Hurts not following herds. Social exclusion. Feeling of Shunned.

Groupthinking symtoms:
1- Illusion of invulnerability
2- Collective rationalization
3- Belief in inherent morality
4- Stereotyped views of out-groups.
5- Direct pressure on dissenters.
6- Self-censorship
7- Illusion of unaminity
8- Mind guards . Police's group. Journals.


Be independent thinker BUT! understand the market.

Endowment effect: you value more what you own just for the fact of owing it!

FOCUS ON THE PROCESS.

Your worst enemy: YOURSELF.

[Le Thang · Rating 5 out of 5]

Some key points that I note out from the book. ^^

0) Introduction: You are your own worst enemy

Relying upon willpower alone is going to be tricky since it is insufficient to defense against behavioral biases. If you go through an event that drain your willpower, you will be lightly perform badly in the next tasks which require strong willpower.

Warren Buffett:" You buy assets for less than their intrinsic value and then sell when they are trading at or above their fair value."

1) In the heat of the moment: Prepare, plan, and pre-commit to a strategy

"When "everyone is busy despondently selling", it is hard to stand against the tide and buy. This difficulty is the definition of an empathy gap."

In order to prevent ourselves from falling into emotional decisions when an event (market crash) happens:
- Do your investment research when you are in a cold, rational state - and when nothing much is happening in the markets.
- Pre-commit to following our own analysis and prepared action steps.

Sir John Templeton:" The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell."
- Make your buy decisions well before the sell off occurred.
- Keep a "wish list" of coins/stocks that you believe are well run but priced too high.
- Have standing order to purchase those "Wishlist" stocks/coins when the market sold off enough to drag their prices down to level at which we considered them as a bargain (previously, before the crash).

2) Who’s Afraid of the big bad market? Re-investing when terrified

"Fear causes people to ignore bargains when they are available in the market, especially if they have previously suffered a loss. The longer they find themselves in this position, the worse their decision-making appears to become."

There is only one cure for this:
- You must have a plan for reinvestment and stick to it!
- Make a few large steps, instead of many small ones. Since every actions you take, you have to overcome your own anxiety/fear.

It is almost impossible & also a bad strategy to time the market and wait for the bottom to be reached. Instead, an investor should start to buy during the bear market happens. (again, buy base on the strategy that you planed before)

To maintain rational thinking at all times:
- Avoid extreme stresses that lead to poor decision making
- Willing ness to hold cash in the absence of compelling investment opportunity.
- A strong sell discipline (cashout at target/stoploss)
- Significant hedging activity
- Avoiding desperate leverage
=> Attempt to reduce the vulnerability to empathy gaps and terror-driven poor decision.

3) Always look on the bright side of life: "But why should I own this investment?"

People often mistake randomness for control: people will pay 4 times more for a lottery ticket if they can pick the numbers. However, this won't increase your chance of winning a lottery.

Optimism could be a great life strategy. However, hope isn’t a good investment strategy.

Warren Buffet :"Never ask a barber if you need a haircut."

Self serving stock-broker research:
- All new is good news
- Everything is always cheap
- Never let the facts get in the way of a good story

How to beating over-optimism?
- Ask "Must I believe this?" rather than "Can I believe this?"
- "Why should I own this investment?"

4) Why does anyone listen to these guys? Stop listening to the Experts
We tend to believe in/follow people who sound confident or are labeled as "expert", but this doesn't mean they are great investor. From thầy Tài: Look at their trading results instead of what they say.

When investing we need to learn to be far more skeptical of experts and their authority.

Imagine how hard it is to get in before anyone else and get out before everyone else? Yet, many investors try to become the "smartest" person in the room. So if we can't outsmart anyone, how can we invest? We need to stick to our investment discipline, ignore the actions of others, and stop listening to the so-called experts.

5) The Folly of forecasting: Prepare - don’t predict
In short, forecasting the market movement is not a good thing to do. Instead, be prepare for what to do when the market heading in both directions.

6) Information overload: Distinguishing the signal from the noise
We want to have more data to analyze, more criteria to evaluate a project. However, it would be better to analyze five things we really need to know about an investment, rather than trying to know absolutely everything about that project.

"It's very common to drown in the details or be attracted to complexity, but what's most important to me is to know what three, four, or five major characteristics of the business really matter. I see my job primarily as asking the right questions and focusing the analysis in order to make a decision."

Warren Buffet:" We just try to buy businesses with good-to-superb underlying economics run by honest and able people and buy them at sensible prices."

Three elements that author focus upon:
1) Valuation: is this stock seriously undervalued?
2) Balance sheets: is this stock going bust?
3) Capital discipline: what is the management doing with the cash I'm giving them?

Important take-away: you should determine the factors you will use to assess your investment choices, and then you will focus on your own analysis of each of these elements.

7) Turn off that bubble-vision: Volatility equals Opportunity


8) See no evil, hear no evil: It's time to prove yourself wrong
Confirmatory bias: a common mistake when it comes to investing. We are twice as likely to look for information that agrees with us than we are to seek out disconfirming evidence.

We can sit down with the people who disagree with us most. Not to change our minds, but rather so that we can hear the opposite side of the argument. If we can't find the logical flaw in the arguments of the opponent, we should re-assess our view again - why do we hold it so strongly?

What can we do to avoid looking at information that agrees with us? Learn to look for evidence that prove our own analysis wrong.

9) In the Land of the Perma-Bear and the Perma-Bull
Perma-bull: always bullish on the market or Perma-bear: always negative on the market.

"We tend to hang onto our views too long simply because we spent time and effort in coming up with those views in the first place." How can we protect ourselves against conservatism?
- Imagine all you have is in cash, will you buy the same coins at this time? If the answer is no => closed the position, cut off all the uncertain holdings.
- While the idea of selling the entire portfolio may sound a little extreme, it shows the discipline that is needed to overcome our behavioral biases.

10) Focusing on the facts
We tend to be over-interpretation and favor compact stories (having emotional content) over raw truths => Focus on the facts, real numbers

11) This time is different: your biggest advantage over the pros
Black swan (Taleb): unpredictable, has massive impact, explanations post-event make it sound less random.

Bubble and their bursts aren't black swans. They are "predictable surprises". Characteristics:
- some people aware of the problem.
- The problem get worse over time.
- Eventually the problem explodes into a crisis => much to the shock of most.

What prevent us from seeing these predictable surprises?
- Over-optimism: tendency to look on the bright side could blind us to the predictable surprises.
- Illusion of control: belief that we can influence the outcome of an uncontrollable events.
- Self-serving bias: inner desiire to interpret information and act in ways that are supportive of our own self-interests.
○ "Never ask a barber if you need a haircut." - Warren Buffett.

Investors get caught up in all the details and the noise, and forget to keep an eye on the big picture.

State of bubbles:
a. Displacement - birth of a boom.
b. Credit creation - the nurturing of a bubble.
c. Euphoria - Everyone starts to buy into the new era.
i. The most 4 dangerous words in investing "This time is different." Sir John Templeton.
d. Critical stage - Financial distress: insiders (VC/team) cashing out, fraud…
e. Final Stage - Revulsion: Investors are so scarred by the events => no longer bring themselves to participate in the market at all => bargain prices.

12) Right for the Wrong Reason, or Wrong for the Right Reason: Writing away your Mistakes and Biases
To learn from a mistake, we have to overcome:
- Self-attribution bias: attribution good outcomes to our skills as investors, while blaming bad outcomes on sth else. How to overcome it?
○ Keep a written record of the decisions we take and the reason behind those decisions - an investment diary.
§ Map the outcomes of the decisions into a quadrant decision => Am I right for the right/wrong decision? Am I wrong for the wrong/right decision?
- Hindsight bias: once we know the outcome we tend to think we know it all the time.

13) Never underestimate the value of doing nothing
Barrier that prevents a lot of investors from acting against bubbles is over focus on the short term. If you holding a stock < 6 months, you don't care at all about the long term.

At a one year-time horizon, the vast majority of your total return comes from changes in valuation - random fluctuations in price.
At 5 year-year time horizon, 80% of your total return in generated by the price you pay for the investment + the growth in the underlying cash flow.

When dealing with losses, the urge to reach for an action bias is exceptionally high.

"Holding cash is uncomfortable, but not as uncomfortable as doing something stupid." - Warren Buffet.

14) Become a Contrarian Investor
A contrarian investor mean that you buy the stocks that everyone else is selling, and sell the stocks that everyone else is buying. This is social pain.

"It is impossible to produce superior performance unless you do sth different from the majority." - Sir John Templeton. So have courage to go against the dominant wisdom of the time, to have a view that is at variance with the present consensus and bet that view. Be a critical thinker, you're seeing valuations that the market is not appreciating, but it's critical that you understand why the market isn't seeing the value. Have perseverance and grit to stick to your principles.

Group thinking problems:
- Illusion of invulnerability which create excessive optimism that encourages taking extreme risks.
- Collective rationalization: people in a group ignore warnings and do not reconsider their assumptions => blind in a same way.
- Members are under pressure not to express arguments against any of the group's views.
- Self-censorship: doubts and deviations from the perceived group consensus are not expressed.

15) When it's Time to Sell an Investment
People believe that a loss isn't a loss until they realize it (Close future/margin) => Holding onto their losing stocks and selling their winning stocks - know as the disposition effect.

Endowment effect: when you own sth, you start to place a higher value on it than others would.

16) That one thing you can control
We obsess with the outcome over which we have no direct control. However we can and do control the process by which we invest. This is what we should focus upon. The management of return is impossible, the management of risk is illusory, but process is the one thing we can exert an influence over.

[BuenoBomb aka Andre Bueno · Rating 4 out of 5]

Behavioral economics and cognitive biases go hand in hand. Stemming from the research Kahneman, Tversky, Thaller, Ariely, and others have performed- this book is excellent at describing the major fallacies our brain falls victim to (I.E. Loss Aversion, Overoptimism, Overconfidence, Hindsight Bias, Disposition Effect, Anchoring, Confirmation Bias, etc).

All in all the book was insightful and a fun read!

[Pete Klein · Rating 5 out of 5]

Very good book in helping you understand your biases and overcoming them through process. Great examples used to showcase his points and help the reader understand the concepts.

[Terry Koressel · Rating 2 out of 5]

This book is not nearly as good or powerful as Trading in the Zone, but it was worthwhile reinforcement of the earlier lessons. The book was shorter, narrower and less in-depth than Trading in the Zone....possibly reversing my order of reading would have made this book more valuable to me. On the other hand, nearly all people who manage their own investments make a myriad of repeated mistakes based on patterned and harmful behavior. Behavioral investing studies these patterns. You can easily learn to identify them. Then comes the hard part....overcoming ones natural inclination to fall into the same harmful patterns time and time again when the pressure is on. Any good book on behavioral investing is valuable. It takes a bit of brainwashing.....repetitive reading of the same topic is a good thing here.

[Alex Gravina · Rating 3 out of 5]

Not bad but not as good nudge or thinning fast and slow

[Kaido · Rating 4 out of 5]

Mõned päris huvitavad tõeterad, mis oli psühholoogiliste katsetega ka tõestatud.
Olles nüüd juba 10 aastat aktiivselt aktsiatega tegelenud ja näinud ning jätkuvalt näen Venema agressioone, siis suurt naftasõda, kus hind oli vahepeal 0 ja siis koroona paanikat ja alati teatud mustrid korduvad.
- Mingi aeg ütlevad härrased analüütikud, et põhi ei ole käes ja oodake ja oodake ja kunagi ei tulda ütlema, kuna see põhi siis käes on. Öeldakse küll, et kukkuvat nuga ei maksa püüda, aga silitada ikka võib. Väikestes kogustes võib hakata ikka ennast mingi hetk sisse ostma. Selle põhja ajastamisega ei jõua kuhugi.
- Samuti see, et otsuseid peaks tegema hetkel kui sul on täis enesekontroll. Meeldis see mõte, et enesekontroll on angu lihas, mis väsib ja väsinuna võid teha valesid otsuseid.
- Rõhutati palju väärtusinvesteerimist.
- Hoiatati selle eest, et liiga väikese horisondiga tehakse investeeringuid. Sageli hoitakse tänapäeval aktsiaid 6kuud kuni aasta. Samas hoiatati ka oma positsioonidesse armumise eest.
Seega palju head ja tarka. Ühe tärni võtsin maha, et tegelikult on sama tarkus paljudes eelnevates investeerimsiega seotud raamatutes.

[Eugenio Gomez-acebo · Rating 4 out of 5]

This is a very interesting book about human behaviour, biases, how our brains make mistakes and the consequences in investing. History of humankind is replete with bad choices by both individuals and nations. The interesting part is that we are predictably irrational. The author explains the X-system and the C-system (guts vs brains). How the key for investing successfully is quite simple: prepare, plan and pre-commit to a strategy. How we need to be skeptical, avoid useless predictions, and focus in penetrating analysis. Simple rules, like taking the current market price and back out what it implies for future growth. Focus in Valuation, Balance Sheet and Capital Discipline. Avoid a burden of information that only provides confidence but not knowledge. Avoid nice stories. Look for hard data that can prove us wrong. Focusing on process, rather than results, seems to be the only way to avoid being drowned by the inability of our brains to deal with fears, ambiguity or risk aversion

[Paul (Life In The Slow Lane) · Rating 4 out of 5]

If, like me, you like to do your own investing, then you simply must read this; and re-read it regularly. It reveals our "bad thinking" commonly used by even the best investment fund managers. Things like "going with the flow", or only reading research that positively agrees with your own decisions. I only took one star off because the Kindle version is loaded with grammatical and typographical errors. A brilliant author who backs up his statements with cold hard research.

[Pat Hornchaiya · Rating 5 out of 5]

มีการอธิบายเรื่องความคิดที่เกี่ยวกับการลงทุนที่เกิดขึ้นจริงกับนักลงทุนทั่วไป พร้อมทั้งพยายามแสวงหาข้อสนับสนุนอย่างเป็นวิทยาศาสตร์ และแนวทางในการปฏิบัติ เหมาะอย่างยิ่งสำหรับผู้คนที่เริ่มลงทุนใหม่ๆ

[Lb · Rating 5 out of 5]

Read again: 2/1/2022
Listened again: September 2022
Listened again: 3/10/24

Listened again: 10/10/2024

[Alex Railean · Rating 5 out of 5]

Very useful book, full of practical tips about investing and human biases in general.



Notes for personal use


# biases

The ones that are most typical
- over-confidence
- - over-optimism
- confirmation bias
# emotions and the heat of the moment

- Solution to this: prepare a strategy in advance and commit to it.

Dealing with procrastination:
- think ahead and commit to a schedule
- - research shows that imposes deadlines work best

## precommitment
7P: perfect planning and preparations prevent piss-poor performance


- the time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell
- - fear causes people to ignore bargains when they are available in the market, especially if they previously suffered a loss


### illusion of control
- if you win a few times in the beginning (maybe even out of luck), you feel more in control
- - and you feel that you have a greater influence on the outcome
- in an experiment people were willing to pay x4 for a lottery ticket if they could choose the numbers themselves; as if the pre-randomized numbers were less likely to occur than the ones they'd choose on their own
- - people often incorrectly associate randomness with [less] control (note to self: I would rather rephrase it as "lack of randomness with more control)

## biases

- never ask a barber if you need a haircut
### optimism

- should I believe that vs can I believe that
- - why should I own this stock vs why shouldn't I?
- be depressed at work and happy at home (depressed people are less optimistic)

- beware of experts: most often people disconnect their brain and do as the experts suggest, even if the experts are making bullshit predictions, but sound confident while doing so
- - experts are an authority - so the findings of Milgram's experiment apply
- men are usually more overconfident than women
- - the greatest obstacle to discovery is not ignorance, it is the illusion of knowledge


- those who have knowledge - don't predict, and those who predict - don't have knowledge
- - I prefer to be approximately right than precisely wrong
- more information brings more confidence, but not more accuracy
## right moves

- knowing where you are in the cycle is easier and better than attempting to predict the exact shape and magnitude of the curve
- - Build a decision-tree for deciding whether to buy shares or not.
- a checklist will do too
- - this will help you focus on the 5 (To-do which 5?) metrics that really matter and ignore the ones that don't matter but overwhelm you with data


### the factors (what the author thinks)
- valuation - is the stock seriously undervalued?
- - balance sheets - is this stock going bust? (e.g. is it a titanic?)
- capital discipline - what is the management doing with the cash I give them?
## disconnect your bubble-vision

Placebic information - information that doesn't mean anything (zero signal, just padding)

The copy-machine experiment for someone who wants to skip the line
1. Can I skip? I have 5 pages, may I use the machine? (no info)
2. 2. Can I skip? I have 5 pages, may I use the machine because I need to make copies (Placebic info)
3. 3. Can I skip? I have 5 pages, may I use the machine because I am in a rush (real info)
- 60% allowed it even in "no info"
- - 90%+ for both of the other ones

It seems that the word "because" gave a 30% boost, even if the info was Placebic.

People process whatever information they see, if it comes in a familiar format. Which is why all sorts of analyst experts are always in demand, regardless of whether what they say is reasonable or not.



- weaving a story makes one's position look better. Reference: the story with the trial, where you (a) just present facts or (b) tell a story about them.
Since your opponent is not telling a story, but addresses points from your story - their side is perceived as less coherent, as it jumps from point to point (vs. Flowing like a story)

Bottom line: avoid confirmation biases

## time-line of a bubble
1. Displacement - an external shock that creates a profit opportunity in a sector and closes it in another. As long as the delta between sectors is high, people will flee to where the profit seems higher
2. 2. Credit creation - like oxygen feeding a fire, credit feeds a bubble
3. 3. Euphoria - everyone starts to buy, forgetting about their usual checklists and other thorough verifications they conduct when normally buying shares. Over-optimism, underestimate risks... "this time is different".
4. 4. Critical stage - insiders are cashing out, because they know something nobody else does. Financial distress and fraud follow.
5. 5. Revulsion - depression, avoidance

# Soros' diary
- keep a log of your purchase decisions, timestamps, rationales and outcomes
- - sometimes you can be right for a wrong reason, or the other way around
- was I right for the right reason?
- - figure out if you are consistently making the same mistake

- outcomes: good, bad
- - reasoning: right, wrong

Without a diary you can fall into the trap of hindsight bias - after knowing the outcome, we think that we knew it all the time. A diary keeps things objective because you have a record of what you thought at the time and it takes away your possibility to claim you thought otherwise.


## don't underestimate the power of doing nothing
Action bias, the goalkeeper and the penalty data

Statistically they are 60% likelier to catch a ball that was shot into the center, the probability for left or right is reduced. However most often goalkeepers choose to dive left or right. When asked about it: "because I felt I made an effort to catch it, as opposed to standing and watching how they score left or right".

Poor performance leads to increased propensity to act. You anticipate the future and think about it in terms of "if only I had done something about it", causing regret. So, to avoid regret, you do something so as to then be able to say "at least I tried my best, it is just that the circumstances weren't favorable".


Holding cash is uncomfortable, but not as uncomfortable as doing something stupid. The worst outcome for inaction is a missed opportunity (note to self: well, it depends on which country you live in and how healthy its economy is).

Reference: baseball player who would only hit the balls he knew for sure he could hit well.



It is impossible to attain superior performance, unless you do something different from the majority.
Thus: if everyone agrees about the merits of an investment, it is therefore unattractive.

În an experiment, the stocks institutions sold the most, outperformed the market by an average of 11%. (note to self: which institutions?)

## group think symptoms
1. Illusion of invulnerability, it leads to unfounded optimism and taking more risks.
2. 2. Collective rationalization - members of the group discard warnings and do not challenge their assumptions.
3. 3. Belief in inherent morality - members believe their cause is righteous, so they disregard ethical consequences of their decisions.
4. 4. Stereotypes about outgroups
5. 5. Direct pressure on dissenters
6. 6. Self-censorship - don't think about ideas that don't fall in line with the group agenda, don't express your doubts about the group.
7. 7. Illusion of unanimity - the mainstream view is assumed to be unanimous
8. 8. Mind guards -
9. Members protect the group and its leader from information that would raise doubt and concerns.

## endowment effect
Once you have something, you value it higher than others would.

Is it a reluctant to buy or a reluctance to sell? It is reluctance to sell, as shown in the "cup experiment".

## focus on process
Just like with the Soros diary, you have 2 dimensions: process, result.

Good process +bad result = bad luck
Bad process + good result = luck, but don't count on it in the future
Bad process + bad result = what did you expect? (-:
Good process + good result = good planning, keep doing it.


- Focus on the process, rather than the outcome.
- - Outcome bias = when judging the past doing so by outcomes rather than by the process that lead to it.
- ambiguity aversion - focus on outcomes with higher certainty

## misc
When chocolate is readily available, people tend to eat more of it, than when they have to take extra steps to get it.

Knowledge is not enough to alter behavior.


Simple rules are a good trick, and they can form positive habits, e. G
- half of the plate must be with vegetables
- - drink a glass of water with every meal

Don't try to alter >3 habits at a time.

Changes must be sustainable, think about it in the long term.

See which of your biases or bad habits need to be fixed first and focus on those. That will provide a higher ROI.

[George Florin · Rating 3 out of 5]

Interesting read, but personally, I already knew some of the information here.

What I did not like was that some experiments that he mentions in the book are not credited to the one who actually did them, which is Daniel Kahneman in the book Thinking fast and slow. One example of such experiment is the one with the risk aversion, and also the one with the price for the coffee mugs. But he credits the rest of the psychologists, so that is fine.

Ideas I stuck with:

-To keep a journal with all the emotions I had when making a transaction on the stock market. This originates from George Soros.

-The steps needed to create a speculative bubble:
1) Dislocation, when something exogenous happens and some industries appear as being more and more profitable at the expense of others.
2) Bubble stimulus, or the credit creation, when more and more people borrow money to help inflate the bubble.
3) Euphoria, when everyone is ecstatic about the new opportunity and puts more and more money into it.
4) The critical phase, when people are hit with the reality; may be characterized by lack of funds to pay back the loans, targets not met, fraud discovered and others.
5) Rejection, when everybody gets scared and sells everything.

-The symptoms of group-thinking:

1) Illusion of invulnerability, when you seem backed up by your peers, so you seem invincible in front of everyone and everything. This leads to an exaggerated optimism.
2) Collective rationalization, when the group becomes blind to every warning.
3) Belief in the inherent morality, which builds up a greater confidence in the group's belief that their cause is the best cause to get behind.
4) Stereotypes about other groups, when you create negative opinions about the ones who do not adhere to your beliefs.
5) Direct pressure on the members, which are forced to not express opinions outside the group's directions.
6) Self censorship, when the members do not openly express their beliefs in front of the others.
7) Unanimity illusion, when the group goes by the belief that all the members unanimously accept the decision without prior debate.
8) "Mind keepers", or simpler put, the protection from outside sources that do not match the group's orientation.

[Frannie]

I only read this because I legitimately had nothing else to read and this was given to me at QWIL in second year from Burgundy

Would I recommend it? Probably not? Very quick read, some psychology of studies you've probably already read about. I don't know if this is a good investing book because I don't know a lot about investing. I will say though there are a bunch of random typos in this book which leads me to believe it was published in a rush? Doesn't mean that the advice in it is bad though, I guess.

If anyone wants to borrow it though let me know lol

[Jaydeep Kulkarni · Rating 4 out of 5]

This book is one of the best guide for long-term investing in the Equity Market.

As it explains about human behavior and showed how it impact to our investing portfolio.

Especially over-optimism, hindsight bias, illusion of control, narrative fallacy, self asserting bias explained in detail.

[Jonathan Birnbaum · Rating 5 out of 5]

Love learning about behavioral biases and believing that I will somehow be able to overcome my own (which is in itself a known overconfidence bias!).
This book is concise and covers a breadth of biases with a delightful interactive approach, quizzing the reader prior to discussing - probability, estimation, logic riddles (e.g. 4 cards with letters/numbers). I've been exposed to the majority of the content prior - a lot of it is MBAish cases - though I still found myself engaged and occasionally surprised. The book is practical, recommending ways to counter your biases - such as writing down why you are doing a trade at the time to ensure accurate attribution of outcomes (right for wrong reason?).

[Stilgar · Rating 4 out of 5]

Very real tips and observations about behavioral investing but the book is written as if the probabilities of success in investing are known like they are in games and brainteasers. This is the only reason I don't rate it with 5 stars

[Kiran Shetty · Rating 4 out of 5]

Excellent insights on Behavioral investing. Must read!

[esther · Rating 3 out of 5]

uh so it was interesting at first. but i think this book just wasn’t really what i was looking for because i don’t invest in single stocks… i also didn’t understand a lot of things because again, i don’t really invest so i’m not sure why i read it. but yeah, 3 stars for personal reasons.

[Mark · Rating 5 out of 5]

A book that makes one think deeply about their implicit behavioural biases in life and in investing. I would highly recommend that the individual who is uncertain about how they want to approach personal or professional investing.

[Thomas Shields · Rating 5 out of 5]

Good book that helps re-evaluate your approach to holding losing positions and the way you make decisions in the heat of the moment.

[murtsson · Rating 3 out of 5]

A good complement to other literature within the investing-space. This book goes into depth on the single most dangerous entity to achieve long-term stock market excellence - you.

[Adriyana Grotseva · Rating 4 out of 5]

The book goes over different human behaviors that influence personal and group investment decisions. One of the core advices is to create processes and ensure to follow them. There are a couple of tips in the book on what to do and not to do, and the author states that by following those, you would be better than the general professional traders (it is also discussed the variety of reasons why). The book is written in understandable language and is suitable for beginners as well as more advanced traders. The main insights for me from the book are:

In order to avoid emotional pitfalls - to prepare and pre-commit. Follow the 7 Ps: perfect planning and preparation prevent piss poor performance. We should do our pre-investment research when we are in rational state when nothing much is happening on the markets and pre-commit to follow our own analysis and prepared action steps. The time of maximum pessimism is the best time to buy and the time of maximum optimism - to sell.
I prefer to be approximately right rather than precisely wrong. - Kanes
Karl Popper says that the only way to test a hypothesis is to look for all the information that disagreed with it (process known as falsification). Confirmatory bias (we are twice as likely to look for information that agrees with us than to seek out disconfirming evidence) is too common mistake when it comes down to investment and other spheres as well. That is why we read and watch the people who agree with us the most, we like to have meetings with the people, whos ideas are closest to our own. Because it makes us warm and fuzzy to have our ideas repeated back to us and we can all leave the meeting agreeing that we all are very smart.
With more information the accuracy falls or slightly increases but the confidence increases a lot.
People tend to under-react in unstable environment with precise signals (turning points) but overreact to stable environment with noisy signals (trending markets). That’s why analysts and economists tend to miss turning points in the market. They get hung up on the stable environment and overreact to it hence they miss important things that happen when the environment becomes more unstable such as a recession starting and under-react to such developments.
Beware of sunk costs bias and put the question from a view where you haven’t spent those costs already - would you still go for it and do it/ invest? Hanging on to a view simply because it is your view it is likely to end up in tears. As Kanes said: when the facts change, I change my mind.
Focusing on hard facts, soundly based in real numbers is the best defense against the siren song of stories.
At least 5 major psychological hurdles prevents us from seeing these “predictable surprises” (bubbles):
1. Overoptimism - everybody thinks they are less likely than the average to have an issue. This tendency to look on the bright side helps to blind us on the dangers posed by predictable surprises.
2. Illusion of control - the belief that we can influence the outcome of uncontrollable events. This is where we encounter a lot of the pseudo-science of finance, things like value at risk (VAR). The idea that if we can quantify risk then we can control it is one of the great fallacies of modern finance. VAR tells us how much you can expect to loose with a given probability such as the max daily loss with 95% probability. Such risks management techniques are akin to buying a car with an airbag that is guaranteed to work unless you crash. Simply providing a number, can make people feel safer - the illusion of safety.
3. Self-serving bias - the innate desire to interpret information and act in ways that are supportive in our own self-interests. Never ask a barber if you need a haircut.
4. Myopia - an overt focus on the short term. Often we find that consequences that occur at a later day, tend to have much less bearing on our choices the further into the future they fall. This can be summed up as: eat, drink and be merry for tomorrow we might die.
5. Intentional blindness - we are not expecting to see what we are not looking for.
Although the details of bubbles change, the underlying patterns and dynamics are similar. Good framework for identifying bubbles is from John Stewart Mill. The model breaks the bubbles into 5 phases:
1. Displacement - exogenous (external cause) shock that triggers creation of profit opportunities in some sectors while closing down profit availability in other sectors. As long as the new opportunities are greater than those shut down, investment and production would exploit those.
2. Credit creation - nurturing of a bubble. Just as fire can’t grow without oxygen, so a boom needs credit to feed on. During this phase rate of interest is almost uniformly low.
3. Euphoria - everyone starts to buy in the new era. Prices are seen as always going up. A wave of overoptimism and overconfidence is unleashed, leading people to overestimate the gains, underestimate the risk and generally think they can control the situation.
4. Critical stage/ financial distress - often insiders are cashing out at this stage and is followed by financial distress. Fraud also often emerges during this stage.
5. Revulsion - investors are so scarred by the events that they don’t want to participate on the market anymore. Panics don’t destroy capital but reveal the extent to which it was previously destroyed by its betrayal in hopelessly unproductive works. The failure of great banks and mercantile firms are the symptoms to the disease not the disease itself.
Avoid using of leverage.
Bubbles are a byproduct of human behavior and human behavior is predictable. The details of each bubble are subtly different but the general patterns remain similar. The timing of the eventual bubble remains uncertain but the patterns of the events themselves are predictable.
Self-attribution bias - the habit of attributing good outcomes to our skills and blaming bad outcomes on something or somebody else. With the self-attribution bias can help us to map the outcomes of decisions and the reasons behind those decisions in a quad diagram. So it will have 2 columns: good and bad outcome, on the left side there would be 2 options: right and wrong reasoning. Under right reasoning and good outcome could be because of skill perhaps, with right reasoning but bad outcome it can be bad luck, with wrong reasoning and good outcome it could be a good luck, and with wrong reasoning and bad outcome it could be a mistake. That is was I right for the right reason - can I claim a skill or was it luck?
Hindsight bias - once we know the outcome we tend to think we knew it all the time. This prevents us learning from our mistakes.
Loss aversion - one of the many behavioral biasses that prevent us investing. It is the tendency to prefer avoiding losses to acquiring equivalent gains. What distinguishes loss aversion from risk aversion is that the utility of a monetary payoff depends on what was previously experienced or was expected to happen. Loss aversion implies that one who loses $100 will lose more satisfaction than the same person will gain satisfaction from a $100 windfall.
Endowment effect - once you own something, you start to place higher value on it than others would. If you hold a stock of a company, you put a higher value of that company.
Focus on process rather than outcomes seems to lead to better decisions. By focusing upon process we maximize our potential to generate good longterm returns. But won’t necessarily provide positive outcomes in a short term. The time to reflect on your investment methods is when you are most successful, not when you are making the most mistakes.

[Nilesh Jasani · Rating 4 out of 5]

It all begins with the most overwhelming fact that Montier is a great writer. On top, he is a great thinker and has experience to boot. The subject is not only immensely interesting but easy to understand and lends itself to humorous story-telling at the expense of many mighties' follies. The book is short, sweet and has many extremely good messages for any investor - all told in fairly hard-hitting ways.

All that said, behavioral science believers keep assuming that its concepts are novel and untold despite popularity for over a decade. Almost all the follies cited in the book are known for a while. May be the experiments described to explain them are new.

Even that's not the main problem. The problem with the ever critical behavioral finance is that it has name attached to every irrationality and an irrationality attached to every action. If you stick to your position too long, you could be accused of conformatory bias and if you switch, you could be a trader without conviction. If you cut your losses soon, you are a victim of your loss aversion and if not, it could be because you don't know how to cut your losses.

Despite implicitly assuming that only a handful of successful investors (isn't that endresult bias exhibited by the author) have been able to overcome most pitfalls, and of course all in the aIdvisory businesses (that the author himself was for decades) are lampoons, lemmings if not downright cheats, the book offers almost no useable suggestions. Almost everything is criticized. Even suggestions like belief in "value" and "analysis" is surrounded by highly contradictory suggestions like loss limits, not observing prices daily, not forecasting, not quantifying, not relying on stories, not looking for much information, analyzing only sporadically, investing for multiple years etc etc

Every suggestion makes sense in isolation and every criticism appears valid. But, if they remove their end-result biases, it is almost like behavioral finance proponents will never have any investment processes beyond reproach. Somebody should test them with lesser known tales of successful investors like Buffett etc along with those of unsuccessful ones and I am sure most BF practitioners will not be able to separate the best methods based on their own theories that tie in with other BF specialists or real-life success stories.

[Gennady · Rating 4 out of 5]

Good summary of Montier's Behavioral investing book.
I found it less structured than I expected for a Little book.

Key thoughts to remember:
1. Process is the key
2. Keep notes of your decisions
3. Check the performance less often
4. Reverse engineered DCF model
5. Where in the cycle we are?

Few notes to remember:
Who’s Afraid of the Big Bad Market?
The evidence above suggests that fear causes people to ignore bargains when they are available in the market, especially if they have previously suffered a loss. The longer they find themselves in this position, the worse their decision-making appears to become.
Jeremy Grantham, chief strategist of GMO, penned the following:
The Cure for Temporary Paralysis
There is only one cure for terminal paralysis: you absolutely must have a battle plan for reinvestment and stick to it. Since every action must overcome paralysis, what I recommend is a few large steps, not many small ones. A single giant step at the low would be nice, but without holding a signed contract with the devil, several big moves would be safer. It is particularly important to have a clear definition of what it will take for you to be fully invested. Without a similar program, be prepared for your committee’s enthusiasm to invest to fall with the market. Finally, be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.
As Klarman notes, “One of our strategies for maintaining rational thinking at all times is to attempt to avoid the extreme stresses that lead to poor decision-making. We have often described our techniques for accomplishing this: willingness to hold cash in the absence of compelling investment opportunity, a strong sell discipline, significant hedging activity, and avoidance of recourse leverage, among others.” By removing some of the sources of forced decisions during difficult times, Klarman attempts to reduce the vulnerability to empathy gaps and terror-driven poor decisions. Learn from his example and try to remove the drivers of forced decisions from your portfolios.

Always Look on the Bright Side of Life
Ben Graham was well aware of the dangers of over-optimism: Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.
Beating Over-Optimism
What can we do to defend ourselves against over-optimism? We must learn to think critically and become more skeptical.
Chapter Four - Why Does Anyone Listen to These Guys?
people prefer those who sound confident and are even willing to pay more for confident (but inaccurate) advisors.

There’s Got to Be a Better Way
Run a reverse engineered DCF model of the sort
This approach harnesses the power of the outside view

The key to dealing with the future lies in knowing where you are, even if you can’t know precisely where you ’re going. Knowing where you are in a cycle and what that implies for the future is different from predicting the timing, extent and shape of the cyclical move.
Simple: It is far better to focus on what really matters, rather than succumbing to the siren call of Wall Street’s many noise peddlers. We would be far better off analyzing the five things we really need to know about an investment, rather than trying to know absolutely everything about everything concerned with the investment.
Buffett: “Our method is very simple. We just try to buy businesses with good-to -superb underlying economics run by honest and able people and buy them at sensible prices.
1. Valuation: Is this stock seriously undervalued?
2. Balance sheets: Is this stock going bust?
3. Capital discipline: What is the management doing with the cash I’m giving them?
Winnie-the-Pooh pointed out, “Never underestimate the value of doing nothing.”
to be a critical thinker. As Joel Greenblatt has opined, “You can’t be a good value investor without being an independent thinker—you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value.”
we make it worse on ourselves by being myopic (which is an overt focus on the short term). The more you check your portfolio the more likely you are to encounter a loss simply because of the volatile nature of stock prices. If only we could avoid the temptation to keep checking our portfolios! Researchers have found that people are willing to invest more when they see the performance of their holdings infrequently. 65
If I’ve done my homework, and selected stocks that I think represent good value over the long term, why on earth would I want to sit and watch their performance day by day, let alone second by second.
the status quo bias. It is also an example of the endowment effect. Simply put, the endowment effect says that once you own something you start to place a higher value on it than others would.
Figuring out how to act in the face of losses is one of the biggest challenges any investor can face.
Process, Process, Process
Time and time again the competitors responded that they were focused on the process, not the outcome.
Psychological evidence also shows that focusing on outcomes can create all sorts of unwanted actions. For instance, in a world in which short -term performance is everything, fund managers may end up buying stocks they find easy to justify to their clients,
In general, holding people accountable for outcomes tends to increase the following:
• Focus on outcomes with a higher certainty, which is known as ambiguity aversion.
• Collection and use of all information (both useful and useless).
• Preference for compromise options.
• Selection of products with average features on all measures over a product with mixed features (i.e. average on four traits, preferred to good on two and bad on two).
Degree of loss aversion that people display. None of these features is likely to serve investors well. Together they suggest that when every decision is measured on outcomes, investors are likely to avoid uncertainty, chase noise, and herd with the consensus.
Conclusion
The key lesson from these investors is that we must concentrate on process. Process is the set of rules that govern how we go about investing.

[B. Henry · Rating 1 out of 5]

Before reading the book, I was under the assumption that, the book will have a great perspective on behavioral investing. However, that turned out to be a wasted hope. The reasons for such conclusion are as follows.

1) The author (with financial background and no psychology background) has disastrously failed to join financial investment with behavioral science. As such, you can say that the book is like a mermaid. (You wished for a maid, and you got half fish. And when you wished for fish, you got half maid.)
2) The author explains the psychological experiments in detail to justify his conclusions, resulting in creating, a pain on the neck as well as on the eyes.
3) The author should have explained the psychological concepts with the financial world examples directly (instead of tangling it with the experiments).
4)The author extensively quotes Benjamin Graham and other authors, resulting in questioning our decision to buy the book (as the respective authors seemed to had more information than the author).
5) Somewhere among the chapters, the author talks about information overload and how we should ignore it. I believe the same advise is applicable on this book as well.

In short, if you are looking for information about behavioral investing, then you should read books about decision making, and apply it to the financial world.

[Jon · Rating 3 out of 5]

This could be regarded as a short summary of behavioral economics. For a complete and more thorough run-through, I recommend the fabulous “Thinking, Fast and Slow” by Daniel Kahneman and books by Dan Ariely (“Predictably Irrational” etc.)

The book written by James Montier, fund manager at GMO Capital, goes through the list of the usual suspects within behavioral economics and makes it relevant in terms of investing. E.g. Paralysis Of Empathy Gap, Fear/Risk Aversion, Overoptimism, Authority Respect/Overconfidence, Anchoring, Information Overload, Confirmation Bias etc.

It goes right to the point without to much fluff which is nice but I suspect it tries to cover too much territory in too short a space. If you are new to investing or behavioral economics the book will explode in your face and leave you confuzzled (yes that’s a word now) and should only serve as an appetizer.
It is a quick read with short succinct topics but you would probably be better off reading Kahneman if you want an in-depth understanding of how behavioral economics influence investing.

[Milan · Rating 4 out of 5]

James Montier's book is a very good introduction to behavioural economics. It has 16 chapters describing the various follies of the investors that most of us are familiar with - Loss Aversion, Overoptimism, Overconfidence, Hindsight Bias, Disposition Effect, Anchoring, Confirmation Bias etc.

The author walks us through all the topics in an easy to understand and humourous way. He is telling stories, referring to various research done and shows how individual as well as institutional investors are prone to these biases. These quirks are a part of human nature and are deeply ingrained in our genetic behaviour. Montier talks of some ways how these biases can be avoided if not eliminated. He writes from the perspective of a value investor and shows the mental challenges involved in the process of investing.

I have been reading about biases and heuristics for some time now. Once I understood these concepts, I began to see them all around me including in my own behaviour. But these traits are hardwired in the human brain. It's nearly impossible to get rid of them.

[Gary · Rating 4 out of 5]

On average, we are much more exceptional than we think. And, that is what this book is about. A fun read on how our behavior, whether nature or nurture, can work against us when it comes to decision making. Lot of examples of we make the wrong decisions quickly, even if we supposedly know better. If there is a take-away it might be to make fact based decisions and to slow down (if possible) in that decision making. One of the interesting examples is that even if a person does well in evaluating a series of one certain kind of math questions, there are other types of questions to which they will be susceptible in choosing the wrong answer. I'd say that this book is interesting and important, but it's degree of appeal is correlated with your interest in finances, simple math and behavioral sciences.

[Francisco Martorell · Rating 5 out of 5]

Un libro en el que cada página da información relevante. Imprescindible. Lo he leído y lo voy a releer en el futuro. Nada más fácil para un humano como nosotros que caer en nuestros condicionantes psicológicos. Creemos ser racionales y no lo somos: seguimos a la manada, tenemos una excesiva aversión al riesgo, etc. Si somos conscientes de nuestros sesgos cognitivos podemos intentar minimizarlos, adoptando un comportamiento inversor más racional.