I am no great fan of psychology. When I was selected for jury duty, 20 years ago, I was the first peremptory challenge because I said that I would not take the word of the psychologist as expert testimony, but rather would consider the opinion of a man on the street as more valuable than that of a psychologist.
There is one place where make an exception, and that is the economics of risk literature. Daniel Kahneman and Amos Tversky, great. Richard Thaler, uh-huh. Behavioral economics? Yes, I am there.
The easiest way to improve the returns of average investors is to train them to think differently. Instead of looking at whether the prices have gone up or down, and getting excited or scared, they need to begin to think in terms of what is the future cash flow yield of the investment that I am pursuing? Past success is not a reason to buy and past failure is not a reason to sell. Focus on maximizing future cash flow yields, and you will do well.
But that’s hard to do; training the mind to think rationally about investments and take the blood out of it is difficult for average men to do. As for me it took 5-10 years for me to train myself not to get emotional over investing. That’s why I don’t look down on people who make mistakes investing over their emotions – they just need better training and they don’t know where to get it.
The book MarketPsych could help them get it. The first thing that it encourages people to do is to understand themselves. You must understand yourself so that you can invest in a way that is consistent with your emotional makeup. You can’t be investor, if you can’t manage fear. You can’t be an investor, if you can’t manager greed.
Why do you do the things that you do? The book MarketPsych has number of exercises that help an investor unravel why he thinks a certain way.
The book does not take a position on questions like value versus growth, or behavioral economics, or any of the anomalies in the market such as momentum. Rather, it tries to get the investor in touch with himself, so that he can react rational and to invest situations rather than out of fear or greed. It encourages investors to focus on things that are known, rather than speculation. It urges them to consider what they need the money for, rather than always seeking for more, more, more.
MarketPsych is good at describing the mental traps and pitfalls that investors suffer. Though I am past all of those traps and pitfalls, nonetheless, I remember what it was like to get past the, and this book would’ve helped me get past them faster.
I take issue with some of the meditation exercises in the back of book because I believe they are harmful not helpful. I also don’t go in for visualization exercises; I don’t believe in pretending. Rather, one should develop competence and understand the markets exceptionally well.
Who would benefit from this book:
Almost any investor who is frustrated with his performance, particularly from bad timing , would benefit from this book. If you want to, you can buy it here: MarketPsych: How to Manage Fear and Build Your Investor Identity (Wiley Finance).
Full disclosure: I asked the publisher for a copy, and they sent one to me.
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