Book Review- "The Behavioral Investor"

Book Review- "The Behavioral Investor"

June 14, 2022

"The Behavioral Investor" is a great book for anyone with an investment account to read. Daniel Crosby, who I have had the pleasure of seeing speak live and virtually, does an incredible job of providing bite size pieces of content that provide perspective on simple things we can do to make better decisions when it comes to our investments (and life as a whole). Behavioral finance has evolved dramatically in the last 10-20 years due to some challenging times and with that we have seen an increase in awareness that participants are not generally rational when it comes to investing the stock market. 

The human brain has been consistent in size for the past 150,000 years. The world we live in has changed exponentially, thus we can see the disconnect and why it is so critical for investors to create a process that will help them to make better, more educated decisions in their futures. 

➡️ Always remember, if everything matters then nothing matters. ⬅️

Interesting Facts from Crosby:

  • Your brain is 2-3% of your body weight but consumes 25% of your energy.
  • Average person makes 35,000 decision a day, 221 are food related.
  • Fidelity study on best performing accounts showed those with the best returns were from people who forgot about the account or had passed away.
  • Average investor loses 13% of their IQ in time of financial duress.
  • HALT – do not make important decision when you are you have one of these four feelings: hungry, angry, lonely or tired.
  • Scientific American showed that data is now doubling every year. Thus, the amount of data created in 2016 was equal to what was created from the beginning of time until the end of 2015.

Frequency Matters:

  • If you check your account daily, you will experience a loss 41% of the time
  • Look every 5 years you will experience a loss 12% of the time
  • Every 12 years you venture to peak, and you will not see a loss. 

💡 Fun Fact: Research shows that bilingual people make better decisions in a foreign language since they are less emotional and reflexive.

Common Biases:

  • Action Bias: Vanguard showed when times are volatile like we are seeing this year people are prone to action bias. We feel we need to make a change when we are losing money. The investors who tinker or trade depending on the research are being outperformed by those who stay the course by a minimum of 1.5% per year.
  • Loss aversion: is one of the most common biases we all deal with on a regular basis. Research by Kahneman shows that the average person feels 2.5 times worse from a loss than the pleasure of experiencing that same gain. Thus, it is clear why investors sell when things go down even if that rationally and financially does not make sense.
  • Confirmation bias: We often tend to consume, hang out or listen to things that agree with our point of view. If I feel a recession is likely I will talk to others how agree, listen to economists, watch news cast or podcasts that support that outlook. This can be dangerous because we get tunnel vision and are not get a 360 degree look at a topic that is important.
  • Overconfidence: Many researchers believe this is the most significant and it affects investors and professionals alike. According to research done by Employee Benefit Research Institute (EBRI) 60% of participants felt they would be able to save enough for retirement, while only 41% had done the calculation. Enough said.

🎙 For those who prefer to listen to Daniel, he also has a podcast called "Standard Deviations," you can find it here ➡️