I’ve spent over 20 years in IT and a lot of time looking at charts and numbers. One thing I’ve learned is that the math is often the easy part. The hard part is the gray matter between your ears.
Wandering around the average investor’s mind is like taking a tour of Wonderland with the White Rabbit. Most of what we think is true is actually false.
Continuing our deep dive into Chapter 1 of Tim Richards’ “Investing Psychology.” Last time, we talked about how our senses lie. Today, we’re looking at why we think we’re in charge when we definitely aren’t.
We all like to think we’re smart. If we didn’t think we were going to make money, we wouldn’t invest. But here’s a cold splash of water: 93% of American drivers think they’re “above average.” Mathematically, that’s impossible.
Picking up from where we left off in Chapter 2. We’ve established that we’re all overconfident. Now let’s look at how that overconfidence turns into specific, expensive mistakes.
We like to think of ourselves as independent thinkers. The “American Dream” is built on the idea that you can do anything if you just try hard enough. But in Chapter 3, Tim Richards shows us that we’re heavily influenced by the situation we’re in, often without even knowing it.
Continuing with Chapter 3 of “Investing Psychology.” We’re looking at all the weird external stuff that influences our money.
Experience actually helps with some biases. Research shows that older investors are less prone to the disposition effect (selling winners and holding losers).
Humans are social animals. We evolved to survive in groups, and that means we have a deep-seated need to fit in. But in Chapter 4, Tim Richards explains that while “conforming” kept our ancestors alive, it’s making modern investors broke.
Picking up from Part 1 of Chapter 4. We know that groups are dangerous. Now let’s look at how the way information is “framed” changes how we spend our money.
When we have a toothache, we go to a dentist. When we have a legal problem, we call a lawyer. So when we have money to invest, we go to a professional, right?
Picking up from Part 1 of Chapter 5. We know the institutions are playing a different game. Now let’s look at the actual humans running the show and why their biology might be messing with your money.
We’ve spent the last five chapters talking about how biased we are. Now it’s time for the “how-to” part. How do we actually fix these mental glitches?
Continuing our look at Chapter 6. We know we need to look at the numbers. Now let’s look at the specific mental exercises that can save your portfolio.
We’ve spent a lot of time dismantling our egos and exposing our biases. Now, in Chapter 7, Tim Richards gives us a toolkit to build something better. He calls it “Good Enough Investing.”
We’re nearing the end of Tim Richards’ “Investing Psychology.” In Chapter 8, he tackles the myths that keep us trapped in bad financial habits.
We’ve reached the end of the tour. In the final chapter of “Investing Psychology,” Tim Richards pulls back the curtain on the entire investment industry.
We’ve spent the last two weeks retelling Tim Richards’ “Investing Psychology” (ISBN: 978-1-118-72219-0). It’s been a bracing, sometimes painful journey through the glitches of the human mind.