David Beckham said “Hindsight is a wonderful thing.” Chapter 9 is the last of the belief perseverance biases in Pompian’s book, and it might be the most relatable one. Because we all do this. Every single one of us.
Abraham Lincoln said: “I claim not to have controlled events, but confess plainly that events have controlled me.” If Lincoln could admit that, why can’t most investors?
Colin Powell said it best: “Fit no stereotypes.” Chapter 7 of Pompian’s book is about representativeness bias, which is basically your brain using shortcuts and stereotypes instead of doing actual math.
Francis Bacon said it centuries ago: humans are “more moved and excited by affirmatives than by negatives.” Chapter 6 of Pompian’s book is about confirmation bias, and honestly, this might be the most dangerous bias in the whole book.
Warren Buffett opens this chapter with a quote about needing a sound framework for decisions and the ability to keep emotions from corroding that framework. Chapter 5 is about one specific way emotions corrode it: by making you too slow to update your beliefs.
You know that feeling when you buy something and then find out there was a better deal elsewhere? That little knot in your stomach? Congratulations, you just experienced cognitive dissonance.
Chapter 3 of Pompian’s book is short but important. It is the setup chapter. Before getting into 20 specific biases over the next 20 chapters, he wants you to understand what biases are, why they matter, and how they break down into categories.
Chapter 2 of Pompian’s book is basically a history lesson. But here’s the thing: it is a surprisingly interesting one. Because when you trace where behavioral finance came from, you realize that humans have been making the same stupid money mistakes for centuries.
There is a great quote at the start of this chapter. Meir Statman from Santa Clara University says: “People in standard finance are rational. People in behavioral finance are normal.” That one sentence pretty much captures the whole idea of this book.
I just finished reading a book that honestly changed how I think about investing. And I’ve been investing for a while now.