Author: James Montier
Genre: Behavioral Economics and Psychology
‘The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy’ provides its readers with an interesting read on the behavioral challenges that everyday investors are most prone to. Warren Buffet once said, “If you have a 150 IQ, sell 30 points to someone else. You need to be smart, but not a genius”. So what does he advise you to buy in return when selling IQ points? It is the behavior and discipline in the stock market.
As the author suggests, you can be your own worst enemy if you are not aware of the cognitive Biases in yourself. We often make decisions in the presence of emotions. It is these emotions that we need to keep a check on. Ben Graham even went so far as to say “The investor’s chief problem and even his worst enemy is likely to be himself”
Why do we suffer from behavioral biases? The answer lies in the fact that our brains have been refined by the process of evolution. But since evolution occurs at a slow pace, our brains are designed for the environment we faced 150000 years ago but potentially poorly suited for the industrial age that probably started just 300 years ago. This means that humans have spent more than 99% of their evolutionary history in the hunter-gatherer environment. If we compress 4 million years into 24 hours, and if the history of humans began at midnight, agriculture made its appearance on the scene 23 hours and 55 minutes later.
We have 2 systems in our brain with which we can think. One is the X-system that takes the emotional approach and is automatic and effortless. It is considered to be the default option, so all information goes to the X system first. To believe that something is valid, it may simply need to wish that it were so. On the other hand, C-system is more logical but a slow system. Since we have come from evolution were reacting quickly to a predator required X-system to work, our C-system was always on the sidelines. Also, parts of the brain associated with the X system are much older and therefore it is more often used even today. It attempts a logical approach to problem-solving but since it can handle only one step at a time our brain prefers the X-system and that is where all our biases come into the picture.
In this book, James Montier tries to decode the language of behavioral biases that affect the thinking of a person not only in investing but in life as well. Strategies are then suggested to combat these biases.
How can it benefit you?
The book can help and make you realize the biases that lie inside all of us and how to tackle those biases in investing and life in general.
Pre-requisites before reading the book: Read about Cognitive Biases on Wikipedia
Are research sources cited: Yes
Is the content relevant even today? Yes
Vocabulary and Understandability: Easy
Level of investment expertise required: Intermediate
After reading this book, an investor will become cognizant of his or her own practices and will thus be better equipped to recognize what to avoid and what to improve upon. It will teach you how behavioral frailties prevent us from achieving the best outcomes in investing.
To talk about pitfalls is one thing and to implement is another. There are some strategies like Pre-commitment and Checklists that the author talks about which will make sure we are rational in irrational times.