Investor Psychology

Personal finance is one of those fields in which our human brains seem tailor-made to fail.

We’re overconfident in our abilities,
We try to make everything fun/exciting, and
We’re hardwired to run at the first sign of trouble.

Often, the best approach is to recognize our psychological shortcomings and make concessions to deal with them. For example, if Investment [...]

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I know many frugally minded people like to use something called the “30-Day Rule” to help curb their spending. Here’s how Leo from ZenHabits once explained it:
Make a new rule: you can’t buy anything (except necessities) until a 30-day waiting period has passed. Put a 30-day list on your refrigerator, and when you have the [...]

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Ever since I first read about it, I’ve found the Monty Hall problem to be absolutely fascinating. It’s a math question that almost everybody gets wrong–even very smart people who have careers in math. Here’s the riddle:
Suppose you’re on a game show and you’re given the choice of three doors. Behind one door is a [...]

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There. I said it.
You’ve probably spent your whole life learning that you have above-average intelligence and above-average work ethic. And, when considering the entire population of people around you, that may very well be true.
But if you plan to pick stocks (or do anything else to beat the market), the group that you’re being compared [...]

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I recently finished reading Nassim Nicholas Taleb’s Fooled by Randomness. (Highly recommend it, in case you’re curious.)
At one point in the book, Taleb mentions that, when looking at the outcome of a transaction, our brains are set up to react primarily to whether we’ve incurred a gain or loss–not, that is, to the size of [...]

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A criticism I hear from time to time about the passive investing/long-term buy-and-hold strategy I advocate is that it’s no fun. That’s true. It’s as boring as could be.
There’s no excitement. There’s precisely zero chance that you’ll strike it rich.
There’s none of the fun of checking your portfolio everyday to see how your latest picks [...]

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I recently watched a Ted talk by Dan Gilbert that I can best describe as an entertaining combination of Nudge, Predictably Irrational, and Against the Gods.
One of the things Dan talks about is that, as humans, we’re not very good at judging value. We have a tendency to judge the value of something simply by [...]

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American culture has a deep belief that being average is akin to being a failure. Everybody wants to be above average.
Unfortunately, this desire to be above average rarely works out to our advantage in the field of investing. It leads us to such endeavors as stock picking and timing the market, both of which tend [...]

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I just finished reading Nudge by Cass Sunstein and Richard Thaler. The book argues that, often, people would make better decisions if they were provided with a better context in which to make those decisions. For example, studies show that in high school cafeterias, students will make healthier eating decisions if the healthy foods are [...]

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For whatever reason, there’s been a great deal of talk recently about some research done in the 1970s by Amos Tversky and Daniel Kahneman. It’s been discussed in Predictably Irrational and Nudge as well as in numerous articles/blog posts.
In short, what Kahneman and Tversky showed is that humans aren’t the best at making rational choices. [...]

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