Behavioural Investing A Practitioner's Guide to Applying Behavioural Finance

by Montier, James

• ISBN13: 9780470516706
• ISBN10: 0470516704
• Edition: 1st
• Format: Hardcover
• Copyright: 2007-10-29
• Publisher: WILEY

Summary

Behavioural investing seeks to bridge the gap between psychology and investing. All too many investors are unaware of the mental pitfalls that await them. Even once we are aware of our biases, we must recognise that knowledge does not equal behaviour. The solution lies is designing and adopting an investment process that is at least partially robust to behavioural decision-making errors.Behavioural Investing: A Practitioner's Guide to Applying Behavioural Finance explores the biases we face, the way in which they show up in the investment process, and urges readers to adopt an empirically based sceptical approach to investing. This book is unique in combining insights from the field of applied psychology with a through understanding of the investment problem. The content is practitioner focused throughout and will be essential reading for any investment professional looking to improve their investing behaviour to maximise returns. Key features include: The only book to cover the applications of behavioural finance An executive summary for every chapter with key points highlighted at the chapter start Information on the key behavioural biases of professional investors, including The seven sins of fund management, Investment myth busting, and The Tao of investing Practical examples showing how using a psychologically inspired model can improve on standard, common practice valuation tools Written by an internationally renowned expert in the field of behavioural finance

Author Biography

JAMES MONTIER is the global equity strategist at Dresdner Kleinwort in London. He has been the top rated strategist in the annual Extel survey for the last two years. He is also the author of Behavioural Finance, published by Wiley in 2000. James was on the 50 must read analysts list complied by the Business magazine, and was one of the Financial News' Rising Stars.
James is a regular speaker at both academic and practitioner conferences, and is regarded as the leading authority on applying behavioural finance to investment. He is also a visiting fellow at the University of Durham. James is also a fellow of the Royal Society of Arts. He has been described as a maverick by the Sunday Times, an enfant terrible by the FAZ, and a prophet by the Fast Company! When not writing or reading, he can usually be found blowing bubbles at fish and swimming with sharks.

Table of Contents

Preface

Acknowledgments

Common Mistakes and Basic Biases

Emotion, Neuroscience and Investing: Investors as Dopamine Addicts

Spock or McCoy?The Primary of Emotion

Emotions: Body or Brain?Emotion: Good, Bad of Both?Self-Control is Like a Muscle

Hard-Wired for the Short Term

Hard-Wired to Herd

Plasticity as Salvation

Part Man, Part Monkey

The Biases We Face

I Know Better, Because I Know More

The Illusion of Knowledge: More Information Isn't Better Information

Professionals Worse than Chance!The Illusion of Control

Big _= Important

Show Me What I Want to See

Heads was Skill, Tails was Bad Luck

I Knew it all Along

The Irrelevant has Value as Input

I Can Make a Judgement Based on What it Looks Like

That's Not the Way I Remember it

If you Tell Me it Is So, It Must be True

A Loss Isn't a Loss Until I Take It

Conclusions

Take aWalk on the Wild Side

Impact Bias

Empathy Gaps

Combating the Biases

Brain Damage, Addicts and Pigeons

What Do Secretaries' Dustbins and the Da Vinci Code have in Common?

The Limits to Learning

Self-Attribution Bias: Heads is Skill, Tails is Bad Luck

Hindsight Bias: I Knew it All Along

Skinner's Pigeons

Illusion of Control

Feedback Distortion

Conclusions

The Professionals And The Biases

Behaving Badly

The Test

The Results

Overoptimism

Confirmatory Bias

Representativeness

The Cognitive Reflection Task (CRT)

Anchoring

Framing

Loss Aversion

Keynes's beauty contest

Monty Hall Problem

Conclusions

The Seven Sins Of Fund Management

A Behavioural Critique

Sin city

Forecasting (Pride)

The Illusion of Knowledge (Gluttony)

Meeting Companies (Lust)

Thinking You Can Outsmart Everyone Else (Envy)

Short Time Horizons and Overtrading (Avarice)

Believing Everything You Read (Sloth)

Group-Based Decisions (Wrath)

Alternative Approaches and Future Directions

Forecasting (Pride)

The Folly of Forecasting: Ignore all Economists, Strategists, & Analysts

Overconfidence as a Driver of Poor Forecasting

Overconfidence and Experts

Why Forecast When the Evidence Shows You Can't?Unskilled and Unaware

Ego Defence Mechanism

Why Use Forecasts?Debasing

What Value Analysts?

Illusion of Knowledge (Gluttony)

The Illusion of Knowledge or Is More Information Better Information?

Meeting Companies (Lust)

WhyWaste Your Time Listening to Company Management?

Managers are Just as Biased as the Rest of Us

Confirmatory Bias and Biased Assimilation

Obedience to Authority

Truth or Lie?

Conclusions

Thinking You Can Outsmart Everyone Else (Envy)

Who's a Pretty Boy Then?

Or Beauty Contests, Rationality and Greater Fools

Background

The Game

The Solution

The Results

A Simple Model of Our Contest

Comparison with Other Experiments

Learning

Conclusions

Short Time Horizons and Overtrading (Avarice)

ADHD, Time Horizons and Underperformance

Believing Everything You Read (Sloth)

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