Investing Psychology, + Website: The Effects of Behavioral Finance on Investment Choice and Bias

258 Pages·2014·6.29 MB·English

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The Effects of Behavioral
Finance on Investment
Choice and Bias
TIM RICHARDS
Creator of the Psy-Fi Blog
(www.psyfi tec.com)
Cover image: ©iStochphoto.com/AmandaRuch ©iStochphoto.com/fatido
Cover design: Wiley
Copyright © 2014 by Tim Richards. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Richards, Tim, 1961-
Investing psychology : the effects of behavioral fi nance on investment choice and bias /
Tim Richards.
pages cm.—(Wiley fi nance series)
Includes bibliographical references and index.
ISBN 978-1-118-72219-0 (cloth)
1. Investments—Psychological aspects. 2. Finance—Psychological aspects. I. Title.
HG4515.15.R53 2014
332.601’9--dc23
2013050096
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
To Skyla, Alexa, and Hallie;
for being there always,
as I will always be here for you.

CCoonntteennttss
Preface xiii
CHAPTER 1
Sensory Finance 1
Beating the Bias Blind Spot 1
Illusory Pattern Recognition 4
Superstitious Pigeons—and Investors 6
The Super Bowl Effect: If It Looks
Too Good to Be True, It Is 9
Your Financial Horoscope: Forecasting and
the Barnum Effect 10
Uncertainty: The Unknown Unknowns 12
Illusion of Control 13
Stocks Aren’t Snakes 15
Herding 16
Availability 19
Assuming the Serial Position 21
Hot Hands 23
Financial Memory Syndrome 25
Attention! 27
The Problem with Linda 29
Representation 31
The Seven Key Takeaways 33
Notes 34
CHAPTER 2
Self-Image and Self-Worth 37
The Introspection Illusion 37
Blind Spot Bias, Revisited 39
Rose-Colored Investing 40
Past and Present Failures 41
Depressed but Wealthy 43
vii
viii CONTENTS
Disposed to Lose Money 44
Loss Aversion 45
Anchored 46
Two Strangers 48
Hindsight’s Not So Wonderful 50
Deferral to Authority 51
Emotion 52
Black Swans 54
Dirty Money, Mental Accounting 55
A Faint Whisper of Emotion 56
Psychologically Numbed 57
Martha Stewart’s Biases 58
Retrospective 60
Annual Returns 60
Nudged 61
Mindfulness 62
The Seven Key Takeaways 65
Notes 66
CHAPTER 3
Situational Finance 69
Disposition vs. Situation 69
Beauty Is in the Eye of the Investor 70
Angels or Demons? 71
Merely Familiar 73
Lemming Time 74
Story Time 76
Wise Crowds? 78
Adaptive Markets 79
George Soros’s Refl exivity 81
Grow Old Quickly 82
Speaking Ill 83
The Power of Persuasion 85
SAD Investors 86
Sell in May . . . 87
The Mystery of the Vanishing Anomalies 89
Tweet and Invest 90
Fire! 92
The Rise of the Machines 93
The Seven Key Takeaways 94
Notes 95