Inside the Investor's Brain: The Power of Mind Over Money

Prices in the financial markets are influenced by people's emotions. The fear of losing money can drive prices low, and greed can take them to unrealistically high levels. The author of this book provides readers with a detailed analysis of how our brain works and how it affects our financial decisions. Most investors are their own enemies without the decent ability to control emotions. They buy high and sell low. The author makes readers aware of how our brain works and how it affects our financial decisions. I will warn readers that it is a long book. The information can be very dry. It reads like a textbook. But the author is extremely knowledgeable about the subject. For those looking to learn about the psychology of investing, this book can be very helpful. - Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market

The typical investor is his/her own worst enemy, doesn't have a long-term investment strategy, cuts profits short and lets losses pile trying to break even, does not use stop loss orders, buys near the highs and sells near the lows, and likes to chase the hottest mutual funds or stocks. If you see yourself in any of these statements, then join the crowd. To become a better investor or trader it is crucial to understand how your brain impacts your decision-making. This book provides not only an exceptional insight into this process, but provides methods to deal with negative thoughts and ideas that can hamper clear thinking. The 23 chapters are presented in a logical sequence and the writing is clear and precise. This book contains critical information that investor and traders require to maximize their efforts to be profitable. The research in this book is based on the behavioral finance field. The book answers two key questions: 1. What are the irrational fears driving my investment behavior? and 2. What can I do to better manage my fears? The key to investing is not just obtaining a solid financial and investment education, but also understanding your brain's topography. The readers will learn to recognize subconscious mistakes in their decision-making. The author's credentials and background are impressive - not only is he an MD with a specialty in psychiatry, but also is a former trader, contributor to numerous publications, and is a seminar leader. The contents of this comprehensive 392-page book provide readers with a unique look at the workings of the mind and how they impact trading decisions. Also included is a 12-page glossary that definitely helps the uninitiated with key terms in psychology, and the 32-pages of detailed footnotes illustrating the monumental amount of work put into this project. This book is not light reading and it cannot be read in a short time if you want to get the most out of it. I particularly enjoyed the chapters on anxiety, fear and nervousness; loss aversion; and charting and data mining as they made me recognize my own emotional reactions to these elements. Overall, the author provides a detailed view of the brain that can only help in improving our trading and investing processes.

I'm surprised there's not more reviews of this book, considering I am halfway done with it (it's a very big book and should be read slowly and carefully), and hav picked up a lot already. I looked ahead to see what I was in store for, and it looks like a good study of momentum investing/value investing. I have read Tharp, Kiev, Elder, Douglas, Koppel, who are pretty much the big names of investing, as well as Gilvovich and Plous. I'd say Mark Douglas and this author gave me the most insight in this topic. I plan to read Thaler next so I cannot comment on what Thaler has to offer. This author quotes Michael J. Mauboussin a few times as well, apparently this author likes his work, as do I. In regards to this book, it is the first book I have come across that had actual psychological studies where the subjects were put to tests to see what kinds of decisions they make in the stock market. This is valuable insight that you don't find much. Usually the author is discussing studies in something other than the stock market, and they extrapolate this data on to what they probably would have done if it were the stock market. This book is full of how people behave in either gambling, or the financial markets. It does go into detail as to what portion of the brain is activated when given certain stimuli, and what effects that portion of the brain give. It is the most in depth and most well researched book I have read so far when it comes to psychology of investing. I have picked up a lot from this book, and now know why we tend to do things that are destructive to our financial health, even after all the books I have read. So we read books like this to gather useful information that we don't know yet, that can be applied successfully to make money, or prevent losing money. Does this book fit this requirement? Absolutely. In addition to this book I might suggest you read the following I found useful. How We Know What isn't So, by Gilvovich Psychology of Judgment and Decision Making, by Pluous Trading in the Zone and Disciplined Trader by Douglas More than you Know by Mauboussin Forget those "Zen and trading" books out there. Go for the real thing.

Now it's clear why those Motley Fool headlines are so compelling to click on. Inside the brain of the investor, fear of loss is twice as great as the joy of gain. In the fascinating "Inside the Investor's Brain", Richard Peterson explains why and much more. An investor is more likely to wager $1000 on a fifty-fifty coin flip if he had just lost $1000 in an investment than if he had just gained $1000. Studies have shown that people would make the risky wager more often when they were in the red (~80%) but fewer people would make the wager when they were in the black (~30%). Why? It's the same wager. But, as Peterson shows in one of his fascinating illustrations, we investors put more import into losses than gains. This type of seemingly irrational behavior is what is going on behind every stock transaction, hedge fund decision, or institutional investment, and it's the main reason why it takes a genius (or a very lucky person) to consistently beat the market. It's also why I left specific investment advice out of my book about Credit Arbitrage. There is simply too much of a human element to trading. While the author does admit that financial advisers fare better than dartboards or the Dow Jones average for that matter, he notes that the wisdom of the collective is always smarter than its constituent parts. Citing Mauboussin, Peterson describes why it's so difficult to beat the market. Peterson also goes on to get into the physiology of the brain and how it reacts to retail situations numerous real-world investment anecdotes to illustrate his points. The result is an entertaining look into what goes on in the minds of investors, which everyone should read.

For most of the 17 years in which I held an endowed chair in a leading finance department. I required that my doctoral students read Fischer Black's Presidential Address to the American Finance Association titled, "Noise." In that paper, Black, a co-inventor of option pricing theory who later worked for Goldman Sachs, stated that stocks could be priced anywhere from 2 times to ½ the value suggested by market efficiency considerations. Black attributed the large deviations from market efficiency to trading "noise." Richard Peterson's book, Inside the Investor's Brain, is important because it gives rational explanations for market inefficiencies and "noise" based upon well-documented neuroeconomics findings. While the book has a high level of professional sophistication, fortunately, it contains a useful glossary to acquaint the reader with technical terms in medicine or finance with which the reader may be unfamiliar. Furthermore, because the author has traded extensively, worked with hedge funds, and, as a psychiatrist, has counseled financial market traders, the book contains numerous practical trading and investing examples and cases to illustrate its points, which makes it interesting and fun to read. The book contains many practical insights that can help participants in the financial markets. By understanding and controlling their emotions, investors and traders may be able to use Peterson's insights to invest more successfully. Toward that end, Peterson explains how can monitor and control the impact of their emotions on their investment decisions. Some of the findings presented in Peterson's book help resolve theoretical anomalies in finance. For instance, he cites research that shows that people typically weight losses twice as heavily as gains in their decision making; and, consequently, peoples' decisions are made differently if they are "framed" in a loss-taking versus gains making context. A major reason for this difference is that different parts of peoples' brains are engaged when considering potential losses rather than considering potential gains. Depending upon which part of a person's brain is engaged, people will behave differently--which can explain why people and markets typically behave differently in "bull" versus "bear" markets, and why many people both buy insurance and gamble. Peterson also shows that the workings of the "rational" planning part of the brain, the prefrontal cortex, can be inhibited or bypassed by emotions stemming from other areas--such as greedy gain anticipations coming from the Nucleus accumbens or by "fearful" emotions emanating from the brain's amygdala. Acting under the influence of fearful emotions, people may exhibit excessive loss aversion and enhanced time preference. Acting under the euphoric input of greedy anticipation, people may make hurried, impulsive decisions and forego doing due diligence before investing. Rational decision making and asset pricing suffers in either case, and