Tuesday, May 24, 2011

Investing and the Irrational Mind

The book Investing and the Irrational Mind by behavioural finance expert Robert Koppel brings together a comprehensive collection of ways that our minds steer us to irrational decisions. The focus is on the behaviours of traders, but any type of investor can benefit from reading this book.

While reading this book it would have been easy to read each irrational tendency and feel superior because I don’t do such dumb things. However, pausing to think about each type of mistake I had to admit that I was guilty of most of them at one point or another in my investing life. I think the reader is likely to get more benefit from this book by trying to think of examples of his or her own mistakes.

I definitely recommend this book to anyone who is serious about becoming a more rational investor. Those who hope to make their living trading may get even more benefit. In my case, my attempts at rational analysis have led me to give up on trading and focus on long-term index investing.

Here are a few interesting quotes:

“We fluctuate irrationally between an aversion to losing and our own delusional optimism.”

“Never attempt to buy at a bottom or sell at a top of a market: this is a feat achieved only by liars.”

Attributed to MIT’s Sloan School of Management professor Andrew Lo: “Much of what behavioralists cite as counterexamples to economic rationality – loss aversion, overconfidence, overreaction, mental accounting, and other behavioral biases – are, in fact, consistent with an evolutionary model of individuals adapting to a changing environment via simple heuristics.”

“Our brains view the market as an issue of life-or-death survival rather than one of arithmetic problem solving.”

“Investing, contrary to popular belief, is not a good recreational activity.”

“Virtually all of the [arthritis] patients interviewed were certain that their bouts with the illness were correlated with the weather. In fact, the actual correlation was close to zero.”


  1. Sounds like I need to add another book to my reading list. Thanks for sharing Michael.

    BTW - I'd be curious to know what your favourite PF or investing books are. You're a well-read dude. Potentially a future post?


  2. @Mark: I think my list of favourite books has changed considerably over the years, not just because new good books show up, but also because I now realize that some of the books I liked at first I no longer think are that good.