Psychology of Investing - Softcover

Nofsinger, John R.

4.03

259 ratings by Goodreads

Softcover

ISBN 10: 0132302349 ISBN 13: 9780132302340

Publisher: Taylor & Francis, 2007

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This book is the first of its kind to delve into the fascinating and important subject of the psychology affecting investments. Its unique coverage describes how investors actually behave, the reasons and causes of that behavior, why the behavior hurts their wealth, and what they can do about it. Chapter topics include overconfidence, fear of regret and seeking pride, considering the past, mental accounting, forming portfolios, representativeness and familiarity, social interaction and investing, mood and investing, and self control and decision making. anyone who wants to invest (either professionally or personally), as well as portfolio managers, fund managers, pension managers, financial advisers, brokers, financial planners, traders, financial analysts, and CPAs.

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From the Back Cover:

Traditional finance has focused on developing the tools that investors use to optimize expected return and risk. Understanding the motivations behind this behavior is extremely important when applying these financial tools. This is the first text of its kind to delve into the fascinating and important subject of the psychology affecting investments!

Includes coverage of:

Behavioral knowledge—Draws from psychology, management, marketing, economics, and finance.
Students can easily understand the relevance, use, and importance of the material presented across different business disciplines.
Examples of psychological biases—Illustrated with examples of everyday behavior, and the effect of psychological biases on investment decisions is then described.
Shows students bow to overcome their biases to increase their wealth!
Both investment as well as non-investment examples—Used throughout the text to illustrate how different concepts relate to investing.
This approach first helps students see how the behavior covered relates to everyday life and then ties the behavior to investment decisions.

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An old Wall Street adage states that two factors move the market: fear and greed. Although true, this characterization is far too simplistic. The human mind is very sophisticated, and human emotions are very complex. The emotions of fear and greed just don't adequately describe the psychology that affects people. This book is one of the first texts to delve into this fascinating and important subject.

Few other texts provide this information because traditional finance has focused on developing the tools that investors use to optimize expected return and risk. This endeavor has been fruitful, yielding tools such as asset pricing models, portfolio theories, and option pricing. Although investors should use these tools in their investment decision making, they typically do not. We tend not to use these tools because psychology affects our decisions more than financial theory does.

Unfortunately, your psychological biases inhibit your ability to make good investment decisions. By learning about your psychological biases, you can overcome them and increase your wealth. You will notice that most of the chapters are structured in a similar way. I first describe the psychological bias and illustrate it with everyday behavior (such as driving a car). The effect of the bias on investment decisions is then described. Lastly, I use academic studies to show that investors really do have the problem.

This material does not replace the investment texts of traditional finance. Understanding psychological biases complements the traditional finance tools. Indeed, after reading this book you should be convinced that traditional tools are valuable.

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