The Psychology of Investing

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9780130930248: The Psychology of Investing

The first book of its kind to delve into the fascinating and important subject of the psychology affecting investment. No other book provides this information because traditional finance focuses on developing the tools in which investors use to optimize expected return and risk. The author believes that understanding the psychology of investing is just as important as knowing the traditional investment topics. Combines behavioral knowledge from psychology, management, marketing, economics, and finance. Uses investment as well as non investment examples. For financial planners, investment managers, individual investors, or to be used as a training manual or reference in financial companies.

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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.

For more information on this and other Prentice Hall Finance titles, please visit our website at www.prenhall.com/finance

Excerpt. Reprinted by permission. All rights reserved.:

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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