Psychology of Investing (3rd Edition)

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9780132302340: Psychology of Investing (3rd Edition)

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.

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 so sophisticated and human emotions are so complex that the emotions of fear and greed do not adequately describe the psychology that affects people as they make investment decisions. 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. This is because psychology affects our decisions more than financial theory does.

Unfortunately, psychological biases inhibit one's 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 in this book are structured similarly. A psychological bias is first described and illustrated with everyday behavior (like driving a car). The effect of the bias on investment decisions is then explained. Last, academic studies are used to show that investors do indeed exhibit the problem.

What we know about investor psychology is increasing rapidly. This second edition of The Psychology of Investing is expanded by 20 percent, with new evidence and ideas added to every chapter. Also, Chapter 8 has been rewritten to focus more on the role of human interaction in the investment process. Finally, an entirely new chapter has been included on the influence of feelings and mood on financial decision making.

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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