THE BEHAVIORAL INVESTOR BY DANIEL CROSBY

You were born to fit in, but investing requires you to stand out. You are wired to protect your ego, but to succeed in the markets, you must suppress it.

You are programmed to ask why, but in investing, you must learn to ask: why not? This is Healthy Mind - Think Big.?And this post is a Top 05 Takeaways from the Book?"The Behavioral Investor".?By Daniel Crosby Let's dive in.

01: 04 BEHAVIORAL RISKS, CRUSHING YOUR INVESTMENT RETURNS

The greatest financial intellect in the world is nothing if it's not paired with a self-understanding to match. Therefore, we will start out this post by presenting four different kinds of behaviors that you must avoid if you want to learn Mida's touch.

EGO :

Men are especially vulnerable to this behavioral risk. Almost every one of us (one study actually had 100% as the result) thinks that we are better than average interpersonally, and 94% of us think that we are more athletic than average. Statistically, I imagine that it would be difficult to prove how 94% are above average. In investing, this hurts us in many ways. I'm not referring only to men anymore - but yes, we suck at this the most. Among other things, ego causes us to seek out information that strengthens our beliefs instead of questioning them. In this search, we are not looking for truths. Rather, we are looking for comfort. Unfortunately, Mr. Market is not a comforting person.?

CONSERVATISM :

A majority, 55%, of all family violence occurs in homes of alcoholics. Many children are hurt emotionally or physically growing up in such families. Therefore, one would assume that these children would take extra measures to avoid ending up in similar situations as grown-ups. The statistics tell a different story. As many as 50% of children of alcoholics end up marrying one themselves. This is caused by conservatism. We prefer?"the devil that we know". This behavioral risk causes one of, if not the most common investing mistake of all: holding on to losing positions.?

ATTENTION :

We pay too much attention to stories and too little attention to mathematics and statistics. A good story, or a terrifying one for that matter, sticks. Numbers .... they don't. Because of this, many problems arise. For instance during market crashes. It's near impossible to remember that corrections and bear markets are common and nothing to worry about, while CNBC, Fox News, and The Wall Street Journal are doing live streams 24/7 about how the world is about to burn to ashes.?

EMOTION :

An interesting study was conducted on students where their sexual preferences were examined. 19 questions were asked to decide their propensity to engage in "odd" sexual activities, cheat on a significant other, and having unprotected sex. Normally, students would shy away from such activities. Now the same 19 questions were asked to another group of students, who were shown pornographic images, aimed at emotionally arousing the participants. The results were astounding. The students were 72% more likely to participate in?"odd" sexual activities, 136% more likely to cheat, and 25% more likely to not wear a raincoat. Prevention, protection, and morale disappeared from their radar screens! Likewise - when you experience strong emotions while investing (not necessarily sexual ones) the set of rules that you normally obey in the market will fly out the window. It's not so much that you suddenly disregard their value, but rather, you forget all about them.?

02: HOW TO MANAGE THE FOUR BEHAVIOURAL RISKS

Your brain is a miracle. And even the best machines/AIs can't compare to it in most aspects. But! It's a miracle for a different time and place than investing in the 21st century, as we saw in the previous takeaway. Let's find out what we can do to restrain ourselves to cope with the difficulties that we have.?

EGO :

Spread the wealth Realize that even thorough analysis can't protect you from unexpected events. The inspiring and amazing CEO that was part of the reason why you made a specific investment, might suddenly die from a heart attack. Therefore, spread your capital over at least a couple of investments. Risk (measured as the volatility of returns) quickly deteriorates with only a few holdings. Those who can teach If you are truly comfortable with an investment decision, it should be easy to convince someone else of your choice. Test it! Guess again Make it your mission to always question your most important assumptions. If you decide that Apple is a great buy because you think that it has great potential in the 3d printing industry or ... or whatever, come up with a couple of reasons as to why you could be wrong.?

CONSERVATISM :

Procrastinate :?(just a little) Subjects pick a default option in 82% of the cases when in a hurry, but only 56% of the time when they get to think for a moment, according to research. Taking your time will allow you to not just be another sheep in the herd who picks the default option in the market.?

No regrets :?Regrets can cause paralysis, which will have a serious negative influence on your investment returns. For this reason, you should invent and implement a rule-based system for picking stocks. Instead of kicking yourself for your bad picks, you now have a scapegoat. It wasn't your fault. It was the system! Better improve it for around 2!?

Flip the script :?According to Charlie Munger, who is Warren Buffett's right-hand man: you must always invert. By this, he means that you can investigate a problem more in-depth if you flip it around. Instead of asking yourself: why do I want to invest in Tesla? If you already are bullish on it, ask yourself: why wouldn't I want to invest in Tesla??

ATTENTION :

Play the odds :?ditch the story Here comes another caveat to financial news reporting during market turmoil. The stock market has an expected return of about 7-8% per year (if we are to trust about 200 years of history). This means that for every $100 you invest you get 7 to 8 dollars back every year on average. Therefore, don't run for the exit door during a bear market just because the new story is telling you that the sky is falling. It's not. And if I'm proven wrong here for some reason .... let's just say that at that point the least of your worries will be that you invested in the stock market.?

Look for simple solutions :?The investor sometimes ends up in a situation where he can't see the forest for the trees. Certain specifics about an investment might consume so much energy that he cannot see the whole picture anymore. Once again, a rule-based system that takes this into account is the solution.?

Size matters :?Let's talk about men and their egos again. Some men with gigantic egos also have gigantic ... No. No, wait ... What was this point about again? What I was about to say was that it's not just important to consider how likely a scenario is, the size of the impact if the event happens is of the same importance. Consider these two stocks. Which one makes for the best investment? I'll leave you to discuss this in the comments.?

EMOTION :

Meditate :?Emotions around financial markets can usually be categorized as either fear or greed. Turns out that meditation is AWESOME when it comes to taming both of them.?

Automates, automate, automate :?At this point, this advice might bore you a little bit, but I'll explain it one more time: to become a great behavioral investor, you need a rule-based system. This goes for countering emotions too.?

Learn to recognize emotions :?If you can learn to identify your emotional state, you can also learn to avoid investing at times when you are more inclined towards making bad decisions in the market. If you feel either hungry, angry, lonely, or tired, stay away from your stock portfolio.?

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