The Behavioral Investor

Mr. Crosby has given us five pieces of advice in this book. They are:• Systems trump discretion.• Diversification and conviction can co-exist.• Prepare for bursting bubbles without being too fine-tuned to them.• Less is more when it comes to information.• Look for evidence, theory, and roots in behavior.While I generally agreed with Mr. Crosby’s conclusions, I think there were ways he could have improved his presentation, partially by reversing his fourth piece of advice, at least as it applies to writing the book. I found the book to largely be a well-organized assembly of other people’s work, with brief breaks to discuss them. This is where I had a problem. I don’t think he looked into some of his research examples deeply enough, violating his fifth principle. I will give three examples, all of which I have encountered before reading his book. In the first example, page 16, cites a Harvard study in which students were paired and given $100 to divide. Person 1 decided how to split it and person 2 decided whether or not to accept it. If person 2 rejected, neither got anything. Harvard found that fifty percent of the low offers were rejected. Mr. Crosby concluded that even a 99 to 1 offer should be accepted because one dollar was better than none. I disagree totally. Person 2 would either consciously or unconsciously be valuing their self in future negotiations, to their own disadvantage. What would happen if person 2 said no and the exercise was repeated a week later with the same players? Would person 1 ask for $99 dollars again? Certainly not. He might be more inclined to ask for $50 while he might have gotten $60 or more each time. Person 2 would be $48 ahead. Harvard could have run this test better, but Crosby failed to see and discuss the possibilities. What if person 1 had been given a specific amount to ask for and each participant had gone through the exercise a number of times at different amounts so that a statistical analysis could have offered information on optimal behavior in this situation? Would this not be good discussion for the investor, especially when evaluating one’s actions when the other person has the hammer? There are more possibilities, but I will move on.Mr. Crosby cites two pieces of supposed research that claim to prove that people over estimate their own abilities or characteristics. One of his examples involves asking people if they were more athletic than the average person. Eighty percent said they were above average. I have seen this before as it applies to a woman’s looks and to good drivers. None of them define terms clearly, define average, or give the person a chance to evaluate themselves in a meaningful way. As far as I know, none of them account for age, change in physical condition over time, and the effects of opinions offered by others? Even if thirty percent (do the math) of the people overestimate their place on the scale, is it because of their ego, or input from other people that helped them form their opinions? How many people tell a woman that her looks are below average, whatever that is, and how much does that impact her view of herself? Mr. Crosby and the researchers have drawn conclusions based on data, not cause and effect. They haven’t even done that. Supposedly 70% put themselves on the right side of the line. So, more than two against one made correct evaluations about themselves. That's pretty good. The third example is on page 154. Mr. Crosby does a wonderful job of telling us how to apply statistical analysis to understanding situations. However, his example is horrible and thus his lesson is limited if not almost useless. He tells us that 1 in 1,000 drivers is intoxicated and that breathalyzers are 95% correct, but that in a random check most of the positives are incorrect and gives us the analysis to back this up. As I said, the math is correct. The problem is that the one in 1,000 average is meaningless in real life. Why would I pay the police my tax dollars to catch one in 1,000 people driving drunk? The distribution of drunk drivers is not spatially or temporally even. The police need to give random checks on Las Vegas Blvd. at 1:00 A.M., not at 10:00 A.M. in your neighborhood. Mr. Crosby failed to realize that broad averages are just that and you need specific, applicable information to do good investment analysis. My suggestion for Mr. Crosby is less examples and more in-depth analysis. Do I recommend this book? Sure, just read it carefully.

This is a book with great ambitions. In the first sentence Daniel Crosby says that the aim for The Behavioral Investor is to be the most comprehensive guide to the psychology of asset management ever written. Dr. Crosby, a psychologist by training, is the Chief Behavioral Officer at Brinker Capital and a leading blogger and podcaster on the subject of behavioral finance – this is his forth book on different topics in this discipline.Some fifteen years ago I fell in love with behavioral finance as it so obviously described aspects of investing and financial markets that traditional finance and economics didn’t. Over time the interest has however started to wane since the academics in the area devoted their energy towards adding yet another insult towards the previously dominant efficient market hypothesis creating an ever growing list of interesting and quirky behavioral biases but no real practical applications for investors. According to the author “[…] all this ends today, as we will take [these biases] and speak to the particulars of what they mean in the context of making money.” I would argue that the aim of being the most comprehensive guide is reasonably well met for a book of “only” about 250 pages. With regards to fulfilling my wish of an applied behavioral finance investment method The Behavioral Investor unfortunately only gives fairly broad guidelines.The author is well read in both academic literature and more practical investing books. Despite the author’s learnedness the language is very readable and clear as Crosby’s writing comes with a humorous and personal touch. This is a finance book without most of the technical finance jargon – although at times it instead contains some psychology terminology. Nevertheless, it’s undoubtedly a very readable book.The book is structured in four parts with the first outlining the sociological, neurological and physiological foundations to the biases investors exhibit. Then the author summarizes the many documented psychotically based follies of investors into four primary tendencies regarding ego, conservatism, attention and emotion. Part three tries to list practical measures to overcome the previously described problems and finally the book ends with the author’s “third way” of investing (as opposed to passive investing and active investing) called rules-based behavioral investing (RBI). Hence, the first half gives a background and the second half tries to apply the learnings in real life. Throughout The Behavioral Investor Crosby discusses most of all the psychological experiments and subsequent findings that a frequent reader of behavioral finance literature will ever have heard of but without it ever getting tedious.RBI is as the name suggests rules based with a high base allocation to equities implemented through a combination of value and momentum quant based equity portfolios and with an overlay of valuation (Tobin’s Q, CAPE etc.) and momentum (200-day or 10 month moving averages etc.) based rules for when to very occasionally lower the allocation of equities. The focus is to find a rational and evidence based methodology where the room for behavioral biases is kept to a minimum. Although this is only one of several good ways to manage money I personally think this is a great setup, but regrettably Cosby only gives a very fleeting description of what his RBI actually looks like. Further, the Achilles heal of the rational quantitative strategy is that it needs permanent money or else it will suffer redemptions at the exact wrong moment from its less than rational human investors.If this is one of the first books you read on behavioral finance you are to be congratulated as it will surely be mind-blowing. If you have followed the area during its development, The Behavioral Investor is a very good inventory of current knowledge but it adds relatively little new. And perhaps it’s a good thing that a best selling book cannot deliver a detailed best practice behavioral finance investing method as it is then up to me to develop it myself.This is a review by investingbythebooks.com

If you've already read the author's prior book "Laws of Wealth" there is no need to read this one as they are very similar - including portions that are identical. If you haven't read his prior book then I highly recommend either as the subject matter is very important for investing success.

The author spends a great deal of time explaining how our emotions can undermine our ability to invest successfully. The author then proposes a rules-based behavioral investing (RBI) method which should mitigates the negative effects of our emotions.The author states some of the features of RBI, which includes automation, low fee, diversification, potential outperformance, low turnover and management of bias. The author does not elaborate and explain in detail his methods and does not explain how to implement RBI. He just goes off on multiple tangents telling multiple stories that is somewhat related. This is a very frustrating read and I am unable to nail down the RBI method. I have a feeling that his next book will elaborate and explain how to implement RBI.I suspect that the RBI method is a variation of the modern portfolio theory, which assumes that markets are efficient. I recommend Burton Malkiel’s book, “The Random Walk Guide to Investing, Ten Rules For Financial Success” for a very concise actionable explanation of this investment method. This method has all of the features of RBI listed above. If you want to read in-depth about the theory of why it works, then read the more comprehensive “A Random Walk Down Wall Street”, 2019 edition also by Burton Malkiel. This latest edition has several chapters on behavior finance.

“Behavioural” investing has become much talked about over the past 5 years or so.Traditionally good investment has been based on:(1) sensible asset allocation; diversity(2) use of Fundamental Analysis to identify what stocks to buy(3) use of Technical Analysis to identify when to buy and sell.To this we can add the need for the investor to understand his own mind and emotions when administering a portfolio. The best scientific skills can be swept away if you sell in panic when prices fall.This book explains why the average intelligent person can be unsuited to coping with financial markets; and then explores how you can compensate for this. Put over simply: identify your rules and keep to them.Well worth reading; if then you use the learning.

The Behavioral Investor” by Daniel Crosby should be required reading for every financial markets professional and student (and I say that as someone who has worked in financial markets for 15 years) ... the book is absolutely packed with value, clearly a lot of thought has gone into putting it together. There are solid gold insights to be found on pretty much every page - and crucially the first time I’ve seen that much real practical advice on how to address behavioral biases. Most books and articles tend to talk about the biases themselves.

Firstly, overall this is an enjoyable read. Secondly, it contains a useful summary and some keen insights into the mind of not only the investor but humans in general. There is much to take away from this book. But beware - there are no get rich quick schemes here, just good advice and what could be thought of as common sense, if it were more common.

Essential reading for investors.Extremely well written and easy to follow discussions of the most important behavioral impacts on investors. So many investors fail to take heed of these warnings. I thoroughly recommend this book. Even those quite familiar with the subject will find plenty of new information on its pages.

Has helped me forming my personal investment strategy. The content provides excellent guidance on the idea of fundamental and analytical investing on market behaviours.