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Trading psychology
Hello, I'm new to stockopedia and picking my own stocks in general (previously went just with recommendations from fool.couk).
I have just finished reading the naked trader book and am now looking for a book on trading psychology. I know the NK has one, but would like to read another point of view.
There are a lot out there, does anyone have any particular recommendations? And do you think it's worth spending the time looking at the psychology of trading?
Thank you.
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13 comments
Some investing emotions/behaviour worth being aware of:
Fear of missing out
Confirmation bias
Groupthink (e.g. in investor forums)
Loss aversion
Restlessness / Impatience
Panic
Euphoria
Overconfidence
I'd agree with timarr's list of books to read although I'd consider Thaler's book Misbehaving to be his best with regard to investing. Nudge is more about messaging to get others to act; techniques that are now greatly used by the Conservative Government, a good example of which is the fact you have to opt out of the NEST pension scheme, rather than opt in.
But here we all are on what is effectively a bulletin board, reading blogs by various gurus and perceived experts. Maybe reading share tips in magazines etc. If you're going to take part and read others views, then by far the most important book you can read in my very humble opinion is the book Influence:The Psychology of Persuasion by Bob Cialdini. I first read it six or seven years ago and not only did it significantly change my outlook on life but it greatly improved my investing. After reading it, you might even think twice before hitting the blue thumb on a post, as I do!
All the best, Si
There is a very long list of behavioural biases that can impact investor decisions:
http://www.psyfitec.com/p/the-...
I'd start with Irrationality by Stuart Sutherland - it's quite old now, but it's still the best introduction to the topic. Personally I find Thinking Fast and Slow a bit of a struggle but it's best read in combination with The Undoing Project by Michael Lewis, which explains how Tversky and Kahneman developed their ideas.
Nudge by Thaler and Sunstein is also required reading - Richard Thaler represents the second leg of behaviourial economics, and it's well worth reading anyway. I'd then read Risk Savvy by Gerg Gigerenzer, who shows that most what Kahneman, et al, proposed can be explained by limitations in the way that we process information.
Finally, I'd move on to actual investing - The Little Book of Behavioral Investing by James Montier is the best I've found.
Happy reading!
timarr
Just to note that Predictably Irrational by the behavioural economist Dan Airely is on sale for 99p in Kindle version on Amazon.
It's not directly about investing, but lots of it is directly relevant. For instance - we value stuff we own more than stuff we don't own.
It's a little bit dated, but the research is still relevant and it's very easily digested, unlike some of the other popular texts on the topic.
timarr
Thanks for all the replies everyone. Going to make my way through a few of these.
The Laws of Wealth by Dr Dan Crosby, behavioural psychologist, is an easy read but highly recommended. Two parts. Part one is his “10 Commandments” of Good/Bad investor behaviours. Part 2 is an application of his ideas to a rules based investment approach - in essence his variation on Greenblatt’s Magic Formula method. One of the few investment books I regularly re-read.
Gus.
Does reading more on this subject help you or confuse you? I was looking at a stock I'd bought recently but had gone down and I had one voice saying to sell quickly at a small loss, and another saying that new investors should leave well alone as they fall into the trap of overtrading and losing on fees etc. I know that hindsight will tell me which voice I should have listened to, but that's not much help at the time. Maybe there's just always someone to tell you you're right/wrong? Or is the trick to stick to one style so you don't hit all the duffs in the different styles?
"Does reading more on this subject help you or confuse you?"
That's a very good question, Indie. We all respond differently to the same information. As Ben Graham observed, the biggest enemy of every investor is himself. Speaking for myself, I believe I make better decisions when I remove my emotional biases (too many to list here). By reading about investor psychology, I am now much more aware whether my decisions are emotional or rational. Sometimes it is challenging to make rational decisions about buying or selling when greed and fear are telling you to do the opposite of what you want to do. But ultimately rationality prevails over emotion. If an investor cannot recognise when emotions are getting in the way of rational decisions, that investor has an inbuilt obstacle to success.
Buy, sell or hold, these are typically the only decisions an investors needs to make, in an ideal world these decisions will be based on logic. Based on the knowledge we have at that time We will make a decision, then standing in the way of these decisions is emotions. Greed and fear are the 2 most obvious, but there are many others
This can lead us to make irrational decisions based on these emotions, which we can typically either praise or punish ourselves weeks afterwards depending on the outcome.
learning to set emotions aside is absolutely essential.
So yes I believe studying psychology on this subject is essential in my opinion.
Investors and traders seem to prioritise stock picking over risk management and psychology when arguably we have it the wrong way round.
Mark Douglas - The Disciplined Trader and Trading in the Zone are my bibles.
I also recommend Annie Duke Thinking in Bets and Nassim Taleb - Fooled by Randomness.
Dr Alexander Elder has written books on psychology in trading - one of his books is reviewed in the Financial Wisdom channel on Youtube.
My personal favourite on psychology is is Daniel Kahneman's 'Thinking, Fast and Slow' - somewhat long, but never dull. He mentions most of the common cognitive and emotional issues faced by traders and investors, e.g. loss aversion, risk aversion etc.
I second the suggestion of Wilkonz. 'Thinking Fast and Slow' is brilliant. One of the most important books on psychology in recent decades, with lots of lessons for investing, ( and some stories that make you smile about conversations with finance people). I note that Kahnemann also has a new book coming out next month, with Cass Sunstein - author of 'Nudge' theory.
1) Misbehaving by Richard Thaler. Not specific to investing but very interesting and applicable
2) The Little Book of Behavioural Investing by James Montier. This is my go to when I don't know what to do or think I'm getting in my own way. Has a value tilt but still useful even if that isn't your main strategy.
Both are fun and interesting reads that I learn something new from each time.