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Friday 17 August 2012

PSB Latticework: On Investing Psychology and Emotion

An updated, reorganized Latticework is now available, which in technical speak provides access to the deep structure of the blog and which, for us laymen, is a way of recycling old content. 

The single largest theme is On Investing Psychology and Emotion, a varied grab-bag of articles loosely arrayed around how our psychology interacts with financial transactions and causes havoc all round.

Perhaps the fundamental concept is that emotions are intrinsic to investing and anything that can affect our emotional state of mind can therefore sway the way we choose to invest.  We’ve seen evidence in Unemotional Investing Is Best that emotionally brain-damaged people are more rational investors, that depressed people are also more likely to make sensible decisions (Depressed People Don’t Need Feedback, Everyone Else Does) and that Happy People Make Terrible Traders.  In fact when markets become stormy our fear of the unknown is activated – as we saw in Dread Risk: Investing Outside the Goldfish Bowl – and we tend to Panic!  All of which suggests that we need to Get An Emotional Margin of Safety.

There are a wide range of other psychological phenomena that seem to impact investing – we prefer stories to numbers (Fairy Tales for Investors and The Media, Fear and Stockmarket Manias and Your Financial Horoscope), we reconstruct memories to make ourselves feel happy not rich (Financial Memory Syndrome), we’re far less honest that we like to think we are (Financial Lessons in Mass Deception and Gaming the System), and we desperately do things that make us feel in control, even when this is a complete illusion (Mindless With Money).  Despite what you might think being smarter doesn’t help you with any of this because Intelligence Can Seriously Damage Your Wealth, but strangely being taller (A Tall Tale of RiskAversion) and born rich (Born Rich, Born Greedy) does.

Even more bizarrely how we spend our money often depends on how we earn it (Dirty Money: There IS Accounting for Taste), some of us fall in love with our investments (Love Your Kids, Not Your Stocks), almost none of us obey the basic economic principle of earnings maximisation because of an innate requirement for fairness (When a Dollar’s Just a Dollar), we’re conditioned to overreact to near-term information (B.F. Skinner’s Stockmarket Slot Machines), and we generally prefer to rely on personal experience even if it makes us sick (Puke: Don’t Invest in the Familiar).  Overall we’re easily distracted (Zombies in the City of London) and impoverish ourselves through very poor self-control (Get Rich, Flee Temptation and Putting Down the Credit Cards).  And perhaps, most oddly of all, some of us are just too stupid to know how stupid we are, so be careful that you Don’t Lose Money in the Stupid Corner.

And if you find none of that believable you might want to see What’s Your Financial IQ?

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