Lessons in Behavioral Investing

Lessons in Behavioral Investing

How Our Emotions and Biases Impact Our Financial Decisions

Lessons in Behavioral Investing
Monday, 22 June 2020

When it comes to financial decision-making, we are oftentimes our own worst enemies. Human nature makes us susceptible to emotional responses, lack of willpower, overconfidence, and personal biases that impact our money mindsets and our financial decisions. Any one of these things can lead us to make less-than-wise decisions with our money, and this is certainly true when it comes to our investments.

As in many areas of life, we all make smarter decisions when we become aware of our inherent weaknesses and put measures in place to overcome them. Understanding more about the psychology around investing is one way to protect yourself from yourself.

In his bestselling book, The Little Book of Behavioral Investing, author and expert James Montier discusses some of the most important behavioral challenges facing investors. He also shares time-tested advice on how to avoid investment pitfalls and achieve your wealth-building goals. Below, we’ll review several of his key concepts.

We are Easily Susceptible to Confirmation Bias

As human beings, we all tend to hang onto our own viewpoints long after evidence or experience point us in new directions, simply because we spent time and effort developing our beliefs and we feel anchored to them. When we see data that confirms our beliefs or hear an opinion from someone else who agrees with us, our confirmation bias means we have a tendency to favor those data sets and opinions – even if there are overwhelming amounts of information and opinions to the contrary.

Willpower isn’t Enough to Overcome Behavioral Biases

We’d all like to believe we’re capable of pushing through our inherent biases to make better decisions, but Montier’s research shows otherwise. Willpower, while useful in many contexts, simply doesn’t create lasting change. Rather, we must rely on systems and formulas to remove the danger of biases for us.

Don’t Mistake Confidence for Intelligence

Experts of all kinds, including investment experts, tend to be more confident than the majority of us. It’s easy to get caught up in the herd mentality of simply investing as the experts recommend, but we must be careful not to abandon our own values in the process.

We Judge Decisions Based on their Outcomes

Instead, we should be judging based on the quality of the decision-making process. Outcome bias is a tough one to overcome in investing because of our natural inclination to value decision-making that leads to a positive result and to devalue the decision-making processes that ended in poor outcomes. We should all be more process-focused in order to guard against outcome bias. This means being disciplined in sticking to the processes we’ve built on our values and trusting in them to lead us to investment success.

We Expect Investing to be Exciting

Wall Street is constantly trying to sell us something sexy and exciting. In truth, though, if we are investing the right way then it should be a fairly boring endeavor. We need to remind ourselves to ignore the shiny new strategies and stick to what we know has given us steady, consistent success – even if it’s not as exciting as we thought it might be.

The above concepts of behavioral investing are useful in opening our eyes to the natural pitfalls we face as investors. Using what we learn, we can then work to eliminate the impact of our emotions, personal biases, and more, and focus on the mindsets, processes, and strategies that optimize our chances at success.

For more on behavioral investing concepts, check out James Montier’s The Little Book of Behavioral Investing.

Related Articles


  • Phone:
  • E-Mail:
    This email address is being protected from spambots. You need JavaScript enabled to view it.

Check us out

© 2020 CHARLES CARROLL FINANCIAL PARTNERS. All rights reserved. Powered by AdvisorFlex.

The information presented on this website is for information on matters of interest only. Given changing laws, rules and regulations, there may be delays, omissions or inaccuracies in information contained on this website. The information in this website is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any financial decision, you should consult one of the Charles Carroll advisors. Every effort has been taken to see that the information contained on this website is accurate. Charles Carroll in not responsible for any errors or omissions, or for the results obtained from the use of this information. Charles Carroll and its employees are not liable to you or anyone else for a decision made or action taken based on the information on this website