Inside the Investor's Brain: The Power of Mind over Money

Overview

The human brain is wired to make decisions in certain ways.Unfortunately, when it comes to the financial markets, the waywe've been "wired" is not conducive to making money. Nobody knowsthis better than author Richard Peterson. As a founder of MarketPsychology Consulting, a former trader, a developer ofpsychology-based trading systems, and an investor coach, Petersonunderstands firsthand how subconscious mistakes (biases) cansabotage the financial decision-making of market ...

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Overview

The human brain is wired to make decisions in certain ways.Unfortunately, when it comes to the financial markets, the waywe've been "wired" is not conducive to making money. Nobody knowsthis better than author Richard Peterson. As a founder of MarketPsychology Consulting, a former trader, a developer ofpsychology-based trading systems, and an investor coach, Petersonunderstands firsthand how subconscious mistakes (biases) cansabotage the financial decision-making of market participants.

Now, with Inside the Investor's Brain, Peterson wants to sharehis invaluable experiences in this field with you. Backed by recentresearch in neurofinance—the study and application ofneuroscience to investment activity—psychology, andexperimental finance, this detailed guide explains the fundamental"hardwired" mistakes made by most investors and reveals the simplesteps you can take to overcome these obstacles and improve yourfinancial decision-making skills.

After an introduction that illustrates some of the most basicand prevalent investor biases—through the well-documentedstories of Long Term Capital Management, Sir Isaac Newton and theSouth Seas bubble, and Mark Twain and the 1860s silverfever—Inside the Investor's Brain moves on to:

  • Part One: The Intersection of Mind and Money describes basicbrain function and how it is unsuited to modern financial marketdynamics
  • Part Two: Feelings and Finance explains emotional states, theirchemical basis, how they alter our financial judgments, and optimalinvestor personality characteristics
  • Part Three: Thinking about Money examines the commonthought-traps of investment analysis. Here, misperceptions in theevaluation of financial opportunity and risk are discussed
  • Part Four: In Practice offers advice for managing your mind inthe financial markets and suggestions on the use ofpsychology-based investment strategies

Most chapters also contain engaging real-world examples, whoselessons will help you identify subconscious biases; understand whenthinking will improve your investment process (and when it won't);improve your emotional intelligence; and focus on the decisionprocess, not the outcome.

While good investing requires a basic financial education, inorder to really excel in this environment, you've got to learn howto manage yourself. With Inside the Investor's Brain as your guide,you'll quickly discover how becoming familiar with both the terrainof the markets and the topography of your mind can enhance theprofitability of your overall investment endeavors.

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Editorial Reviews

From the Publisher
"Exceptionally well-written, it will likely prove to be a seminal text on the influence of the human brain on investment behavior. And neurofinance, as that field is known, may provide the next great edge for savvy investors. ... Inside the Investor's Brain , written by an experienced but surprisingly young author (he's 35), is outstanding. Peterson and his first book have much to offer investors and the institutions in which they work."— Dr. David L. Nathan, (Barron's, September 2007)

"Clear and Accessible." — Bob Frick (Kiplinger's Personal Finance, December 2007)

"Highly recommended." — (Kiplinger's Best Investing Reads of 2007)

"For those who want to take behaviouralism a step further, and to study the science of the brain - a subject that tells us a lot about ourselves, as well as about how we might just make some more money ... " —(Financial Times, December 2007)

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Product Details

  • ISBN-13: 9780470067376
  • Publisher: Wiley
  • Publication date: 7/9/2007
  • Series: Wiley Trading Series , #295
  • Edition number: 1
  • Pages: 416
  • Sales rank: 1,514,171
  • Product dimensions: 6.26 (w) x 9.35 (h) x 1.41 (d)

Meet the Author

Richard L. Peterson, MD, is a Managing Partner of Market Psychology Consulting, an Associate Editor at the Journal of Behavioral Finance, a psychiatrist, and a former trader. He has written for a number of publications, including the Journal of Psychology and Financial Markets, and was a contributor to the book Risk Management: A Modern Perspective. Peterson holds seminars around the world for investment professionals and has two active Web sites: www.marketpsych.com and www.richard.peterson.net. He received his medical and bachelor's degrees from the University of Texas, completed his psychiatry training in the San Francisco Bay Area, and performed postgraduate neuroeconomics research at Stanford University.

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Table of Contents

Preface.

Acknowledgments.

About the Author.

Introduction.

Part I: Foundations.

Chapter 1: Markets on the Mind.

Analysts and Dart Boards.

Developing Better Expectations.

“The Wisdom of the Collective”

Meteorological Anomalies and Other Animal Spirits.

Sentiment.

Chapter 2: Brain Basics.

Damasio and the Iowa Gambling Task.

The Brain: Structure and Function.

The Brain-Damaged Investor.

Research Methods.

Neuroscience Preview.

Chapter 3: Origins of Mind.

Emotions and Perceptions.

Expectations and the Comparator.

Counterfactual Comparisons.

Beliefs and Expectations: The Placebo Effect.

Making Sense of the News.

Self-Deception.

Emotional Defense Mechanisms and Motivated Reasoning.

Chapter 4: Neurochemistry.

Introducing the Neurotransmitters.

Serotonin.

Dopamine.

Norepinephrine.

Opiates.

Stress Hormones.

Caffeine.

GABA, Acetylcholine, and Omega-3 Fatty Acids.

The Chemistry of (Financial) Mental Disorders.

The Neurochemistry of Financial Performance.

Serotonin and Market Bubbles.

Recreational Drugs and Alcohol.

Alcohol.

Cocaine.

Part II: Feelings and Finances.

Chapter 5: Intuition.

Analysis and Intuition.

Investment Practice.

What Does Your "Gut" Tell You?

Listening Without Thinking.

Intuition and Emotion in Investing.

Emotional Intelligence.

Subliminal Emotion.

Stirring the Unconscious.

Chapter 6: Money Emotions.

Emotional Biases.

The Difference between Positive and Negative Feelings.

Regret as a Self-Fulfilling Prophecy.

An Amicable Divorce.

Sadness and Disgust.

Fear and Anger.

Projection Bias.

Managing Feelings.

Summary.

Chapter 7: Excitement and Greed.

Brokers Kindle Irrational Exuberance.

The Anatomy of Stock Hype.

Greed: The Basics.

The BIAS Task.

The Nucleus Accumbens.

Excited About a Good Deal.

Improving Biased Decision Making.

Greed in the Markets.

Chapter 8: Overconfidence and Hubris.

The Psychology of Hubris.

Overconfidence.

Illusion of Control.

Winning Changes the Brain.

The Neurochemistry of Exploration.

One Who Knows: Christian Siva-Jothy.

Confidence—the "Good" Kind.

Solutions.

Chapter 9: Anxiety, Fear, and Nervousness.

Climbing a Wall of Worry.

Dread in the MRI.

Nature versus Nurture.

It’s All in Your Head.

Empathy Gaps.

Pain Relief.

Investment Lessons.

Of Hurricanes, Risk Perceptions, and Opportunity.

Summary.

Chapter 10: Stress and Burnout.

Stress.

Cramer on Stress.

Choking for Rupees.

Which Goes Wrong—the Brains or the Brawn?

Stress and Trend Perception.

Neurochemistry of Stress.

Biological Effects of Stress.

Adrenaline Junkies.

Managing Investment Stress.

Summary.

Chapter 11: Love of Risk.

Knowing When to Fold ‘Em.

Pathological Gambling.

The Gambler’s Brain.

Ought to Know Better.

Reducing Gambling.

Summary.

Chapter 12: Personality Factors.

The "Big Five."

Extraversion versus Introversion.

Neuroticism versus Emotional Stability.

Conscientiousness versus Impulsiveness.

Openness to New Experiences versus Traditionalism.

Agreeableness versus Self-interest.

The Genetics of Personality.

Investing Personality.

Neurotic Investors.

Extraverted, Open, and Conscientious Investors.

Other Personality Research.

Trading Psychology.

Part III: Thinking about Money.

Chapter 13: Making Decisions.

Expected Value and Expected Utility.

The Jackpot Trap.

Probability Misjudgments.

Vividness, Imagination, and Desire.

Ambiguity and Uncertainty.

Ambiguity in the Markets.

Neuroscience of Ambiguity, Risk, and Reward.

The Possibility that You are Overweight.

The Trusting Brain.

Neuroscience of the Ultimatum Game.

The Trust Hormone.

Implications.

Chapter 14: Framing Your Options.

The Disposition Effect.

A Father-Son Stock Sale.

Teasing out the Problem.

Framing Risk.

A Frame in the Membrane.

Holding Losers: "Double-or-Nothing!"

Differences in Aversion.

Letting Winners Ride.

Summary.

Chapter 15: Loss Aversion.

Neuroscience of Loss Aversion.

The Equity Premium Puzzle.

The Implied Put Option.

Overcoming Loss Aversion.

The House Money Effect.

Lessons from the Pope.

Comments from Soros, Tudor, and Cramer: "Booyah!"

Chapter 16: Time Discounting.

Get Your Hand out of the Cookie Jar.

Brain Basis of Delayed Gratification.

Chemical Impulses.

Monkey Business.

Making a Killing in the Options Pit.

Improving Self-Control.

In Practice.

Chapter 17: Herding.

Herding.

Social Proof.

Social Comparison.

Asch and Conformity.

Information Cascades.

Stanley Milgram and the Shocking Truth.

Nice Clothes, Fast Cars, and Fancy Titles.

The Neuroscience of Cooperation.

Analysts' Abuse of Authority.

The Herding Habit.

Living the Contrarian Lifestyle.

Advice for Herd Animals and Trend Followers.

Advice for Investment Committees.

Chapter 18: Charting and Data Mining.

Artificial Neural Networks.

Data Mining and Self-deception.

Finding Patterns in the Noise.

The Trend and Mean-reversion Biases in Chart Reading.

Overreliance on Charts.

The Gambler's Fallacy.

Irrational Exuberance . . . Called Too Early.

The Soochow Gambling Task.

The Learned Caudate.

Patterns in Earnings Reports.

Fooled by Randomness.

Chapter 19: Attention and Memory.

Terminal Illness.

Representative Returns.

Fond Memories.

Beating the Hindsight Bias.

Attention Deficit.

Keep Your Eye on the Pills.

What's in a Name?

China Prosperity Internet Holdings.

"All that Glitters."

Chapter 20: Age, Sex, and Culture.

Emotional Memories.

The Female Brain: Estrogen, Emotion, and Cooperation.

Financial Planning for Divorcees.

Male Overconfidence.

Age.

The Seattle Longitudinal Study of Adult Development.

Culture (East and West).

Chinese Risk Takers.

Biases Among Chinese Stock Traders.

Part IV: In Practice.

Chapter 21: Emotion Management.

Do it for Love, Not Money.

Money Changes You.

Emotional Defenses.

The Pursuit of Happiness.

Neuroplasticity.

Chemical Stabilizers.

Self-discipline.

Creating a Decision Journal.

Chapter 22: Change Techniques.

Dealing with Fearful and Overconfident Clients.

Cognitive-behavioral Therapy and Stress Management.

Yoga, Meditation, and Lifestyle.

Simple Stress Reduction.

Getting Out of a Slump.

Trading Coaches.

Flavia Cymbalista.

Denise Shull.

Modeling Others.

Growing Happier.

Neurofeedback.

Maintain "Learning Goals."

Chapter 23: Behavioral Finance Investing.

Harvesting Risk Premia.

Risk Premia and Expectations.

Value versus Glamour.

Momentum, Size, and the Optimal Portfolio.

"Buy on the Rumor and Sell on the News."

Limits to Arbitrage.

Behavioral Finance Fund Performance.

Behavioral Investment Products.

Final Notes.

Notes.

Glossary.

Index.

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Sort by: Showing 1 Customer Reviews
  • Posted July 14, 2009

    more from this reviewer

    Multifaceted discussion of influences on investing

    Richard L. Peterson's book is riveting, useful and, at times, poignant and funny. Peterson discusses a broad range of emotional and cognitive factors that influence investing. Some are common and will apply to all readers, but others are so subtle that they are sure to surprise even experienced investors. Peterson synthesizes and summarizes neuropsychology and behavioral studies, explains them in clear prose and illustrates them with examples drawn from investors' lives - and sometimes from their disasters. getAbstract recommends this work to readers interested in behavioral economics or in improving their investment practices.

    1 out of 1 people found this review helpful.

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