Koppel - Investing and the Irrational Mind

INVESTING and the IRRATIONAL MIND

Rethink Risk, Outwit Optimism, and Seize Opportunities Others Miss

ROBERT KOPPEL

Copyright 2011 by Robert Koppel. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

ISBN: 978-0-07-175343-2

MHID: 0-07-175343-5

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WILLIAM J. BRODSKY
Chairman and CEO, Chicago Board Options Exchange

Over the years of helping to guide the development of several U.S. exchangescurrently as chairman and CEO of the Chicago Board Options Exchange, and before that at the Chicago Mercantile Exchange and the American Stock ExchangeIve had the pleasure of getting to know a long list of professional traders and investors. In addition, I am an avid personal investor.

Many of the professionals I knowseveral of whom are profiled in this bookhave become legends for their trading prowess. Their successes, however, rather than being a series of endless profitable trades, were peppered along the way with some failures, followed by a good dose of learning and personal introspection. Otherssome professional traders and many more who are part-time investorshave not been as successful; they have had to learn the hard way that without emotional intelligence, even the best-thought-out strategy can unravel during times of market upheaval. John Maynard Keynes admonished that the markets have the ability to stay irrational longer than investors can stay solvent, and for those who are unable to digest that warning, the journey toward becoming a successful investor or trader may be short-lived.

This book also suggests that neither formal education nor raw IQ appears to be the biggest factor in achieving market success. In his inimitable down-to-earth style, Warren Buffett may have said it best: Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Whats needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.

And that, in its broadest sense, is what Bob Koppels book explores. Contained in its 250 fast-reading pages are fascinating examples and insights into how the brain works, drawn from studies of some of the best scientific minds in behavioral economics and psychology.

This book differentiates itself from others that concentrate on either nuts-and-bolts analytical and strategic skills (the stuff of the left brain) or simple formulas for market mastery. Taking an entirely different path, our author and the experts he cites suggest that investors emotions cannot and should not be ignored, with all market decisions being left to automated trading systems. Instead, the underlying theme is that the best investors are able to recognize their emotions and use them to their advantage without allowing those emotions to overpower them.

In his introduction, Koppel states that he has come to believe that the market is truly a Rorschach testa way to see himself clearly in the mirror, with all of his personal beliefs, emotions, and inconsistencies in how he deals with the markets laid out before him. He is able to expertly express why these human factors may be inextricably linked to a better chance of success in the markets.

The good news, as Bob points out, is that even old dogs can learn new tricks about investing. We can master new skills, alter old ones, overcome crippling emotions, and, through experimentation, teach ourselves psychological responses and styles that can become automatic. And we can do this because, as the latest findings on the plasticity of the brain prove, we continue to change.

Readers of this book will find within these pages new truthsin the form of a sort of investors field manualthat will help transform their thinking on an important subject. I believe that this is as relevant as, or more so than, todays latest investment strategies, trading systems, or technical chart formations. It is yet another successful endeavor for Bob, whose books offer lessons that could be extremely invaluable throughout ones investing life.