Daniel Crosby - The Behavioral Investor

The Behavioral Investor

Daniel Crosby

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First published in Great Britain in 2018

Copyright Daniel Crosby

The right of Daniel Crosby to be identified as the Author has been asserted in accordance with the Copyright, Design and Patents Act 1988.

Print ISBN: 978-0-85719-686-6

eBook ISBN: 978-0-85719-687-3

British Library Cataloguing in Publication Data

A CIP catalogue record for this book can be obtained from the British Library.

All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior written permission of the Publisher. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published without the prior written consent of the Publisher.

Whilst every effort has been made to ensure that information in this book is accurate, no liability can be accepted for any loss incurred in any way whatsoever by any person relying solely on the information contained herein.

No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading material in this book can be accepted by the Publisher, by the Author, or by the employers of the Author.

For Katrina, the Why that guides my every How

For Charlotte, Liam and Lola, my light

Contents

About the author

Educated at Brigham Young and Emory Universities, Dr Daniel Crosby is a psychologist, behavioral finance expert and asset manager who applies his study of market psychology to everything from financial product design to security selection. He is co-author of the New York Times bestseller Personal Benchmark: Integrating Behavioral Finance and Investment Management and founder of Nocturne Capital. He is at the forefront of behavioralizing finance. His ideas have appeared in the Huffington Post and Risk Management Magazine , as well as his monthly columns for WealthManagement.com and Investment News .

Daniel was named one of the 12 Thinkers to Watch by Monster.com , a Financial Blogger You Should Be Reading by AARP and in the Top 40 Under 40 by Investment News .

When he is not consulting around market psychology, Daniel enjoys independent films, fanatically following St. Louis Cardinals baseball, and spending time with his wife and three children.

Also by Daniel Crosby

Everyone You Love Will Die

Youre Not That Great

Personal Benchmark: Integrating Behavioral Finance and Investment Management (with Chuck Widger)

The Laws of Wealth: Psychology and the secret to investing success

Foreword by Noreen D. Beaman

I have worked with financial advisors and investors for the better part of 30 years. During that time, I have seen bubbles and busts, manias and meltdowns, and am now a firm believer that behavioral mastery is what separates successful from unsuccessful investors. Having now worked with and for some of the brightest minds on Wall Street, I can say with a confidence borne of a three-decade long career that the greatest financial intellect in the world is nothing if it is not paired with a self-understanding to match. All exceptional investing is, at its core, behavioral investing.

My adventure with Dr Daniel Crosby began in 2012 when he began to assist our firm in creating a framework to help financial advisors capture the elusive behavioral alpha, or the outperformance that accrues to clients receiving sound behavioral coaching. Based on the success of this effort, we further deepened our commitment to behavioral finance by partnering with Daniel to create The Center for Outcomes, an educational initiative designed to combat the 50% non-compliance among clients receiving formal financial advice. After all, the only advice that works is advice that is followed through.

The ideas set forth in this book represent the coming together of years of applied work combined with a comprehensive review of the literature on psychologically informed investing. It is only through this blend of theory and praxis that we can begin to protect individuals from their greatest enemy: themselves.

My favorite part of beginning a new read is taking a step into the unknown. What new things will I learn? How might I begin to question some of my cherished beliefs? Will I walk away with information that changes the way that I live my life? While many investment books are a tepid rehashing of old ideas, The Behavioral Investor sets forth a vision for an entirely new planning and investing paradigm.

The journey that Daniel takes us on is by turns surprising, far ranging, sometimes downright weird, but always informative. Whether by drawing comparisons between monkeys and financial markets or ugly German towns and our penchant for the status quo, The Behavioral Investor has a knack for making the complex easily understandable. The reader will leave with a deep belief that there is no understanding markets without first understanding people and Daniel is a skilled guide through the labyrinthine maze of human behavior.

Daniel clearly demonstrates through effective sharing of the science and history that our brains, while unrivaled in sophistication, are still woefully ill-suited for the task of long-term investing. We are simultaneously the most evolved species on the planet and wholly unprepared for the demands of modern life. But this book is ultimately hopeful, and our shortcomings are only presented with an eye to setting forth solutions for the psychological traps to which we so easily succumb.

With humor, wisdom and, above all, passion, The Behavioral Investor sets forth a series of ideas that have done as much to enrich my life as they have my wallet. The best investment books understand that there is no growing of wealth without knowledge of self and The Behavioral Investor is a model of this new, more enlightened understanding of the financial world.

It is a rare finance book that can cause you to think, question and even laugh, but The Behavioral Investor is just such a work. I am confident that you will find it as enjoyable and impactful as I have.

Noreen D. Beaman,CEO, Brinker Capital

Preface

Gentle reader, the aim of this book is to be the most comprehensive guide to the psychology of asset management ever written. This goal is admittedly audacious, but I am a believer that only an impertinent dream such as this ought to give rise to so irrational an undertaking as writing a book.

In order to meet the full measure of its creation, The Behavioral Investor takes a sweeping tour of human nature before arriving at the specifics of portfolio construction. It is only as we come to a deep understanding of why humans make decisions in the way we do that we are left with any clue as to how we ought to invest.

This book is comprised of four parts. They are as follows:

• Part One An explication of the sociological, neurological and physiological impediments to sound investment decision-making. Readers will leave with an improved understanding of how externalities impact choices and may also suffer a bout of existential malaise owing to an altered belief in free will.
• Part Two Coverage of the four primary psychological tendencies that impact investment behavior. Although human behavior is undoubtedly complex, in an investment context our choices are largely driven by one of these four factors. Readers will emerge with an improved understanding of their own actions, increased humility and a deepened desire to do good in the world.