5 Books to Master Investor Psychology (2024)

5 Books to Master Investor Psychology (1)

Today’s episode is sponsored by Shortform

A major difference between so-called Superinvestors and the investors that trail or underperform the market is Investor Psychology. The average investor can’t handle his emotions and stumbles from one mistake to the next. You could be the greatest expert on valuation. You could even be the greatest forecaster.

Without handling your own emotions, you can’t win in the stock market.

Why is our remarkable Brain tricked by the Stock Market?

Investors have to be rational, patient, calculating, and calm. And all those things do not lie in our nature.

There is an asymmetry of information processing. The ratio of nerve fibers that go from the amygdala to the neocortex instead of the other way around is 80:20.

The amygdala is the major processing center for emotions. Especially when fear and anger arise, the amygdala is at play. When stocks tank and you panic, that’s the amygdala taking over.

Investor psychology is mainly about two things:

  1. Avoiding the Amygdala taking over in connection with your Investments

  2. Avoiding Biases and Heuristics that cause you to make Standard Stupidities

The following books will help you do exactly that. I’ve chosen books that complement each other. It’s in the nature of books that topics overlap. Most books tell the same stories, just in another context.

But on this list, every book adds a factor not considered in the ones before. Without further ado, let’s get to the books:

1. Psychology and The Stock Market by David Dreman

Unique Insight: Group Think

This book was a recommendation from one of you. I didn’t know it before, and luckily, I came across it now. It’s a real classic written by David Dreman in 1977.

While the other books featured on this list are modern bestsellers that you can get your hands on pretty easily, this book is out of print.

But every once in a while, there’s a PDF online.

Dreman discusses, as one of the first, how participation in a group, which is inevitable as an investor, affects individual decision-making.

He was also one of the first to verify the overreaction hypothesis, which is about the extreme effects of “event triggers” on investor perceptions. Event triggers are unanticipated news about a stock. Common examples are slight misses on earnings growth that result in severe losses for the stock.

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5 Books to Master Investor Psychology (3)

All of the following books are also available on Shortform, today’s sponsor.

I use Shortform on a daily basis. I can quickly revisit the core ideas and principles of books that I’ve read in the past or consider reading in the future.

If you want to take a closer look into any of the books on this list, give Shortform a try. If you like reading and learning, I’m confident you’ll love Shortform.

You can use this link to get a free trial and a 20% discount on the subscription:


2. Thinking, Fast and Slow by Daniel Kahneman

Unique Insight: The Most Comprehensive Collection of Biases and Heuristics

The following books are characterized by the fact that they shed more light on specific psychological effects. This book is an all-rounder.

Daniel Kahneman and Amos Tversky, who unfortunately passed away before Kahneman wrote this book, compiled research over many, many years, and this masterpiece was created as a result.

Everyone who knows my content a little better knows how much I love this book. To me, it’s the bible of human decision-making.

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3. The Art of Thinking Clearly by Rolf Dobelli

Unique Insight: Misdirected Attention

We are wired to focus our attention on the most emotionalizing headlines. Those are the most memorable ones and thus influence our decision-making more than they should. Especially, when there is nothing to gain from an emotional opinion.

Whether you invest in a company or not shouldn’t be an emotional decision. Yet, for the vast majority of investors, it is. People like or dislike companies, fall in love with companies, or categorically rule out investing in another.

In “The Art of Thinking Clearly,” Ralf Dobelli demonstrates which effects are causing our misguided attention and how we can overcome them.

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4. Think Again by Adam Grant

Unique Insight: Practice and Pursue Reconsideration

Reconsideration is the ability to question, investigate, and analyze your opinions and beliefs.

This is a crucial skill for investors. Whenever we make an investment, we have a thesis of what we expect a company to do in the future and how it will perform.

And while we should generally stick with that thesis, we must reconsider it constantly. Is the company actually doing what we expected it to do? Is it delivering on its promises? Is my thesis playing out?

If we fail this process, we will hold on to losing stocks and deteriorating companies.

Now, you might think that you’re doing this all the time. But from experience, I can say that we often trick ourselves into thinking we are reviewing our thesis, while, internally, never really questioning it in its essence.

The Confirmation Bias plays a key role here. The tendency to interpret or seek out information in a way that confirms or supports one’s preexisting beliefs or hypotheses while ignoring or downplaying contradictory information.

“Think Again” does a great job of explaining how to overcome this problem and actually practice reconsideration.

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5. Rationality: What It Is, Why It Seems Scarce, Why It Matters by Steven Pinker

Unique Insight: Rationality

The term “rational” is being thrown around a lot. I do it myself all the time. But what even is rationality?

Steven Pinker, a cognitive psychologist and Harvard professor, digs deeper into the meaning of rationality and challenges the widely accepted economic definition based on the rational choice theory.

The rational choice theory focuses on the expected utility of decisions and is based on the idea that a rational person will always aim to maximize his expected utility.

I only read this book recently, and I asked myself how I could miss out on it for so long.

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In the following weeks, I’ll post my lessons and learnings from each of these books on X. Follow me there if you don’t want to miss that.

I’ve also finished the Deep Dive on the Video Streaming Sector and scheduled it for Wednesday. I hope that you’ll like it!

Now, thanks for reading, and enjoy the rest of the Sunday!

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As someone deeply immersed in the intricacies of investor psychology, I find the article's exploration into the challenges faced by both novice and seasoned investors quite compelling. The author accurately identifies a critical factor that sets superinvestors apart from the rest: the ability to manage investor psychology effectively. I've personally witnessed how this aspect plays a pivotal role in determining success in the stock market.

The article delves into the fascinating realm of cognitive processes, particularly the influence of the amygdala on decision-making during market fluctuations. The asymmetry of information processing, where the amygdala often takes precedence over the neocortex, sheds light on the emotional rollercoaster that investors experience. It's intriguing how our brains can be both our greatest asset and our most significant liability in the world of finance.

Now, let's explore the recommended books that the article suggests for gaining a deeper understanding of investor psychology:

  1. "Psychology and The Stock Market" by David Dreman:

    • Unique Insight: Group Think
    • Notably, Dreman's work, dating back to 1977, provides a classic perspective on how group dynamics influence individual decision-making. The exploration of the overreaction hypothesis in response to event triggers adds a valuable dimension to understanding market behavior.
  2. "Thinking, Fast and Slow" by Daniel Kahneman:

    • Unique Insight: The Most Comprehensive Collection of Biases and Heuristics
    • Kahneman's collaboration with Amos Tversky results in a masterpiece that compiles years of research on biases and heuristics. This book serves as a comprehensive guide to the various psychological effects that impact decision-making, making it a must-read for anyone navigating the stock market.
  3. "The Art of Thinking Clearly" by Rolf Dobelli:

    • Unique Insight: Misdirected Attention
    • Dobelli's work addresses our tendency to focus on emotionally charged headlines and make decisions based on irrational emotions. This book provides insights into overcoming misguided attention, a critical skill for investors who should ideally make decisions based on rational analysis rather than emotional impulses.
  4. "Think Again" by Adam Grant:

    • Unique Insight: Practice and Pursue Reconsideration
    • Grant's emphasis on reconsideration as a skill essential for investors resonates deeply. The Confirmation Bias, a common pitfall, is discussed, highlighting the importance of continuously evaluating and questioning investment theses.
  5. "Rationality: What It Is, Why It Seems Scarce, Why It Matters" by Steven Pinker:

    • Unique Insight: Rationality
    • Pinker challenges the conventional economic definition of rationality based on the rational choice theory. This book prompts a reevaluation of our understanding of rational decision-making, an essential aspect in the world of finance.

In conclusion, the recommended books collectively offer a well-rounded exploration of investor psychology, providing valuable insights and tools to navigate the complex landscape of the stock market. Understanding and mastering these psychological aspects can be the key to becoming a successful investor.

5 Books to Master Investor Psychology (2024)
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