The Behavioral Investor by Daniel Crosby (Summary & Review)

MoneyPersonal FinancePsychology

The Behavioral Investor by Daniel Crosby dives deep into the psychology of investing and talks about biases, fallacies, and various other factors that impact the choices while investing.

The Behavioral Investor Summary [PDF]

The Behavioral Investor by Daniel Crosby is one of the best finance books of all time on investing.

In this book summary, I’ll share the best lessons I learned from it.

Alrighty, so without further ado, let’s get started.

Lesson #1: To understand the markets, understand the psychology of people.

As we all know, humans are social creatures.

Building social connections and believing in narratives have allowed us to become the most powerful species.

Other creatures like ants are very hardworking.

But what separates us from them is our ability to think and believe in ideas.

We can form concepts and manifest them.

This is both a blessing and a curse.

Conceptualizing in the right way brings us closer to reality, while believing in unreal objects moves us away from it.

Interestingly, the ability to think bigger has enabled us to coordinate together on a large scale.

The author shares how monkeys can’t keep more than 100 relationships.

But this number is higher in sapiens.

We can communicate on a larger scale.

These days, distance is not a barrier anymore.

You can sit in the US and communicate with your friend in India.

The interconnected web has helped us socialize even more.

So far, so good, right?

However, this ability to make concepts in mind and act on them also leads to irrational behavior.

Money is also a concept. It feels natural, though.

The author says that it’s more psychological than physical.

Almost all sapiens believe in the idea of money, as it facilitates the exchange of value.

Markets go up and down based on what people think.

Have you ever wondered why it’s so hard to predict markets?

That’s because humans behave irrationally.

We like to think that we are all rational beings, but we are not.

Markets and capitals are the products of the human mind.

So, how can they be rational?

The author suggests that one must understand the human mind to study the markets.

Otherwise, it’ll be a shallow analysis.

Merely observing markets doesn’t give you enough data to make accurate judgments.

In other words, the ability to understand people separates a good investor from a bad one.

Good investors not only focus on the metrics, but also know how people think and operate.

Lesson #2: Your monkey mind isn’t designed to make you a great investor.

Investing can be tricky if you don’t understand the human mind.

The author says that the human brain is old, hungry, and impatient.

Our brain isn’t designed for long-term pursuits, so we tend to act impatiently and seek immediate gratification.

And not only is it old, but it’s also hungry.

It takes 25% of your energy and keeps running even when asleep.

The brain tries to find out shortcuts to save even more energy.

Think about it.

If you are given two options to choose from:

Eating a tasty snack or Reading a book on a complex topic.

Which one will you choose?

Most people choose to eat a tasty snack instead of reading a book.

This is because eating tasty food gives immediate gratification, releasing dopamine inside the brain.

Although the world has become more advanced with sophisticated technology, we still carry that old brain that needs to adapt to such drastic changes.

So, what does all this has to do with investing?

All these behaviors are not suitable for investors.

An intelligent investor has to have patience.

When you are impatient, you tend to get emotional and make bad decisions.

The author discusses how this goes against the basic principles of investing.

One principle of investing is to buy stocks at a low price and sell them at a high price.

In other words, savvy investors don’t behave based on emotions.

When the market is low, the price is low, so they buy stocks at a low price. And when the market is high, the price is high, so they sell their stocks at a high price.

They don’t act out of greed and fear.

But monkey brain isn’t like that. It seeks immediate pleasure and wants to avoid any pain, even if it has long-term benefits.

Have you seen how monkeys keep jumping around for no reason?

In the same way, investors tend to act even when it’s not necessary.

They tend to trade stocks when they need to sit and watch their money grow gradually.

The thing is:

Most people have no idea how much wealth is enough.

So, having an impatient mind, they keep running after money without asking how much they need exactly.

For all these reasons, the author says that those who can understand their monkey brains naturally become intelligent investors.

I recommend reading a couple of psychology books to know how biased a human mind can be.

Lesson #3: Search the truth. Not the comfort.

Almost every self-help guru teaches you to believe in yourself.

But believing in yourself too much fuels your ego and ultimately takes you away from the truth.

We all are programmed to seek comfort.

When we hear ideas against our cherished beliefs, we try to avoid them and start looking for opinions that confirm our preexisting notions.

This is not good for an investor.

The more certain you are of your ideas, the higher the chances that you will risk failing.

The author discusses the Dunning Kruger effect, which says that people who lack expertise often don’t realize their lack of skill and overestimate their abilities.

This becomes a vicious cycle unless they accept that they don’t know.

The author points out that people are more skeptical about ideas that contradict their beliefs than those that agree with them.

For instance, there are many studies that show that milk is bad for health and suggest that you should stop drinking milk.

But at the same time, milk is consumed on a colossal scale and is associated with strong bones.

So, the people who already love consuming milk-made products look for research that shows how healthy drinking milk is.

On the other end, people who hate milk and believe that it’s terrible for health seek researches that show how bad it is for our bodies.

Whether you want to drink milk or not, it’s up to you.

The point here is worth noting is that we tend to accept “Yes, you are right.” than “No, you are wrong.”

We tend to become more confident in our beliefs if the contradictory argument is ambiguous.

This goes against the principles of intelligent investing.

Savvy investors believe in diversification because you can always be wrong.

Diversification exists because investors believe that they can be wrong, no matter how expert they are at predicting the market fluctuations.

This is not the case with amateur investors, they are too confident about their choices, and that’s why they probably make more bad decisions compared to savvy investors.

So, what is the takeaway here?

Don’t ignore the facts that contradict your firm beliefs.

Add this phrase to your mental dictionary: “I might be wrong.”

Seek “No” more than you seek “Yes.”

Lesson #4: Our love for certainty is not only responsible for bad investments but also limits us from doing big meaningful things.

Risk and Failure.

These are the two words nobody likes.

We go to great lengths to avoid risks and failures, don’t we?

I wish life worked like that.

The author says that be it market or life, the CHANGE is the only constant.

But how does this affect investors?

The author talks about Conservatism.

It means we don’t like unfamiliar situations that could result in a loss.

We like to stick to the known patterns, even when they make us sad and miserable.

Why? Because there is a certainty.

This is why most people choose jobs over entrepreneurship.

Jobs are safer, relatively.

Some people, even when they find their job exhausting and painful, don’t do anything because they know what tomorrow will bring them.

Every day is the same for them.

On the other side, entrepreneurship has ups and downs.

You are constantly put under challenging situations.

One day, you are making profits, while the other day, you find yourself beaten by your competitors.

There is a comfort in sticking to the same patterns of life.

Another reason for not liking change and being conservative is that THINKING requires effort and energy.

Research says that we make around 35000 decisions per day.

That’s too much, right?

So, our brain tries to conserve energy.

Think about it.

How many times do you calculate the probability of every decision you make every minute?

We are wired to go with the flow and not disrupt our daily lives, even when it’s not beneficial to us.

Change is hard and requires planning, which is taxing on our brains.

Growth is impossible without change.

So, those, who don’t want to change, choose mediocrity for themselves.

There is comfort in mediocrity.

If you want to achieve something big in your life, be ready to face challenges and take risks.

You can’t become your best self while remaining who you are right now.

For some reason, we value what we have more than what we don’t have.

According to the author, once some investment is made, we tend to stick to our decisions.

This is why you see most businesses keep following the same practices even after they become outdated, and why investors tend not to sell stocks they own even when it makes sense not to hold them.

The risk-aversion is not limited to investing.

Mother nature has made us in such a way that we preserve ourselves.

Risk has potential danger, but also the promise of something better than what we have currently.

Almost all our decisions are affected based on how much risk a decision has in store for us.

In short, our tendency to avoid risk isn’t going anywhere.

Investors must learn about this INACTION bias and balance risks to turn the circumstances in their favor.

But do you know that the information you consume also plays a vital role in deciding the quality of decisions you make as an investor?

Lesson #5: Most information in today’s digital age is “useless drama” without any utility.

Data is the new oil these days.

The more the data about something, the better it is, right?

Not really.

The author says that most data comes in the form of noise these days.

The problem is that most data is false and has no practical use.

Studies show that when your brain consumes an overwhelming amount of data, you make bad decisions, and it also affects how satisfied you are with your choices.

The age we live in is obsessed with data.

The demand for data is so much that many news channels feed drama in the name of information.

They want attention and are willing to serve anything that gets more attention.

After all, a good deal of news channel owners are business people. They must provide what people want to see and hear to make money and keep their business running.

How does it influence the behavior of an investor?

Investors watch Finance news to stay updated and make sure they are making the right decisions.

They rely on information from various sources.

But as we discussed, most information creates more chaos than order.

We aren’t designed to consume that much information.

Remember, we all have a lizard brain that is still adapting to this advanced world.

We also tend to confuse correlation with causation, forming relationships between various concepts that lead to even more confusion.

Sometimes, when the problem is complex, it’s essential to focus on a few fundamental factors and ignore the rest that are creating noise.

After all, not all information is helpful.

This is also why, despite having so many videos on YouTube on every topic or problem, we buy courses taught by experts with a specific skill.

A behavioral investor investigates the credentials of the person delivering the information before processing it.

These days, media pushes numerous personal agendas among the people, so often, the actual information is distorted.

What you get ultimately is a twisted perception of the reality.

Your approach must be to filter out any noise out there and focus on the facts.

The author puts it like this:

Keeping your head in the information age designed to help you lose it is the never-ending task of the behavioral investor.

Daniel Crosby

Lesson #6: Emotions are suitable for survival-based situations, but often bad for investing where the assessment of probabilities is involved.

Some people use phrases like “Don’t get too emotional. Be logical.” While others use phrases like “Don’t you have any emotions?”

So, what’s right?

Are emotions good or bad for us?

Let’s talk about this.

Emotions can be helpful when you are concerned about your survival.

For instance, you walk down the street but suddenly see a snake crawling near your leg.

In that case, you would suddenly move back out of fear.

Fear is an emotion that helps you in survival.

So, fear is a good thing in that context.

But on the flip side, if that same fear clutches you with its fangs when you buy shares, it might dull your sense of judgment.

Therefore, it’s neither good nor bad. It all depends on the context.

In other words, you can say that emotions are good when surviving harsh circumstances and ensuring safety.

But where logic is required, they aren’t much of utility.

The author talks about how emotions affect our perception of risks and probability.

If there is a particular company you love, you will tend to ignore the data that says why you shouldn’t invest in that company.

Think about how people get emotional and overestimate their chances of winning a lottery.

On the other side, when people fear something, let’s say, starting a bootstrap business, they overestimate the risks associated with it.

That’s also why many people don’t launch any business or venture.

Always remember that emotions have helped us navigate the jungles centuries ago.

It’d be impossible to protect ourselves from wild animals if we didn’t have fear and gut feelings.

But today, they are a hindrance.

When you decide to take any kind of risk, your brain thinks there is some danger to your survival and activates fight or flight responses.

They are no good when you have to give an important speech in front of an audience.

Lesson #7: Don’t take yourself and your opinions too seriously.

The author suggests that ego is bad for behavioral investors.

Often, investors make judgments based only on their personal experience and opinions, which is the wrong approach.

Instead, they should look at the data.

As we discussed, the human mind has plenty of biases.

Regardless of how good you are at investing, there is always some probability that you will make mistakes.

Data helps you make sound investments compared to our personal opinions.

Sure, too much of it paralyzes us, but it’s still better than relying on biased opinions that we all have in our minds.

The proof of this is that well-known investors like Warren Buffett diversify their portfolios.

Even they believe that the human mind is always prone to misjudgments and errors.

But often, overconfidence makes us even more biased.

We think confidence is a virtue, but regardless of how many celebrate it, it can also make you lose money in the stock market.

So what?

It means that you should keep your ego in check and open yourself to feedback.

The Behavioral Investor Review

I’d say this is a great book to understand the psychology of behavioral investors.

Only by understanding human behavior can one understand the market.

As the author says, people are fundamental units of the market.

There is no market without people.

It only exists in our minds.

And this book helps you learn exactly that.

The book is divided into four parts.

Part 1 & Part 2 cover what impacts our choices.

While Parts 3 & 4 cover how to overcome our psychological biases and invest smartly.

Overall, this book focuses more on psychology and helps you understand biases.

It has the same vibe as The Art Of Thinking Clearly, and You Are Not So Smart.

Who should read this book?

  • Anybody interested in learning about behavioral investing should definitely give this book a shot.
  • Stock traders or Investors who want to understand why their portfolio is going negative and how they can diversify their holdings to minimize risk.

Should you buy this book?

Yes, this book is worth reading as it teaches a lot about the human mind.

I enjoyed how the author explained every concept nicely.

👉Get your copy here on Amazon

Further Reading

Want to read more book summaries on Finance?

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Now You Tell Me

There you have it.

I hope this book summary will help you in your investments.

Now you tell me:

What are your takeaways from this summary?

Leave a comment below and let me know your thoughts.

Shami Manohar

The Brain Behind

I am Shami Manohar, the founder of WizBuskOut. My obsession with non-fiction books has fueled me with the energy to create this website. I read at least one book every week on topics such as business, critical thinking, mindset, psychology, and more.

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