Behavioural finance
If the arithmetic is simple, why do people with the arithmetic still lose money?
10 of 10 chapters published
Chapters
Beginner
- What behavioural finance actually claimsNot that people are stupid. That people depart from the textbook investor in directions you can predict in advance — which is what makes the departures worth studying rather than merely laughing at.
- Loss aversion and the reference pointPeople do not evaluate wealth. They evaluate changes from a reference point, losses hurt more than equivalent gains, and below the reference point they become willing to take risks they would otherwise refuse.
- The disposition effectInvestors sell their winners and hold their losers, in a measurable ratio, in hundreds of thousands of real accounts — and the pattern reverses in December for a reason that shows the rest of the year is a mistake.
- Mental accountingMoney is fungible in arithmetic and not in the mind. People keep it in separate mental jars with separate rules, which sometimes helps them save and sometimes makes them borrow at 36% while holding a deposit earning 6%.
Intermediate
- Overconfidence and the cost of tradingThe most expensive bias, and the one with the cleanest evidence. People who trade more do not pick better; they pay more. Across datasets and countries the result is the same, and in Indian derivatives it is stark.
- Anchoring and framingAn irrelevant number pulls an estimate toward itself, and the same fact described two ways produces two decisions. Both are exploited commercially, which is why recognising them has practical value.
- Attention and what gets boughtBuying and selling are not symmetric. You can only buy from the few thousand stocks that reach your notice, but you sell from the handful you already own — so attention shapes purchases far more than sales.
Advanced
- Recency and reinforcement learningPeople repeat what recently felt good and avoid what recently felt bad. In a domain where outcomes are mostly noise, that machinery learns the noise — and it works on whole generations, not just individuals.
- Herding, narratives and bubblesFollowing the crowd is often sensible, which is what makes it dangerous. A bubble does not require anyone to behave stupidly — only for each participant to be reasonable given what everyone else is doing.
- Designing around yourselfKnowing about a bias is weak protection against it. What works is arranging matters in advance so the decision is already made when the moment arrives — and accepting that your future self will not cooperate.