Choosing the right investments alone won’t make you wealthy. It’s important to understand your biases and blind spots. These behavioral finance books will give you a better understanding of the human mind and make you a better investor.
Best Behavioral Finance Books
Daniel Kahneman won the 2002 Nobel Prize in economics. Thinking, Fast and Slow distills a lifetime of work into easily digestible pieces. The book focuses on two modes of thought – System 1: fast, automatic, and emotional and System 2: slow, logical, and deliberative. The book also looks at biases, heuristics, and decision-making. This book will change the way you think.
The title Irrational Exuberance refers to the investor behavior that drives up stock prices with little regard to the fundamentals. Reading this book will help you avoid the common mistakes investors make in the markets. Schiller says the speculative behavior of investors is a result of a naturally occurring Ponzi scheme where investors bid up asset prices until external factors end the Ponzi scheme.
The efficient market hypothesis (EMH) has been a well-accepted concept in investing for more than 30 years. EMH states that stock prices must equal their fundamental values because investors are rational or because arbitrage eliminates pricing inefficiencies. This book floats an alternative theory – behavioral finance, which focuses on investor sentiment and psychology. The book collects research from many technical papers and is recommended for readers who would like to take a deep dive into behavioral finance.
In each chapter of the Winner’s Curse, the author takes a real-world problem (eg. lottery, betting on horses, etc.) and compares the predictions of theoretical models and actual human behavior. It’s clear that people behave irrationally from an economic perspective which ensures that they don’t get the gains they expect. The book includes a collection of articles that the author has written. The book is an excellent introduction to behavioral finance and you will find yourself exploring the field of behavioral finance further after reading it.
The author Dan Ariely is a well-known behavioral economist and is a professor at Duke University. The book, Predictably Irrational, contains interesting anecdotes on the psychological traps that humans fall prey to. The author discusses the experiments he has conducted over the years and their conclusions. The book is an interesting read and will keep you entertained. You will have a better understanding of your irrational self after reading this book.