Book Review
Title: "Investing and the Irrational Mind: Rethink Risk, Outwit Optimism, and Seize Opportunities Others Miss"
Author: Robert Koppel
Publisher: McGraw-Hill, 2011; 304 pages; $17.72 on amazon.com
A good number of books lately have explored the various takeaways investors can learn from the field of behavioral finance, which studies how our thought processes (and often, flawed thinking patterns) interact with our investment and personal financial decisions.
Most, though, over-index on the exploring and underdo the upshot: What, precisely, are we investors supposed to be doing with this information?
We know we can be a little bit crazy. Market drops freak us out, and the tips we get from our hairdresser’s roommate can get us excited, despite the — ahem! — questionable nature of the source. But what are we supposed to do to prevent our crazy thoughts from creating actual losses?
Enter analyst and fund manager Robert Koppel, whose new book, "Investing and the Irrational Mind: Rethink Risk, Outwit Optimism, and Seize Opportunities," aims to answer this question.
Koppel also aims to equip investors with what I call mindset management tools to actually take the understanding of "the crazy" he imparts to the next level — teaching them how to counteract their flawed thinking and prevent it from impacting their investment returns.
Or, in Koppel’s own words, "how we can master our irrational minds to gain the skills necessary to control our financial decisions."
First off, Koppel’s credentials might distract some from what becomes apparent very early on in the book: he’s a fantastic writer. He creates beautiful imagery and metaphors to describe and illuminate potentially dry and staid subjects in terms every reader will appreciate and understand.
And Koppel’s writing skill translates into a very effective organizational scheme for "Investing and the Irrational Mind."
He very briefly covers some very bright spots from the history of investor psychology before taking readers through a tour of their own mindsets, helping them to understand that, contrary to the classical economists’ view of a rational market, we humans possess both neurological and psychological features that cause us to feel like we’re on drugs or in love when we’re making profits and to process investment risks the same way that we do "threats of mortal danger."
After listing a number of pithy, but profound, key psychological barriers to sound investing, from "not defining a loss" to "being more invested in being right than in making money," Koppel walks readers through the process of "(developing) a personal list of investment rules to govern decisions.
Koppel then briefs readers on cognitive biases, fallacies and illusions and how they can play into investment fails, covering only the stuff one really needs to know, including things like the physical and emotional symptoms of taking a loss, and the critical nature of a number of mindset management strategies, like harnessing intuition, being resilient — and learning — after losses, creating a risk management plan that accounts for your individual psychology, and being confident without being overconfident.
You might have seen some of the behavioral economics discussed in "Investing and the Irrational Mind" elsewhere, but I’ve read virtually every modern-day treatment of the subject, and can vouch — you won’t find another one that combines such thorough academic research into the emotional, psychological and neurological challenges to wise investing with such a clear and concise explanation of why individual investors should care about it, and smart, actionable steps for what to do about it.
