Cardan Capital Partners is home to avid readers who are happy to recommend good books, news and industry reports, websites and articles — and not just about finance, either. Our latest, reviewed by summer intern William “Mac” Lyons:
The Little Book of Behavioral Investing: How Not to be Your Own Worst Enemy by James Montier, a member of the GMO asset allocation team, is a concise and informative read for investors of all ages and asset classes and explains many of the behavioral pitfalls that can ensnare them.
Before investors can navigate some of the common troubles that cloud their judgment, it’s important to understand how the mind works. Montier provides an overview of what he calls “X-system and C-system thinking.” All information passes through the X system, a section of the brain influenced by emotion and one that can evaluate many different pieces of information quickly. The C system is a processing mechanism that allows us to consider information in depth — a system that encourages us to pause, think more logically and answer more sophisticated questions before taking action. “All humans are prone to decision-making using the X system, and this is often unchecked by the more logical C system,” Montier writes.
Through accounts of various studies and his professional experiences, Montier examines three common pitfalls for investors: emotion, bias and overconfidence. Stories and feelings typically govern the way we think — and subsequently act, he writes. Investors who challenge themselves to act out of logic, or C system thinking, are more likely to overcome the strong emotion of fear that often prevents them from snapping up bargains on the market, especially soon after they have experienced recent losses.
Investors need to replace fear with confidence, Montier writes — but not too much confidence. That’s because humans tend to be biased in their beliefs, overly confident of their abilities and too optimistic when market conditions are favorable, he writes. And experts in every field — not just the world of finance — are prone to believe the mistakes and behaviors that fell most people in their field of expertise won’t be problems for them.
So how to overcome emotion, bias and overconfidence? Read Montier’s book to find out.