If you haven't already read a dozen books on the subject (and perhaps even if, like me, you have), you should definitely take a look at Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias (Wiley, 2014). Written by Tim Richards, a former physicist, computer system designer, and psychologist and a sporadic blogger, it does an excellent job of surveying the literature and explaining how behavioral finance accounts for many of our less than optimal investing decisions. In the process it takes the reader on a self-reflective journey, eventually offering him tips on how to "debias" his brain and become a "good enough" investor.
Although Richards warns the reader not to jump ahead in the book (because "the journey is every bit as important as the destination"), for purposes of this post I'm going to ignore his warning. I think it's important to realize that Richards is not promising the reader a pot of gold at the end of the rainbow. In fact, this metaphor has no place in the world of investing. For Richards, the destination is every bit as scary as (if not scarier than) the journey.
The author begins with an old bromide but then takes the reader into a darker place: "[M]y aim is to teach you to fish because if you buy a man a fish he eats for a day but if you teach a man to fish then he eats forever. Only we have to deal with the fact that sometimes the fish disappear, and then the lake. And then the volcano goes off and nothing looks the same again." Phrased less apocalyptically, "markets are adaptive, people are reflexive, and the ground underneath our feet is unstable." (p. 187)
And so we have to confront our number one enemy, our brain, with all of its biases, confusions, and self-delusions- understanding what is leading us astray and setting about to improve ourselves along the lines that Richards suggests. Fortunately, even a little progress will make a difference relative to other investors, both retail and professional, who are also biased and confused. This takes us back to page 1 and the journey toward at least partial self-understanding.
Richards knows how to turn a good phrase and how to tell a good story- even as he warns the reader to steer clear of storytellers, especially those investing self-help "Texas sharpshooters" gurus who paint the target after the fact and then point to evidence of their success. He's no storyteller in this sense. Richards offers the reader a reasonable behavioral investing framework, a meta-method, not a get-rich-quick scheme. His framework is not for the lazy or the overconfident, but then success rarely knocks on either of their doors. With work and a modicum of self-awareness, however, we can become a one-eyed monarch in the land of the blind. That's good enough for me.