Testimonial on www.amazon.in



“Amit takes us down the memory lane and re-caps the previous rallies and the turmoils. It is very interesting when he says that markets do fall because they do rise. The book is punched with interesting observations from similar books and mixes a good bunch of humour in between. This is a good read to set our expectations as an investor. Very good guide when we need help to learn the right behaviour in the market, as an investor. I enjoyed reading & learning.”

Rohit Shah on http://www.amazon.in


Why Smart People Make Bad Decisions – a brilliant post by Morgan Housel

In another brilliant post, Morgan Housel brings some extremely important points:

  • One of the most persistent fallacies is the reflexive association of wealth with wisdom,” investor Ed Borgato tweeted this week.
  • Another is the association between intelligence and good decisions.
  • Intelligence increases the ability to fool yourself with elaborate stories about why something happened.
  • … the smarter and more creative we are, the more elaborate stories we can tell ourselves to justify our poor decisions
  • Intelligence pushes you toward the idea that complex problems require complex solutions.
  • Even when a problem requires a complex solution, the ability to communicate it in simple terms is indispensable to getting people to take you seriously.

Read the full post here

There are stories of some intelligent and brilliant investors in the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”. The list is quite illustrious.

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The blame game – whom to blame?

Yesterday I wrote about “The blame game“. It is a common human trait. However, there is another pattern if you consider who gets the blame. In “Beyond Greed and Fear”, Hersh Shefrin continues:

Of course, for this to work, the person to whom responsibility gets shifted must be seen to have expertise. Otherwise, the client will feel just as much regret for having relied on a novice for advice.

 The person to be blamed must be known as an expert, else the blame comes back in a different form, “How could you trust such a person?” But with an expert, there is a comfort that there is no mistake in trusting the expert.

It’s all in the mind, after all.

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The Blame Game

In his book “Beyond Greed and Fear – Understanding Behavioral Finance and the Psychology of Investing” ; Hersh Shefrin explains a particular human behavior as under:

One way people attempt to shift responsibility is by playing the “blame game”. This game, whereby a client picks someone regarded as an expert and relies on him or her for advice, is usually set up in advance. If things go well, the client takes the credit, attributing the success to his or her own skill. But if things go badly, then the client can attribute the blame to the expert, thereby reducing regret by shifting responsibility for the negative outcome.

Compare this blame game with the following excerpt from “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

After every crisis, there is a post-mortem process. We all want to know whom to blame for our miseries. Hence, after every market crash, a committee is set up to investigate the reasons for the crash. No committee has ever come up with the conclusion that the rise itself was the reason behind the crash.

Even the governments and the regulators are not left behind in this finger-pointing exercise.

There seems to be a deep psychological reason behind such thinking.

And the need to lay the blame on someone else.

Failure is a part of life for those who try. It is unavoidable and in many cases, even when one has made the efforts to win, victory eludes one and failure stares one in the eye. It is not easy to embrace this situation for most. In almost all such cases, when you do not get the desired results and the enemy is not visible (market forces in this case), one is considered either a fool who got to the situation on account of some stupid decisions and actions; or a victim of the circumstances.

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Behaviour gap

In our last two posts, we discussed about why understanding psychology is important for investor success. Links to both the posts are given below for a quick reference.

  1. Why understanding investor psychology is important
  2. Why understanding investor psychology is important – 2

In many cases, one observes that what the investor takes home is far less than what the investment avenue generates. Nick Murray and Carl Richards call it the “Behaviour Gap” – a wonderful term coined to explain the role of human behaviour in taking financial decisions. The “gap” in behaviour gap pertains to the negative impact of the human behaviour on investment returns.

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Why understanding investor psychology is important – 2

Continuing from yesterday’s post:

While the various assets would generate various kinds of investment returns, be it current income (in form of rent, interest or dividends) or capital growth over the years, it entirely depends on the behaviour of the investor as to how much of it one takes home.

This gap between what an investment generates and what an investor gets depends on costs (transaction costs, holding costs, maintenance costs, etc.), taxes and investor psychology. To some extent, the former increase due to unstable mind of the investor.

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Why understanding investor psychology is important

he subject of behavioural economics, or behavioural finance, or plain simple investor psychology has been around for decades. However, it came into limelight only in last few years. Today, more number of people are talking about this subject.

This is not new. The role of emotions in our daily life has been explained by our Upanishads. As the famous Amrit Bindu Upanishad says


(The mind alone is the reason of our bondage or our freedom.)

The fact is, ever since humans started dealing with other humans – even before money was invented – the relation between price and value has always been a subject of debate. There have been opinions justifying the price for the value and there are opinions questioning the price with respect to the value. Probably trade happens only due to such differences in opinions.

However, when cold logic is applied, it is often difficult to arrive at a decision. Add a pinch of emotions and you are able to arrive at a conclusive decision and act on it.

However, emotional decision making has its own flaws.

It is important to understand the role of emotions in our life and the flaws associated. These emotional flaws reduce the upside in case of our financial decisions or they increase the costs and the risks.

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