Behavioural Finance- don’t fall in love with markets

This is one area deserves a special place in forum. The last mile stone where even you can bring back the horizon. An investor attains eternity, find a stairway for stardom. Behavioral finance differentiates good from rest, the proverbial separating wheat from chaff; happens to be tag line of valuepickr.

Academically behavioural finance is the study of causes and effects behind irrational financial decisions. Behavioural finance is a subset of behavioural economics. Other areas closely associated with behavioural finance are cognitive studies, subject of psychology. Behavioural finance has seen several advanced versions even when its relatively new such as neural finance and economics. Earlier NLP (Neuro Linguistic Programming) studies were very similar to behavioural finance.

But before let me say something. I am a student of behavioural finance that to unsuccessful student. My writings may turned out be here amateurish and made me a laughing stock. Still I am pushing this subject here because a focussed forum like valuepickr is build on networking of human ideas; must have something about guiding principles behind those networking ideas. Hence the attempt!

It’s a mega subject, not sure where to start. Just an idea of how it started and what key resources are must to get acquainted.

Traders and investors have been known to use the intuition, instinct, gut etc for a long time. Mostly these were black holes to others who wanted to know how these people are using such ideas, at the same time it was difficult for those who were exercising to explain in details. Watch these statements:

  • I know I am right, market has to fall (Jesse Lauriston Livermore before famous 400-million-dollar short selling in 1929, almost one fourth of US stock market).
  • I felt a back ache, pain shooting through left shoulder. Heart attack :blush:. No, George Soros before infamous short selling of pound which broke Bank of England.
  • Go and tell them money will be there tomorrow. Jack Pierpont Morgan told to key people to save 1912 crash. Even he wasn’t sure fully.
  • This liquid taste something else, I felt a sensation in spine. It has to be something else. Aga Chandler bought coca cola patent by paying his lifetime savings to a frustrated John Pemberton who made a pharmacy invention.

It was Daniel Kahneman and Amos Tversky who pursued the subject entire life on heuristics, psychology behind judgment. The larger study turned into a concept which became attention of practitioners, the concept was called Behavioural Economics for which Dan got a Noble prize. At same time NLP or Neuor-Lingustic Programming was attempted by Richard Bandler as a communication and personal development tool connecting neural process to behavioural patterns. This is in addition to scientific study on structure of brain such as chaos, right side of brain which was ongoing for several decades mostly by medical practitioners. For some cognitive science is as old as religious scriptures, even all dynastic empires. Further fractal theory practiced by a lot of academician points out a method to break data and wire right side of brain to core brain.

In summary study of behavioural finance connects several aspects, it would be better call network of mental model.

I am leaving you with few resources, going for a workshop next 2/3 weeks. Possibly will think about an approach how to present this magnanimous study. Please feel free to guide:

Frogs into Princes by Richard Bandler

NLP: The new technology achievement by Charles Faulkner

Thinking fast and slow: Daniel Kahneman

Trading with Chaos: Bill Williams

A rare book showing legendary Bill Williams showing fractal theory and right side of brain thinking.

Behavioural Investing: James Montier

Advances in behavioural economics: Colin Camerer

Trading from your gut- Curtis Faith

Another investment specific book, practiced by famous turtles.

Trading Psychology by Brett Steenbarger

Trading in the Zone by Mark Douglas

In fact most of trading books are stuffed with heavy behavioural finance.

A food for thought? :roll_eyes:


Richard Thaler got Noble

Yesterday Behavioural Economics was recognised again when one of it’s strongest proponent awarded with one of highest civilian awards.

I think it’s one more reminder we should do more in behavioural finance. Meanwhile Mr Thaler has written quite a few books. I mentioned one in first post , on NLP.

See few more links:

  1. Nudge: this is an attempt by the genius to convey message to mass. He tried to put simple words, easy examples. if you are familiar with other works then you may not find much new stuffs.
  1. Misbehaving: legend is back in business, he goes one step forward bring NLP and behavioural economics both. Highly impressive, sight for sore eyes.
  1. The Winner’s Curse: the number of paradox cited is beyond my little brain. May be you will get much more.
  1. Advances in behavioural finance: Second round after Colin Camerer started.

Let us celebrate on triumph of behavioural economics.


sir, great topic and thread. am also a newbie to BF. started with reading nudge bu accident few months back. now reading parrikh "value investing and Behavioral Finance’

please keep posting so we are encouraged to read more and learn

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Sir, glad to see you are liking behavioral finance. These books you may like to put in priority:

And of course I would strongly suggest the below one, this is a serious practice book. Somewhere we have to put our ideas to work.

Best wishes and happy reading.

Yes I will come back with more analogy once I am done with certain priority tasks.

Wonderful thread Sir, One of my favourite topics.
I found this TED Talk interesting and can relate very much to Behavioural economics.


Am I not supposed to be smart? – Glancing behind human neurons

The first step I realised to understand behavioural finance is limitations of a human. Yes, we can be exceptions, we can be super humans still our neurons are embedded with fibres which send conflicting signals all the time. Unless we know what, these conflicting signals are it’s difficult to understand what driving these signals.

I got this wonderful picture from Michael Sincere’s book worth repeating. He calls investor sentiment cycle. Copy Right- Michael Sincere, using for educational purpose. I have a written permission from him, in case you have a valid reason against it please send a mail with reason to I will be happy to provide a copy of email.

IMPORTANT NOTE: I was pleasantly surprised when Mr Michael Sincere was very candid to indicate me via email that he is reading some of posts in forum. I have requested him to join, not sure whether he will or not.

Michael Sincere is a well known trader/investor and author. A columnist in the wall street journal. Below is a link to his book meant for everyone who is associated with speculation.

The picture sounds familiar? If you agree, why this happens then?

Humans are made with neuron fibres from birth, some change fibres through deliberate practice. Some never attempted, but point remain whether you are Albert Einstein or Mahatma Gandhi we all born more or less same fibres. Of course, right side of brain is not measurable, we will speak about it later. What these fibres made us to do then? Few examples:

  1. Feeling fearful in dark
  2. Crawling sensation when seeing a snake
  3. Laugh at jokes
  4. Flow state when you completely move to a zone where you cut off from outside.

Now let’s take some market example:

  1. I saw the price moved from 100 to 180, I couldn’t do anything. I just got froze.
  2. Stock was 200 and now 100. Must be cheap, it has to come back.
  3. How can this happen to me? Maybe I am not born to Damani family.
  4. Market is rigged completely, not meant for middle class.
  5. I am invincible, going to make lots of money.
  6. How can RJ be wrong? He made that gigantic money in market.

When we go through these thought process and most of the time we action them as well, very little we realise they can have terrible consequences on us. Then why do we do? Because we continue to work hard, practice on certain traits thinking they will do well for us. If it’s so wrong they why do we practice then? Is it possible to change those practices? Of course, but first let us understand what kind of biases, prejudices and fallacies we are born with.

I am getting a hang of how to cover the topic. I will start with standard biases/prejudices, next to what is irrational behavioural finance, the role of biases behind such irrational decision, impact of these irrationality on investment decisions and finally to role of NLP, right mode thinking in managing the irrational behavioural finance.

I should move ahead faster now, thanks for wishes.