The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy, author James Montier states: “I…highlight some of the most destructive behavioral biases and common mental mistakes that I’ve seen professional investors make. I’ll teach you how to recognize these mental pitfalls while exploring the underlying psychology behind the mistake. Then I show you what you can do to try to protect your portfolio from their damaging influence on your returns.” Biases he surveys include: action bias, bias for stories, confirmation bias, conformity bias (herding or groupthink), conservatism (including sunk cost fallacy), disposition effect, empathy gap, endowment effect, hindsight bias, illusion of control, inattentional blindness, information overload, loss aversion, myopia, overconfidence, overoptimism, placebo effect, self-attribution bias and self-serving bias). Value investing provides the context for discussion. Citing a number of studies, he concludes that:

“…we should do our investment research when we are in a cold, rational state–and when nothing much is happening in markets–and then pre-commit to following our own analysis and prepared action steps.”

“…fear causes people to ignore bargains when they are available in the market… The ‘battle plan for reinvestment’ is a schedule of pre-commitments…”

“We should get used to asking ‘Must I believe this?’ rather than… ‘Can I believe this?’” (more…)