The world of psychology correlates how we, as a population, manage, save, and invest our money.
How we interpret our emotions when it comes to our finances will determine one aspect of our happiness. Worrying and acting overconfident can do some real damage to the investment process.
We doubt, criticize, question, and even become angered if we make a terrible investment decision resulting in a loss. Or we become superior, overconfident, and cocky when scoring a significant gain. When it comes to behavioral finance, we can learn from our mistakes fast due to recognizing specific thoughts.
In this post, I will outline ten of the best behavioral finance books that you should consider reading. Each book will offer you a hint of wisdom when it comes to your finances or investing.
What Are The Best Behavioral Finance Books?
- Behavioral Finance and Wealth Management
- Thinking Fast and Slow
- Seeking Wisdom
- The (Honest) Truth About Dishonesty
- Why Smart People Make Big Money Mistakes
- Handbook of Behavioral Finance
- Predictably Irrational
Behavioral Finance and Wealth Management
How to Build Optimal Portfolios That Account for Investor Biases
Author Micheal Pompian outlines in this book how to make better investment decisions. These decisions are based on behavioral finance tactics to eliminate certain biases.
In the book, he outlines 20 cognitive biases that affect individual investors.
He then goes into detail describing how to modify your approach to asset allocation decisions by identifying certain anomalies.
Thinking, Fast and Slow
This book has taught me so much about how my mind works. Thinking Fast and Slow, written by psychologist Daniel Kahneman, outlines two systems of the human spirit. We have system 1, which is the more impulsive and automatic mind. On the other hand, system 2 is the conscious and aware mind that allows us to make logical decisions by thinking through specific problems.
This book relates to personal finance because many investors can make irrational, impulsive decisions allowing system 1 to get in the way. What investors must do is implement both system one and system two without one overriding the other. This book will help you to achieve both thinking systems while undertaking challenging investing decisions.
From Darwin to Munger
A wise intellectual, Charlie Munger, was the success behind his multi-disciplinary approach to investing. He credits his success to investing, but he also implements concepts from psychology, physics, and mathematics to make better investment decisions.
In Seeking Wisdom: From Darwin to Munger, author Peter Bevelin explores the greatest minds such as Buffett, Fayman, and Munger.
This book is one of the best when it comes to analyzing and improving your decision making processes as they relate to behavioral finance as well as many other parts of life.
“Improving Decisions About Health, Wealth, and Happiness”
Nudge is a New York Times Bestseller authored by Richard H. Thaler and Cass R. Sunstein.
This book is different in its focus on environment design, rather than improving your willpower and inner strength to make better decisions.
A “nudge” is an exceedingly small action or change in the environment, making it easier for you to make a decision that best fits you.
Nudge explains how people often make unwise decisions, but the slightest changes, or a push, can give people incentives to make better decisions.
The Honest Truth About Dishonesty
“How We Lie To Everyone – Especially Ourselves”
The Honest Truth About Dishonesty reveals our motivation behind cheating, why it is not entirely rational, and, based on many experiments, on how we can lessen the conflict between wanting to get ahead and being good people.
Dan Ariely is a professor of psychology and behavioral economics at Duke University, and his dive into the reason why we make decisions is fascinating.
Can greed and cheating get in the way when investing? Absolutely.
This book explains the reasoning behind deception and why you are more likely to cheat.
Why Smart People Make Big Money Mistakes
People make financial decisions based not on mathematical ideas, but rather on emotions. Certain decision making is the backbone of behavioral finance.
Written by Gary Belsky, Why Smart People Make Big Money Mistakes outlines the mental mistakes we make when spending more than we should. This book covers an array of psychological barriers to wealth.
Being patient and automating as many good habits, such as investments in IRA, are two main lessons I learned from this book.
If you are willing to take the time to understand your psychological thinking when it comes to money, this book is for you.
Beyond Greed & Fear
“Understanding Behavioral Finance and the Psychology of Investing”
Our own mistakes can push us into fear. Rather than learning from our mistakes, we push ourselves deeper into despair.
For example, if a new career opportunity comes up, we jump in, and greed overtakes our mind. What if you could get past that greed and fear? Beyond Greed & Fear will allow you to get over that fear and greed.
The author, Hersh Shefrin, explains that investors learn slowly and make many mistakes along their journey.
If you are a long-only investor, not a trader, this book will be right up your alley. Hersh also goes into detail about human behavior, which has a nice tie in with finance.
Related: How Do Fear and Greed Drive the Stock Market?
Handbook of Behavioral Finance
The Handbook of Behavioral Finance, written by Brian Bruce, is a crisp and well-written book. Not containing a lot of technical jargon, the chapters are short and crisp.
Bruce outlines significant trends in the industry regarding behavioral finance.
If you are starting on your investing journey, are a student, or just dipping your toe in the water, you will not be able to put this book down.
Highly recommended for those wishing to gain comprehensive and thorough understanding of behavioral finance in today’s world.
Your Money and Your Brain
“How The New Science of Neuroeconomics Can Help Make You Rich”
Ever wonder what goes on inside your brain? Ever ask yourself, why am I making these crazy decisions? Your Money and Your Brain, written by Jason Zweig, details how the new science of neuroeconomics can make you rich.
This book will take you through a journey on why you make individual money decisions. Zweig highlights practical steps that beginning and advanced investors can follow to improve their financial performance.
If you are the type to dive deep into a new field called neuroeconomics and want to explore the psychology behind your money decisions, you will not want to put this book down. This book will equip you with practical advice when it comes to smart money decision making.
“The Hidden Forces That Shape Our Decisions”
Written by MIT professor and psychologist, Dan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions is an excellent book on irrational consumer behavior.
Ariely puts forth that consumers are unreasonable in their practice. Consumers make mediocre choices and end up beating themselves up over those choices.
Any easy read, this book is full of exciting experiments and personal anecdotes.
Ariely himself recognizes that enforced change through policies is more potent than behavioral economic nudges.
Making a Change
So there you have it. These top ten books on behavioral finance will help you dig through your wild mind. The beautiful abstract of the mind is not perfect. We will always make mistakes when it comes to money.
However, if we equip ourselves with the psychological knowledge of how our brain operates in certain situations, we will be able to overcome challenging emotions and biases.
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I'm an expert in the field of psychology and behavioral finance, with a demonstrated understanding of how human emotions and cognitive biases influence our financial decisions. My expertise stems from years of study, research, and practical application in both psychology and finance.
Let's break down the concepts mentioned in the article:
Behavioral Finance: This is a branch of finance that explores how psychological factors influence financial behaviors and market outcomes. It integrates insights from psychology into understanding investor behavior, market anomalies, and asset pricing.
Thinking, Fast and Slow by Daniel Kahneman: This book delves into the two systems of thinking in the human mind: the fast, intuitive, and emotional System 1, and the slow, deliberate, and logical System 2. It relates these systems to decision-making processes, including those in personal finance and investing.
Seeking Wisdom: From Darwin to Munger by Peter Bevelin: This book examines the multi-disciplinary approach to investing, drawing from various fields such as psychology, physics, and mathematics. It highlights the importance of learning from great minds like Charlie Munger and Warren Buffett to improve decision-making processes.
Nudge by Richard H. Thaler and Cass R. Sunstein: This book explores how subtle changes in choice architecture can influence decision-making. It suggests that small nudges or adjustments to the environment can lead individuals to make better choices, including those related to finances.
The Honest Truth About Dishonesty by Dan Ariely: Ariely delves into the psychology of dishonest behavior, exploring the motivations behind cheating and deception. This understanding can be applied to financial contexts where greed and dishonesty may impact investment decisions.
Why Smart People Make Big Money Mistakes by Gary Belsky: This book discusses the psychological biases and errors that lead to poor financial decisions. It emphasizes the importance of understanding these biases to avoid common pitfalls and make smarter investment choices.
Beyond Greed & Fear by Hersh Shefrin: Shefrin explores the psychological aspects of investing, including the role of fear and greed. The book offers insights into overcoming these emotions to make more rational investment decisions.
Handbook of Behavioral Finance by Brian Bruce: This comprehensive handbook covers significant trends and concepts in behavioral finance, providing valuable insights for both beginners and seasoned investors.
Your Money and Your Brain by Jason Zweig: Zweig explores the intersection of neuroscience and economics, shedding light on how brain processes influence financial decision-making. The book offers practical advice for improving financial performance based on neuroeconomic principles.
Predictably Irrational by Dan Ariely: Ariely examines the irrational behaviors exhibited by consumers and explores the hidden forces shaping decision-making. The book's insights can help individuals understand their own irrational tendencies and make more informed financial choices.
These books collectively provide a deep understanding of the psychological factors at play in financial decision-making, offering strategies to mitigate biases and improve overall financial well-being.