Thursday, July 23, 2009

Elvin, Financial Risk Taking

Financial Risk Taking: An Introduction to the Psychology of Trading and Behavioural Finance by Mike Elvin (Wiley, 2004) is a derivative book. Elvin summarizes Mark Douglas’ The Disciplined Trader, Alexander Elder’s Trading for a Living and Come into My Trading Room, and Lewis Borsellino’s The Day Trader from the Pit to the PC. He reviews psychological literature as it relates to trading, and he looks for insights from the martial arts and Budo Zen. The problem is that the book reads like a shoebox full of note cards.

I did laugh, however, at one image that Elvin invokes twice: “Monitoring is a form of risk management and doing it well should allow your winners to run and assist you to cut your losers short. . . There is a downside to monitoring and I like the metaphor of the gardener who pulls out his plant to see how the roots are growing.” (p. 55) Again, “Worry has a significant and direct effect upon investment performance. The trader who continually worries about the outcome of his positions is not likely to do well. He is likely to be like the gardener . . . who digs up his plant to see how the roots are growing.” (p. 98)

For the novice unfamiliar with the literature on the psychology of trading and behavioral finance Elvin’s book may serve as an annotated bibliography. But there are definitely better books available; soon enough I’ll review one of the best.

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