Wednesday, October 6, 2010

Peterson and Murtha, MarketPsych

Traders, especially discretionary traders, have long recognized the importance of psychology to their endeavor—trying to fathom not only what’s in their own heads but what’s in the heads of those on the other side of their trades. As a result, there is a fairly extensive bibliography of books and articles on trader psychology. Not so with investor psychology, at least not outside the world of academe. Richard L. Peterson and Frank F. Murtha, co-authors of MarketPsych: How to Manage Fear and Build Your Investor Identity (Wiley, 2010), seek to help fill that void.

The authors, by training a psychiatrist and a psychologist, are also the co-founders of MarketPsych LLC, a company that “trains financial advisors, portfolio managers, traders, and executives in emotion management and intuitive decision skills.” Its website offers free personality tests for investors and traders.

Throughout the book the authors draw on the findings of research in behavioral finance. For instance, in one chapter the authors identify ten investor blind spots (or mental traps), some of which should be familiar to those who have read (or read summaries of) the work of Kahneman, Tversky, Thaler, and their colleagues and followers. The traps are: win/lose mentality, down with the ship syndrome, anchoring, mean reversion bias, endowment effect, media hype effect, short-termism, overconfidence, herding, and hindsight bias. The authors profile hypothetical investors, each of whom falls into between two and five of these traps. We meet the Wicked Gardener, Corporal Clinger, Mr. Magoo, the Roulette Player, and Maxwell Smart. Let your imaginations run wild trying to match them up!

Topics covered in the book run the gamut from the genetics of risk taking to the pitfalls of self-affirmation. (“…some studies show that people who think they need affirmations—the insecure and the doubtful—typically have a negative response to affirmations. The people who benefit from daily affirmations are positive, confident, optimistic people—exactly those whom you wouldn’t expect to need them.”) (p. 182)

The authors also dig into investor values. I particularly enjoyed the set of questions a top financial advisor asks his clients. They include: What about money is exciting (stressful) for you? What are three things you lie to yourself (to others) about when it comes to your money? (p. 112)

MarketPsych offers case studies, exercises, planning templates, and down-to-earth advice. All are designed to take the investor from being an underperformer to being an achiever. And for those who think that being average is good enough, here is a stunning statistic. $100,000 invested in the S&P 500 index on January 1, 1989, would have grown to $292,329 by 2009, after accounting for inflation. The average equities investor, by contrast, would have ended up with $82,288 over the same 20-year period!

I personally didn’t learn a great deal from this book, but then I’ve read thousands of pages on behavioral finance and trading psychology. For those who need help managing their investing selves but have no intention of ensconcing themselves in the library or laying out countless dollars, MarketPsych is a quick yet wide-ranging 240-page read.

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