The psychology of investing

Preface

Chapter 1. Psychology and Finance

Traditional Versus Behavioral Finance

Prediction

Behavioral Finance

Sources of Cognitive Errors

Bias and Wealth Impact

What to Expect

Summary

Questions

Notes

Chapter 2. Overconfidence

Overconfidence Affects Investor Decisions

Overconfident Trading

Overconfidence and the Market

Overconfidence and Risk

Illusion of Knowledge

Who Is Overconfident?

Illusion of Control

Choice

Outcome Sequence

Task Familiarity

Information

Active Involvement

Past Successes

Online Trading

Online Trading and Performance

Summary

Questions

Notes

Chapter 3. Pride and Regret

Disposition Effect

Disposition Effect and Wealth

Tests of Avoiding Regret and Seeking Pride

International Tests of the Disposition Effect

Disposition Outside the Stock Market

Selling Winners Too Soon and Holding Losers Too Long

Disposition Effect and News

Reference Points

Reference Point Adaptation

Can the Disposition Effect Impact the Market?

Disposition and Investor Sophistication

Buying Back Stock Previously Sold

Summary

Questions

Notes

Chapter 4. Risk Perceptions

House-Money Effect

Snakebite (or Risk Aversion)

Trying to Break Even

Effect on Investors

Endowment (or Status Quo Bias) Effects

Endowment and Investors

Perception of Investment Risk

Memory and Decision Making

Memory and Investment Decisions

Cognitive Dissonance

Cognitive Dissonance and Investing

Nature or Nurture?

Summary

Questions

Notes

Chapter 5. Decision Frames

Framing and Choice

Framing and Investing

Framing and the Risk-Return Relationship

Framing and Prediction

Thinking Mode and Decision Processes

Measuring Thinking Mode

Risk Framing and Thinking Style

Framing Financial Decisions

Pension Decisions

Payday Loans

Summary

Questions

Notes

Chapter 6. Mental Accounting

Mental Budgeting

Matching Costs to Benefits

Matching Debt

Sunk-Cost Effect

Economic Impact

Mental Accounting and Investing

Investor Trading

Asset Allocation

Market Impart

Summary

Questions

Notes

Chapter 7. Forming Portfolios

Modern Portfolio Theory

Mental Accounting and Portfolios

Perceptions on Risk

Risk Perception in the Real World

Building Behavioral Portfolios

Household Portfolios

Preferred Risk Habitat

Naïve Diversification

Retirement Plans

Summary

Questions

Notes

Chapter 8. Representativeness and Familiarity

Representativeness

Representativeness and Investing

Extrapolation Bias

Familiarity

Familiarity Breeds Investment

Local Bias

Market Impacts

Familiarity Breeds Investment Problems

Combining Familiarity and Representativeness Biases

Summary

Questions

Notes

Chapter 9. Social Interaction and Investing

Talking the Talk

Imitate Thy Neighbor's Portfolio

Social Environment

Investment Clubs

Investment Club Performance

Investment Clubs and Social Dynamics

The Media

Language

Speed Is Not of the Essence

Herding

Herding into Stocks

"A Rose.com by Any Other Name"

Short-Term Focus

Faith

Social Validation

Summary

Questions

Notes

Chapter 10. Emotion and Investment Decisions

Feelings and Decisions

Feelings and Finance

Feelings Affect Investment Decisions

Sunshine

Negative Emotions

Optimism

Sentiment

Market Bubbles

The Thrills of Investing

Summary

Questions

Notes

Chapter 11. Self-Control and Decision Making

Short-Term Versus Long-Term Focus

Controlling Yourself

Saving and Self-Control

401(k) and IRA Plans

Self-Control and Dividends

Beating the Biases

Strategy 1. Understand the Biases

Strategy 2. Know Why You Are Investing

Strategy 3. Have Quantitative Investment Criteria

Strategy 4. Diversify

Strategy 5. Control Your Investing Environment

Additional Rules of Thumb

Maybe an Advisor is Needed?

Using Biases for Good

Save More Tomorrow

Save and Win

Summary

Questions

Notes

Chapter 12. Psychology in the Mortgage Crisis

Mortgage Industry

Subprime Mortgages

Emotional Stress and Frame Manipulation

Society Cross-Subsidy

Households in Distress

Mortgage Default: Social Norms and Psychology

Government's Use of Psychology in Mortgage Social Policy

Psychology Further Down the Mortgage Supply Chain

Summary

Questions

Notes

Credits

Index