Successful Investing Depends on Behavior

Most books about investing focus on corporate finance or economics. While these are important, investing is mostly about behavior and how this impacts your money decisions.

Stay Seated, Class

Think back to grade school (a long time ago I know), and how the teacher kept telling you and your classmates to “behave and stay in your seats.” Well, good investment behavior is exactly the same: Stay the course. All the emphasis on global diversification and low costs go right out the window when bad behavior rears its head.

While company earnings and economic growth are obvious and visible, investor behavior is mostly silent. It lurks in the background.

As the work by Professor Dan Ariely, a Duke University neuroeconomist, and others have shown, we often make mistakes in a predictable, repeatable fashion. But this mistake pattern is mostly unrecognizable to us.  This makes trying to solve behavior problems all the more challenging.

Intelligence Doesn’t Equate to Good Decisions

I have a surprising hypothesis about investor behavior distilled from a couple thousand client interactions over 30+ years. My supposition is that the smarter someone is in raw intellect terms, the more difficult it is to confront errant behavior head-on.

I have witnessed this over and over again. Smart people think they will be able to avoid behavioral mistakes through sheer force of intellect. My experience tells me this is dramatically false.

Very little financial media coverage is given to the topic of human behavior. My guess is, by almost any objective measure, behavior is among the least discussed topics in all of personal finance. Yet, it has primary importance.

David Booth, the co-founder of Dimensional Funds, often says that investors need a philosophy that they can stick with; a structure where they can “stay in their seat.” So true. Jumping around based on the whims of the day doesn’t amount to a coherent strategy.

Want to have good investing behavior? Don’t just do something...sit there. Ready for a real conversation? 

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