Behavioral finance is the study of human behavior and how that behavior leads to investment errors, including the mispricing of assets. The field has gained an increasing amount of attention in academia over the past several decades as pricing anomalies have been discovered.
The basic hypothesis of behavioral finance is that, due to behavioral biases, investors/markets make persistent mistakes in pricing securities. An example of a persistent mistake is that investors/the market underreact to news—both good and bad news are only slowly incorporated into prices.
Because behavioral finance is my favorite subject, I read everything I can get my hands on. It’s why I wrote “Investment Mistakes Even Smart Investors Make and How to Avoid Them,” which covers 77 mistakes, most of which are related to behavioral errors (others are simply due to lack of knowledge).
I’m often asked which are my favorite books on the subject. With that in mind, the following is my list of the best baker’s dozen, in alphabetical order, by author. Of course, all such lists are based on personal opinions. That said, here’s my list. I hope you get as much knowledge and enjoyment from them as I did.
- “The Honest Truth About Dishonesty” by Dan Ariely
- “Predictably Irrational” by Dan Ariely
- “Why Smart People Make Big Money Mistakes” by Gary Belsky and Thomas Gilovich
- “Thinking, Fast and Slow” by Daniel Kahneman
- “The Drunkard’s Walk” by Leonard Mlodinow
- “Behavioural Finance” by James Montier
- “Behavioral Finance and Wealth Management” by Michael Pompian
- “Beyond Greed and Fear” by Hersh Shefrin
- “Finance for Normal People” by Meir Statman
- “What Investors Really Want” by Meir Statman
- “Misbehaving” by Richard Thaler
- “Nudge” by Richard Thaler and Cass Sunstein
- “Your Money and Your Brain” by Jason Zweig
I hope you will find them as impactful as I did.
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.