Inside the Investor's Brain: The Power of Mind Over Money by Richard L. Peterson

Inside the Investor's Brain: The Power of Mind Over Money by Richard L. Peterson
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Inside the Investor's Brain:

The Power of Mind Over Money

by Richard L. Peterson

Wiley Trading

Adobe E-Book

September 2007

Unique insights into how the mind of an investor operates and how developing emotional awareness leads to long-term success Inside the Investor's Brain provides readers with specific techniques for understanding their financial psychology, so that they can improve their own performance and learn how to outsmart other investors. Chapter by chapter, author Richard Peterson addresses various mental traps and how they play a role in investing. Through examples, such as a gambling experiment with playing cards, the author shows readers how being aware of the subconscious can separate the smart investors from the average ones. This book also contains descriptions of the work of neuroscientists, financial practitioners, and psychologists, offering an expert's view into the mind of the market. Innovative and accessible, Inside the Investor's Brain gives investors the tools they need to better understand how emotions and mental biases affect the way they manage money and react to market moves.


Richard L. Peterson, MD, is a Managing Partner of Market Psychology Consulting, an Associate Editor at the Journal of Behavioral Finance, a psychiatrist, and a former trader. He has?written for a number of publications, including the Journal of Psychology and Financial Markets, and?was a contributor to the book Risk Management: A Modern Perspective. Peterson holds seminars around the world for investment professionals. He received his medical and bachelor's degrees from the University of Texas, completed his psychiatry training in the San Francisco Bay Area, and performed postgraduate neuroeconomics research at Stanford University.


Preface. Acknowledgments.

About the Author.


Part I: Foundations.

Chapter 1: Markets on the Mind.

Analysts and Dart Boards.

Developing Better Expectations.

¡°The Wisdom of the Collective¡±

Meteorological Anomalies and Other Animal Spirits.


Chapter 2: Brain Basics.

Damasio and the Iowa Gambling Task.

The Brain: Structure and Function.

The Brain-Damaged Investor.

Research Methods.

Neuroscience Preview.

Chapter 3: Origins of Mind.

Emotions and Perceptions.

Expectations and the Comparator.

Counterfactual Comparisons.

Beliefs and Expectations: The Placebo Effect.

Making Sense of the News.


Emotional Defense Mechanisms and Motivated Reasoning.

Chapter 4: Neurochemistry.

Introducing the Neurotransmitters.





Stress Hormones.


GABA, Acetylcholine, and Omega-3 Fatty Acids.

The Chemistry of (Financial) Mental Disorders.

The Neurochemistry of Financial Performance.

Serotonin and Market Bubbles.

Recreational Drugs and Alcohol.



Part II: Feelings and Finances.

Chapter 5: Intuition.

Analysis and Intuition.

Investment Practice.

What Does Your "Gut" Tell You?

Listening Without Thinking.

Intuition and Emotion in Investing.

Emotional Intelligence.

Subliminal Emotion.

Stirring the Unconscious.

Chapter 6: Money Emotions.

Emotional Biases.

The Difference between Positive and Negative Feelings.

Regret as a Self-Fulfilling Prophecy.

An Amicable Divorce.

Sadness and Disgust.

Fear and Anger.

Projection Bias.

Managing Feelings.


Chapter 7: Excitement and Greed.

Brokers Kindle Irrational Exuberance.

The Anatomy of Stock Hype.

Greed: The Basics.

The BIAS Task.

The Nucleus Accumbens.

Excited About a Good Deal.

Improving Biased Decision Making.

Greed in the Markets.

Chapter 8: Overconfidence and Hubris.

The Psychology of Hubris.


Illusion of Control.

Winning Changes the Brain.

The Neurochemistry of Exploration.

One Who Knows: Christian Siva-Jothy.

Confidence¡ªthe "Good" Kind.


Chapter 9: Anxiety, Fear, and Nervousness.

Climbing a Wall of Worry.

Dread in the MRI.

Nature versus Nurture.

It¡¯s All in Your Head.

Empathy Gaps.

Pain Relief.

Investment Lessons.

Of Hurricanes, Risk Perceptions, and Opportunity.


Chapter 10: Stress and Burnout.


Cramer on Stress.

Choking for Rupees.

Which Goes Wrong¡ªthe Brains or the Brawn?

Stress and Trend Perception.

Neurochemistry of Stress.

Biological Effects of Stress.

Adrenaline Junkies.

Managing Investment Stress.


Chapter 11: Love of Risk.

Knowing When to Fold ¡®Em.

Pathological Gambling.

The Gambler¡¯s Brain.

Ought to Know Better.

Reducing Gambling.


Chapter 12: Personality Factors.

The "Big Five."

Extraversion versus Introversion.

Neuroticism versus Emotional Stability.

Conscientiousness versus Impulsiveness.

Openness to New Experiences versus Traditionalism.

Agreeableness versus Self-interest.

The Genetics of Personality.

Investing Personality.

Neurotic Investors.

Extraverted, Open, and Conscientious Investors.

Other Personality Research.

Trading Psychology.

Part III: Thinking about Money.

Chapter 13: Making Decisions.

Expected Value and Expected Utility.

The Jackpot Trap.

Probability Misjudgments.

Vividness, Imagination, and Desire.

Ambiguity and Uncertainty.

Ambiguity in the Markets.

Neuroscience of Ambiguity, Risk, and Reward.

The Possibility that You are Overweight.

The Trusting Brain.

Neuroscience of the Ultimatum Game.

The Trust Hormone.


Chapter 14: Framing Your Options.

The Disposition Effect.

A Father-Son Stock Sale.

Teasing out the Problem.

Framing Risk.

A Frame in the Membrane.

Holding Losers: "Double-or-Nothing!"

Differences in Aversion.

Letting Winners Ride.


Chapter 15: Loss Aversion.

Neuroscience of Loss Aversion.

The Equity Premium Puzzle.

The Implied Put Option.

Overcoming Loss Aversion.

The House Money Effect.

Lessons from the Pope.

Comments from Soros, Tudor, and Cramer: "Booyah!"

Chapter 16: Time Discounting.

Get Your Hand out of the Cookie Jar.

Brain Basis of Delayed Gratification.

Chemical Impulses.

Monkey Business.

Making a Killing in the Options Pit.

Improving Self-Control.

In Practice.

Chapter 17: Herding.


Social Proof.

Social Comparison.

Asch and Conformity.

Information Cascades.

Stanley Milgram and the Shocking Truth.

Nice Clothes, Fast Cars, and Fancy Titles.

The Neuroscience of Cooperation.

Analysts' Abuse of Authority.

The Herding Habit.

Living the Contrarian Lifestyle.

Advice for Herd Animals and Trend Followers.

Advice for Investment Committees.

Chapter 18: Charting and Data Mining.

Artificial Neural Networks.

Data Mining and Self-deception.

Finding Patterns in the Noise.

The Trend and Mean-reversion Biases in Chart Reading.

Overreliance on Charts.

The Gambler's Fallacy.

Irrational Exuberance . . . Called Too Early.

The Soochow Gambling Task.

The Learned Caudate.

Patterns in Earnings Reports.

Fooled by Randomness.

Chapter 19: Attention and Memory.

Terminal Illness.

Representative Returns.

Fond Memories.

Beating the Hindsight Bias.

Attention Deficit.

Keep Your Eye on the Pills.

What's in a Name?

China Prosperity Internet Holdings.

"All that Glitters."

Chapter 20: Age, Sex, and Culture.

Emotional Memories.

The Female Brain: Estrogen, Emotion, and Cooperation.

Financial Planning for Divorcees.

Male Overconfidence.


The Seattle Longitudinal Study of Adult Development.

Culture (East and West).

Chinese Risk Takers.

Biases Among Chinese Stock Traders.

Part IV: In Practice.

Chapter 21: Emotion Management.

Do it for Love, Not Money.

Money Changes You.

Emotional Defenses.

The Pursuit of Happiness.


Chemical Stabilizers.


Creating a Decision Journal.

Chapter 22: Change Techniques.

Dealing with Fearful and Overconfident Clients.

Cognitive-behavioral Therapy and Stress Management.

Yoga, Meditation, and Lifestyle.

Simple Stress Reduction.

Getting Out of a Slump.

Trading Coaches.

Flavia Cymbalista.

Denise Shull.

Modeling Others.

Growing Happier.


Maintain "Learning Goals."

Chapter 23: Behavioral Finance Investing.

Harvesting Risk Premia.

Risk Premia and Expectations.

Value versus Glamour.

Momentum, Size, and the Optimal Portfolio.

"Buy on the Rumor and Sell on the News."

Limits to Arbitrage.

Behavioral Finance Fund Performance.

Behavioral Investment Products.

Final Notes.