7 Investing Lessons from Behavioral Psychology

Click … bait

You could start by not wasting your time clicking on stupid clickbait articles, I suppose. But since you’re here you might as well learn something.

Investing should be mainly about hard work, slogging through accounts and trying to figure out where or why a company has a defendable competitive advantage. But that’s not much help if you have the self control of an octogenarian with prostate trouble.  Investing is 90% hard work and 10% mental discipline – but don’t even bother if you haven’t got the 10%.

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M is for Mental Accounting

Mental Accounting is the term given for our habit of mentally allocating money to various accounts and then acting as though they're in separate high security vaults, transferable only by using a elite team of undercover operatives armed with a teleporter and a genetically modified ape. From there it's a short step to using our mental accounts to engage in some perverse and financially draining behaviors.

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Mental Accounting: Not All Money Is Equal

Coherent Holes

Now listen carefully, because this is where the bizarre, byzantine and seemingly disparate behavioural biases that afflict our every monetary movement start to coalesce into a single, coherent whole. Or at least a set of coherent wholes. Or is that coherent holes?

Mental accounting isn’t about the madness of the dark denizens of accounting departments, although that’d be as good a subject as any. No, in fact it’s the strange way that we humans turn the perfectly designed medium of exchange we call “money” into an irrational, segregated and non-transferrable set of silos to which we then apply all the normal battery of biased behaviours, thus gearing up our irrationality to a marvellously unhinged degree.

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