Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias, + Website

CHAPTER 6

Debiasing

By this point, I hope the message has gotten through—we spend our lives immersed in a sea of bias, and like the air we breathe it's so natural we don't even realize it exists—most of the time. Unfortunately, in finance our biases are inclined to lead us into error, penury, and worse.

Having spent most of the book setting up this premise I'd now like to start looking at how you debias yourselves. After all, if the world is full of biased people we probably only need to be a little bit better than them to be reasonably successful.

This, of course, is a nice theory but is unfortunately easier said than done. Nonetheless, there are a few things we can do to ease our way through the minefield.

NUMBERS, NUMBERS, NUMBERS

I'm afraid that the boring answer to debiasing is to spend time sweating the numbers. The brutal fact is that if we're interested in making money from stocks then we need to take the time to understand the finances of the corporations we're thinking of investing in. Moreover, we can't simply take the numbers at face value: company accounts are a snapshot of the viability of the firm at a specific point in time and good finance departments are adept at managing the numbers to give the world the best possible view of the company. And this is perfectly legal.

There's a good reason, for instance, why company reports start with a narrative and end with the numbers. The narratives can be useful but are all too often used to distract investors away from the ...