MarketPsych: How to Manage Fear and Build Your Investor Identity

Chapter 1. Your Investor Identity: And Why You Need One

The unexplored area is the emotional area. All the charts and breadth indicators and technical palaver are statisticians' attempts to describe an emotional state.

——Edward Johnson, founder of Fidelity Investments

These words were spoken by Edward Johnson more than 40 years ago, and they ring every bit as true today. So why, after so much time, is the psychological understanding of investing decisions still so widely misunderstood? Given the volatility of the past decade, it stands to reason that merging the lessons of psychology and finance could be wonderfully beneficial to investors.

Psychology and Finance: Failure to Communicate

It's not that I can't help these people. It's just I don't want to.

——Tom Hanks, Volunteers

The movie Volunteers is an immensely underrated comedy starring Tom Hanks and the late John Candy. In an effort to avoid a gambling debt, Hanks's character poses as a Peace Corps volunteer and boards a plane to a developing country. Shortly after arriving, he seeks to return home. When an incredulous Peace Corps organizer pleads with him to stay by entreating him, "But you can help these people!", Hanks responds with the classic line quoted above.

This quote is also a fair way to think of the relationship between psychology and finance. These two fields have lived side by side in the same neighborhood for more than a hundred years and have never been properly introduced.

Traditionally the world of psychology has not ...