The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails

Big Brother Is Studying You

If there is a criticism to be made of behavioral economics, it is that while there is clearly some truth to the matter, it remains a decidedly soft discipline in the rough and tumble world of investing. A behavioral economist will likely never run a major bank or honcho a trading desk. Those jobs will always be held by bankers and traders. But people who understand the psychology of investing, and who can talk with investors are increasingly likely to be hired by a major bank. Put another way: Even if you decide to ignore behavioral economics, the banks are not, and they are using it to learn more about you, and other investors. Ignore behavioral finance at your own peril.

Since 2006, Barclay’s Capital, one of the world’s largest banks, has employed a behavioral economist to help clients understand why and how they make decisions. Since then, other banks have adapted a similar focus, including Bank of America, Merrill Lynch, J.P. Morgan, and Allianz Global Investors. And more will join the fray.

It is easy to imagine that the banks will use the data they collect on clients to more effectively market investment products. It is also easy to imagine that clients can be taught to be better investors if they are taught to make better decisions. Investors are likely to lose less money if they avoid the standard psychological pitfalls that trap most investors.

Greg Davies heads Barclays’ Behavioral and Quantitative Investment Philosophy Group. He oversees four ...