The Little Book of Bulletproof Investing: Do's and Don'ts to Protect Your Financial Life

Chapter 1. The Nut Behind the Wheel: Behavioral Finance in One Lesson

As Ben's sister, Rachel, likes to say, "Your basic human is not such a hot item." Nowhere is this truer than when it comes time for said average human being to manage his or her own investments. To understand what has gone so very wrong with our financial lives, we need to look more closely at the man or woman in the mirror.

Two devils toss investors back and forth between their pitchforks. One of these is Greed, and the other is Fear. According to this model of investor psychology, the prudent investor is the one who chooses a moderate course, being neither inordinately greedy nor disproportionately fearful. This investor reins in his feelings and threads an Aristotelian mean between these two emotional extremes. There is a lot to be said for this line of thinking, probably because it is true.

If we probe a little deeper, we see that greed and fear are not two emotions, but one, and that single emotion is ... fear. In fact, greed is not an emotion at all, but rather a moral state (one of the Seven Deadly Sins). Greed springs from fear. We fear that we will not have enough, and so greed overcompensates. At its most primitive level, greed is the fear that the big breast of life will be snatched away, leaving us forever unfilled. Greed can mask social fears as well. We fear not doing as well as our brother-in-law or our next-door neighbor. We may fear that our families will be disappointed with us as providers—that ...