Coreen Sol, CFA
September 21, 2022Education Financial literacy Lifestyle
Unbiased Investor: Why and How to Limit Financial Decisions
This past weekend I was playing pinball at a housewarming party when one of the guests asked about my new book. I realized then that the margarita and wine cocktail in my stomach would make this tricky.
I stammered something about the way that we sort things out in our brains contributes to judgment errors. In financial decisions, those errors are measured in money. How do you explain an entire book at a party?
Have you ever held onto a stock after it drops, I offered, thinking that it should go back to the price you paid for it? Right, he said. I didn't want to lose money; if it was that price before, surely it could return to that price.
Of course, losing money is unpleasant! But the price of a stock reflects the current outlook for the company’s profits, so the share price reflects its value now. There's nothing to say that it will return to the earlier price.
Maybe, but it usually does, he defended.
Well, sometimes, I conceded, but at a cost. You could have invested those funds in a better investment. People usually stick to the losing investment rather than roll the dice on something new because if you lose again, it feels twice as bad as only losing once.
Suddenly, my brain populated with other examples fighting to get out, but I knew it would not explain the entire book any better than the first example.
Yes, the book is about why we justify unhealthy decisions about money and other aspects of life, but it's about so much more. Like how and why to limit financial decisions altogether. How much money will legitimately increase your happiness? And I’ve listed habits you can adopt to reduce the effects of bias on your decisions, my brain protested. Plus, there’s evidence who should use passive or active management. There’s a ton of stuff to offer up.
I woke up the next morning determined to develop a few resonating statements that capture the reasons that I wrote this book. I'll start with this diagram.
If you'd like to contribute to the conversation, you can read how Wiley & Sons summarizes Unbiased Investor: Reduce Financial Stress & Keep More of Your Money. The back cover is posted online at your favourite bookstore. Let me know what this diagram means to you, or what you’d have said at the housewarming party while leaning over the pin ball machine.
Unbiased Investor is available now for pre-order and will be published in November 2022.