ll co Ge tA T he w w w m Chapter One - In the Heat of the Moment Ge tA The Perils of Procrastination The Power of Pre-Commitment ll co Little Book Big Profits Series Title Page Copyright Page Dedication Foreword Introduction The Most Important Lesson of All The Power of Star Trek So, Are You Spock or McCoy? X Unchecked m Table of Contents Chapter Two - Who’s Afraid of the Big Bad Market? T he Brain Drain and Performance The Cure for Temporary Paralysis Chapter Three - Always Look on the Bright Side of Life w Optimism and the X-System Nature versus Nurture Beating Over-Optimism w Chapter Four - Why Does Anyone Listen to These Guys? w Why Does Anyone Listen to Jim Cramer? The Shocking Dangers of Doing What We Are Told Fund Managers: Weathermen or Doctors? Overconfidence May Be Hazardous to Your Wealth Chapter Five - The Folly of Forecasting So, Why Do We Keep Forecasting? Why Do We Use Forecasts? There’s Got to Be a Better Way Chapter Six - Information Overload Is More Better? When Less Is More From the Emergency Room to the Markets Chapter Seven - Turn off That Bubblevision! Meet Mr Market ll co The Sorry Tale of Sir Roger Prisoners of Our Preconceptions Kill the Company m Chapter Eight - See No Evil, Hear No Evil Chapter Nine - In the Land of the Perma-Bear and the Perma-Bull Ge tA Hanging onto Your View Sunk Costs at the Root of Conservatism Chapter Ten - The Siren Song of Stories T he Stock Market Stories Beware of Capitalizing Hope Focus on the Facts Chapter Eleven - This Time Is Different w Why Can’t We Time Predictable Surprises? A Beginner’s Guide to Spotting Bubbles Your Edge Over the Pros! w Chapter Twelve - Right for the Wrong Reason, or Wrong for the Right Reason w It’s Not My Fault, It’s Just Bad Luck Don’t Be a Monday Morning Quarterback Chapter Thirteen - The Perils of ADHD Investing What Can We Learn from Goalkeepers? Poor Performance Increases the Desire to Act Investors and Action Bias Waiting for the Fat Pitch Chapter Fourteen - Inside the Mind of a Lemming The Pain of Going against the Crowd The Carrot of Conformity The Dangers of Groupthink Alone in a Crowd of Sheep Chapter Fifteen - You Gotta Know When to Fold Them The Psychology of Process Process Accountability w w w T he Ge tA Conclusion ll co Chapter Sixteen - Process, Process, Process m We Are Not Alone (or Perhaps Not Even That Evolved!) Myopia and Loss Aversion Why You Can’t Bring Yourself to Sell The Endowment Effect m Little Book Big Profits Series ll co In the Little Book Big Profits series, the brightest icons in the financial world write on topics that range from tried-and-true investment strategies to tomorrow’s new trends Each book offers a unique perspective on investing, allowing the reader to pick and choose from the very best in investment advice today Ge tA Books in the Little Book Big Profits series include: w w w T he The Little Book That Beats the Market by Joel Greenblatt The Little Book of Value Investing by Christopher Browne The Little Book of Common Sense Investing by John C Bogle The Little Book That Makes You Rich by Louis Navellier The Little Book That Builds Wealth by Pat Dorsey The Little Book That Saves Your Assets by David M Darst The Little Book of Bull Moves in Bear Markets by Peter D Schiff The Little Book of Main Street Money by Jonathan Clements The Little Book of Safe Money by Jason Zweig The Little Book of Behavioral Investing by James Montier ll co Ge tA T he w w w m ll co Ge tA T he w w w m Copyright © 2010 by John Wiley & Sons, Ltd All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada m No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions ll co Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages Ge tA For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 5723993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com w w w T he eISBN : 978-0-470-71202-3 w w w T he Ge tA ll co m To Charlotte Your smile lights up my world Foreword Homo Mistakus w w w T he Ge tA ll co m I AM RATHER AN EXPERT ON BAD CHOICES I have made so many over the years, from unhealthy food choices to postponing exercise (today’s bad choice) and yes, even regrettable investment choices (sigh) And then I have observed so many bad choices on the part of my seven teenagers (Thankfully, now down to just one, but these days I get to watch my grandkids learn to navigate the world.) Teenagers have a remarkable ability to make the easy choice today and postpone the hard and difficult choice until tomorrow And some of us grow up, having perfected that ability, making even more bad choices as adults I have interviewed hundreds of investors over the years, from small and starting out to having-arrived billionaires I am always amazed by the mistakes they make and the inventive rational they use for having made them As a nation and a world, we have made numerous bad choices, taken the easy road, and ended up in the worst global economic crisis in 80 years Now we are faced with a set of difficult choices as we work our way back to a new normal History is replete with bad choices by both individuals and nations In the past few decades, a new science has emerged that has taken note of the fact that not only are we sometimes irrational, but we are predictably irrational This new behavioral science has started looking at how we go about making decisions and is finding all sorts of interesting, if sometimes distressing, things about the human species It seems that our emotions and much of our decision-making process is hard wired into our brains, developed for survival on the African savannahs some 100,000 years ago We adapted to movement, learning to make decisions quickly, because there was quite a difference, literally life and death, between dodging dangerous lions and chasing succulent antelope And while those survival instincts are quite useful in general, when translated into a modern world, and especially a modern investment world, they make us prone to all sorts of errors Think of chasing momentum all too often in the hope that it will continue and running from falling markets just as they start to turn What works for survival in the African jungles is not as productive in the jungles of world finance Happily, we are not just homo mistakus If we had learned to make nothing but bad choices our species would have been consigned to the dust bin of history a long time ago, making room for some survivors less prone to error We clearly learned to make good choices as well, and to learn from our mistakes and even the success and wisdom of others As I mentioned earlier, I have formally interviewed hundreds of millionaires I am even more fascinated by choices they made that were the good (and sometimes brilliant!) ones, and the processes they used to ... Big Profits series include: w w w T he The Little Book That Beats the Market by Joel Greenblatt The Little Book of Value Investing by Christopher Browne The Little Book of Common Sense Investing. .. Bull Moves in Bear Markets by Peter D Schiff The Little Book of Main Street Money by Jonathan Clements The Little Book of Safe Money by Jason Zweig The Little Book of Behavioral Investing by James... funding However, this time the money could be split between the two beers How would you allocate the $10 million between the two beers? In addition you are told one of the following: Or w w The information