Showing posts with label books. Show all posts
Showing posts with label books. Show all posts

Monday, August 16, 2010

Three Books for Approaching Behavioral Finance

In my recent travels I plucked two behavioral finance books out of airport bookstores. Apparently Blink has triggered a new title and jacket aesthetic, as both of these books look as if they could have been companion volumes.

The quickest read of the bunch, Sway: The Irresistable Pull of Irrational Behavior (Ori Brafman and Rom Brafman), can easily be polished off in a three-hour flight. Frankly, this is the book’s main attraction, but also its weakness. Here is an entertaining read that provides a vignette-centric approach to illuminating the decision-making shortfalls humans are prone to making. Theories and conclusions are loosely woven around the vignettes to provide structure and coherence, yet most of these are self-explanatory from the examples. Sway has the readability of Freakonomics and is just as likely to be consumed in one sitting, but ultimately does little more than whet the appetite for anyone with an interest in getting to the full menu of behavioral finance. As an hors d'oeuvre, however, it is most enjoyable.

At first glance, Nudge: Improving Decisions About Health, Wealth and Happiness (Richard Thaler and Cass Sunstein), looks to be an only slightly heartier meal. In fact, Nudge retains the readability of Sway, but is much more comprehensive, better organized and yet has the heft of an academic introduction to behavioral finance. Nudge will probably require an overseas flight to digest, and is better suited for savoring over the course of multiple sittings.

In another league entirely is the encyclopedic Choices, Values, and Frames (Daniel Kahneman and Amos Tversky), which is a comprehensive collection of articles that represent the definitive thinking on much of the field of behavioral finance, which Kahneman and Tversky were instrumental in establishing. One could argue that Choices, Values, and Frames was the book which was largely responsible for Kahneman being awarded the Nobel Prize following Tversky’s death. This book is a densely packed buffet of ideas that is probably best consumed in small chunks over the course of weeks or months. It is not necessarily an easy read, but the ideas and research that went into it and the reflection and rethinking of the investment world that come out of it make it one of the most influential books in the realm of finance and investments.

Related posts:

Disclosure(s): none

Monday, June 18, 2007

The Risk Library

Two weeks ago I offered up “Ten Anecdotal/Historical Book Ideas for Investors” on the premise that humans have a tendency to learn and retain more valuable concepts when the learning process is enjoyable.

This list is quite different. Risk is something that the novice trader/investor invariably fails to think about enough and properly address in their trading methodology. Interestingly, risk management is often the Achilles heel of more experienced traders who know better, but also fail to attend to with sufficient rigor.

With this in mind, I offer up some favorites from my personal library to help all traders think about risk and act to limit the risks inherent in their trading strategies, ordered roughly from the most abstract to the most prescriptive, which I often find is an excellent way to tackle any unfamiliar subject:

Against the Gods (Peter Bernstein) – A high level survey of the history of risk from the perspective of the advance of civilization. A relatively quick read that should inspire the desire to take a closer look at risk vis-à-vis investments. 

The (Mis)Behavior of Markets (Benoit Mandelbrot) – A fun and mind-expanding stew of financial risk, fractals and chaos theory. A great thought starter and surprisingly easy for non-math/physics scholars to breeze through.

Fooled By Randomness (Nassim Taleb) and The Black Swan (Nassim Taleb) – I suggest you try these in chronological order, starting with Fooled By Randomness. If Bernstein and Mandelbrot offer up two solid thought starters, then Taleb is a master of throwing gasoline on the fire. Deftly written in his own idiosyncratic narrative, Taleb’s books are bursting at the seams with ideas and ground zero is risk.

Choices, Values, and Frames (Daniel Kahneman and Amos Tversky) – Behavioral finance is a subject that is still gaining traction, but the sooner you steep your thinking in the ideas of the discipline’s founding fathers, Kahneman and Tversky, the better off you will be. This particular book is a collection of essays that you can read through at your own pace.

Manias, Panics, and Crashes (Charles Kindelberger) and/or Devil Take the Hindmost (Edward Chancellor) – Kindleberger offers a dense but informative history, while Chancellor wins out in terms of readability. Each is an excellent account of the history of speculation and market excesses; picking one of the two would probably suffice. Note that Charles MacKay’s Extraordinary Popular Delusions and the Madness of Crowds should also probably be on this historical menu, but I have not yet read it.

With Fortune’s Formula (William Poundstone), this list passes over from the largely theoretical into the prescriptive realm. This is a fun read on the Kelly criterion, set to a backdrop of blackjack and casino gambling.

A Thousand Barrels a Second (Peter Tertzakian) and/or The Oil Factor (Stephen Leeb) – There are many books out there that discuss the merits of Peak Oil. I have only read a few of them, but Tertzakian’s treatment is by far my favorite and certainly one of the more objective ones. Leeb’s book probably created a larger stir (as did his The Coming Economic Collapse, which strikes me as little more than a hastily assembled slight update of his previous book), but it covers most of the important points in much smaller bites. Every investor, Peak Oil proponent or otherwise, needs to take a close look at this subject and be prepared for how a number of oil-related scenarios may play out over the remainder of their investment time horizon.

Financial Shenanigans (Howard Schilit) – The subtitle of the book, How to Detect Accounting Gimmicks & Fraud in Financial Reports is exactly what this book is all about. Here is a fundamental approach that addresses what to look for, with an excellent treatment by Schilit. It is up to the reader to determine whether these companies should merely be avoided or whether they might also be short candidates.

How to Make Money Selling Stocks Short (William O’Neil and Gil Morales) – This is another prescriptive book and it relies entirely on a couple of basic technical analysis concepts. Even with that shortcoming, I think the true value of the book is that it will help you to actively look for short opportunities and avoid the confirmation bias that long-only approaches can sometimes succumb to. For example, if stock chart is screaming “buy” at you, would it be a “sell” if you turned the chart upside down?

When to Sell (Justin Mamis) and/or It’s When You Sell that Counts (Donald Cassidy) – While it is easy to find books on how to buy stocks, good luck finding an entire book devoted to the topic of selling them. Mamis and Cassidy are the only two books of this kind I have encountered and fortunately each offers an excellent treatment of the subject. I am slightly partial to Mamis here, but since most of us make or lose a lot more money managing existing positions than seeking better entries, my suggestion is to try both of them.

Trading Risk (Kenneth Grant) – This book is the only one I know of that offers highly detailed advice about how to evaluate the various types of risk in your holdings and take action to mitigate those risks. If I could, I would make it required reading for any newcomer to the investment world.

Tuesday, June 5, 2007

Ten Anecdotal/Historical Book Ideas for Investors

About a month or so ago, I finally got around to reading Marty Schwartz’s classic, Pit Bull, which I can best describe as a colorful autobiography that uses the 1980s options world as a palette for many amusing anecdotes that are expertly conveyed. The book was such a fun read that I went through the whole thing in no more than 2-3 days, cobbling together bits and pieces of ‘free time’ in order to do so.

Schwartz’s book is pure entertainment and touches only briefly on methodologies and techniques, yet I was able to pull quite a few investment-related nuggets from it in a short period of time, with the added benefit that the learning process was all fun and no pain. The process got me thinking that perhaps the fastest way to effortlessly bombard the brain with useful investment ideas are those easy reads that provide a personal historical window into the markets.

I am contrasting this process with the process I went through in trying to read and digest the ideas in Alan Farley’s The Master Swing Trader, which, despite the many interesting ideas, is about as fun to trudge through as Hegel.

With this in mind, I offer the following ten books as relatively effortless ways to cross-pollinate your investment thinking with that of some of the better minds in the field, both past and present.

Roughly in order of how quick and easy they are to read:

  • How I Made $2,000,000 in the Stock Market (Nicolas Darvas) – You can probably read this book in a little over an hour. There are only a few salient ideas, but these are destined to stick with you long after you have read the book. I also found that the path Darvas took along the way to developing his system bears a strong resemblance to my own.
  • Pit Bull (Marty Schwartz) – A fast-moving and superbly written account of a champion options trader. A great companion for a cross-country plane trip.
  • Reminiscences of a Stock Operator (Edwin Lefevre) – This is on almost everyone’s reading list, so I will say little about it, other than to point out that it is chock full of insight, yet still reads like a novel.
  • A Journey Through Economic Time (John Kenneth Galbraith) – A very different book from the others on this list, this is certainly one of the easiest economics reads out there, yet the survey of the economic landscape from WWI to after the fall of the Berlin Wall will give the reader a lot to think about.
  • My Life as a Quant (Emanuel Derman) – Another physicist who writes extremely well, Derman provides a thoughtful accounting of his personal journey through the (then) unlikely intersection of theoretical physics, finance and risk.
  • Investment Biker (Jim Rogers) and Adventure Capitalist (Jim Rogers) – These two books are probably best read back to back, in chronological order, starting with the Investment Biker’s 1990-1992 world tour, then using the 1999-2001 Adventure Capitalist jaunt to see how the world had changed over the course of a decade. This is first-person global macro analysis at its best, though you may not have the stamina to do your own world tour in one sitting…
  • Market Wizards (Jack Schwager), The New Market Wizards (Jack Schwager), and Stock Market Wizards (Jack Schwager) – I never thought I’d willingly place the Schwager wizards trilogy at the bottom of any list, but they end up here because they are more densely packed than the other books. Like the Jim Rogers duo, these are best consumed in small bites, on an empty stomach, leaving ample time for proper chewing and digestion. Schwager’s interview style and editing is such that he is able to deliver an astonishing amount of information in an easy to read fashion. The best news of all is that while the books are a great place for beginners to start, they somehow manage to improve with repeated reading.

DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2013 Bill Luby. All rights reserved.
 
Web Analytics