There are many books available in the market on share market and investment but only few books are written on Behavioral Finance. Stocks to riches: Insights on investor behavior is one of the book written on Behavioral Finance.
Is Behavioral Finance is so important in investing field? The answer is Yes; because results of investing are depends on how the investor thinks while investing his money in some investment products.
The author says that investing means putting money to work but people often forget that what is sown today can’t give results immediately.
In investing, new investors buy 5-6 stocks today and expect profit on the next day. If the stocks are not showing profit, they will sell them without waiting for a considerable time. Buying stocks without researching them often lead to decline more than 10-20 % in a short span.
Now they are not ready to book loss by selling at a low price; Even if the stock is reaching at new low. Some may buy it again for averaging. One’s financial decisions (in terms of investing in the stock market) depend more or less on his emotional intelligence as well as on market fluctuations. The book ‘Stocks to riches: Insights on investor behavior’ exactly describes the part of emotional intelligence while investing.
What was wrong in this type of behavior while investing? Many aspects of investing are discussed but no one pays attention to what the investor thinks while investing. Author Parag Parikh has focused this book on investor’s behavior. The book ‘Stocks to riches: Insights on investor behavior’ covers concepts of investing, speculation, loss aversion, sunk cost fallacy, herd mentality, etc. During investing, every investor has somewhere faced such situations and this book exactly teaches readers how to deal in these situations.
The author has studied Behavioral Finance in a short course from Harvard University’s Kennedy School of Government and has designed this book by combining his experience in stock investing.
A funny example at the beginning of the book explains how different people understand investing. A young son in a family tells his father that he wants some money. He told, “As my friends are investing, I will also invest in the stock market and make money. The father told, “Complete your college education first. Focus on your studies, if you get good marks and then you will get a job. This is your investment.
The daughter told, “My husband is working in the commodity market. He told me that gold prices are going up soon. So you give me some money; I will buy gold from it. It will also be an investment for my future.
The mother of the children says that your father has built the factory with great effort; that is their investment. The children told to mother that if money can be earned easily in stock market, then why do father need to work hard?
Mother again told to children that you two don’t have to invest money anywhere. Your father has already purchased some dividend paying mutual funds and some real estate in my name, that is enough for you. Tired of hearing all this discussion, father told “now I am going to sleep, I think the investment is a very complicated subject”.
It is clear from this conversation that none of the four understood Investment. Son and daughter talk about investment but they don’t know what investment is. The father has a factory and he is telling to children to focus on education, as it is an investment for them. The mother herself is a real investor because she has real estate and some Mutual Funds in her portfolio. But still, she could not explain exactly what an investment is.
Some of the chapters of this book are full of good information on Behavioral Finance? These chapters discuss how someone sell a rising stock and bought a falling stock as someone suggests doing this. Also, this book discusses Classical Economic Theory and Behavioral Economic Theory. Loss Aversion and Sunk Cost Fallacy are explained in good detail.
Loss Aversion means the fear of losing money and Sunk Cost Fallacy is your inability to forget the money lost. Loss Aversion is when someone sells a good stock for a small profit and exits immediately, even if it is likely to rise further in near future. Sunk Cost Fallacy means not selling the stocks even if it making new lows. Sunk Cost Fallacy is about wasting money on a person or investment without any benefit from them.
Some organization also hires people who are unlikely to do anything useful. Investing in such employees is also called Sunk Cost in the language of economics. Loss Aversion is the fear of losing. Loss Aversion is about reversing back your winning horse when there is a chance to achieve something better.
The other example of loss aversion is when the market is in the bear phase and good stocks are available at low prices, someone might invest money in a fixed deposit as he was afraid of a bear market. Ideally, this may be an opportunity to buy good shares at low prices. But due to fear of losing money, the investor loses the good opportunity to buy stocks at an attractive price.
To whom this book is most suitable?
- Who is dedicated for wealth accumulation by investing and not by trading.
- Beginner in investing but want to grow by not following herd mentality.
- Professional investor who want to focus on behavioral finance and value investing to maximize the returns.
I had to read some paragraphs from this book twice to understand what it tells about. To be honest, I found this book a little difficult to digest; but after reading slowly, I realized that something new I have found which is very important in investing area.
Looking to a depth of subject behavioral finance, the Author’s attempt to explain a complex thing in easy words with crispy examples is admirable. Readers who want to increase their investment wisdom should read the book “Stocks to riches: Insights on investor behavior”. By doing so the reader will stand apart from crowd thinking and this will surely help him only.
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