Wednesday, 29 June 2011

Book Review: Investing and the Irrational Mind by Robert Koppel

In this book Robert Koppel relates how he has discovered that the precepts and practises that he knew from practical experience lead to market trading success are underpinned, explained and validated by the findings of behavioural finance research.

Not so much a ground-breaker providing new insight or knowledge, it is readable summary and description of many behavioural finance concepts and how they have been applied successfully by traders. But it falls short in explaining exactly how to change one's own behaviour. There is a difference between saying that intuition is a quality of successful traders, which he does, and setting out an action program to get there, which is not done. One wonders if he thinks that may be impossible using only a book since as he also notes, "... none of what success requires is easy. There are no shortcuts, simple answers, or turnkey solutions."

It has been known for a long time what kinds of behaviours and psychological qualities lead to success. Koppel cites an 1880 list - self-reliance, judgment, courage, prudence and pliability. Koppel also relates how certain highly successful traders through extreme determination and unstinting enormous effort managed to change themselves and imbue themselves with the required qualities. That's learning the hard way, self-taught through much trial and error. Is that really the only way? Surely not, in this age of deliberate formal education that turns out vast numbers of people who are better at many things than would have been the case if left to their own devices. There is a little bit of such content in the section on psychological resilience but the book misses the opportunity to take the next step by providing the training-type advice to operationalize improved investor behaviour. For instance, Koppel cites research which concluded that optimism can be learned, an encouraging bit of news. Ok, tell me how to do that. My family and close friends would really like me to know! It is not just a case of "just do it".

Koppel is not particularly to blame in this. So far, no book I have come across goes beyond describing the problems uncovered by behavioural finance to putting in writing a comprehensive practical training program. As a model for what I think can and should be assembled, there is the classic on how to be a good consultant, Flawless Consulting by Peter Block. It is very specific and tells you exactly what to do step by step.

The book reads easily. It contains some amusing quotes e.g. "I have stuff, therefore I am", a fitting epitaph for the consumer society. Another, said to be Wall Street lore, vividly describes the investing risk-return trade-off "You can't eat like a bird and shit like an elephant". It also contains a good reading list and copious references.

Most likely, the greatest appeal of this book will be to the active investor, especially the short-term trader and market timer. Passive index investors will find the admonitions about finding a trading system that gives a person an investing edge somewhat beside the point. One could say that one of the great benefits of passive investing is that it helps bypass much of the harmful stimulation that leads to bad decisions and portfolio loss. Someone who owns a broad market index fund can simply do a Rip Van Winkle - file, forget and ignore for a decade or two, perhaps awakening every few years to rebalance amongst asset classes.

In short, this is a good though not great book. My rating 3.5 out of 5 stars.

Thanks to the publisher McGraw-Hill for providing me with a gratis review copy.


Anonymous said...

Regarding this part of your review:
"For instance, Koppel cites research which concluded that optimism can be learned, an encouraging bit of news. Ok, tell me how to do that. My family and close friends would really like me to know! It is not just a case of "just do it"."

I'm sure Koppel is referring to Dr. Martin Seligman's research. If you'd like to learn more about learning optimism, I recommend Seligman's book titled "Learned Optimism". It's very good and based on actual research. (In case you're wondering, Seligman is an actual MD and university researcher who is widely published in major academic journals on the study of optimism and psychological resilience, not a Dr. Phil or Dr. Laura type. But the book is written for a general audience.)

Seligman has a few other books too, including one that just came out. I haven't read any of the others, but I wouldn't hesitate to.

CanadianInvestor said...

Anon, Yes, you are correct. To Koppel's credit, and it's an aspect of his book I like. he does give the citation for this point and other similar ones. I'll put that other book on my wish list and I'm sure someone in my family will gladly buy it for me!

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