Transparent Investing: How to Play the Stock Market without Getting Played by Patrick Geddes

Part I
YOUR BRAIN IS HAZARDOUS TO
YOUR WEALTH

Chapter 1
Emotions Count More Than Math
A COUPLE OF YEARS AGO, I was chatting with a
sophisticated wealth manager whose investment savvy and ethics I’ve
admired for years. As she reflected on her twenty-plus years of experience
working in the investment industry, she said, “You know, the longer I’m in
this business, the more I realize that when working with investors, it’s about
80 percent emotions and 20 percent math and analysis.”
She went on to say that, for all her fine talk about quantitative analysis,
clients’ emotions remain the more important driver, in spite of how
counterintuitive that might be. She didn’t mean this as a complaint or
evidence of foolishness, but rather as an accurate assessment of how
investors, whether neophyte or expert, make choices that affect their
financial future. I was struck by how this mirrored my own experiences in
the financial sector.
However, this doesn’t mean the quantitative analytic approach to
investing is no longer relevant. I’ve spent forty years living in that world,
and I have as much fun as the next “quant” throwing around terms like
covariance matrix or leptokurtic logarithmic distributions when talking
about investing. The problem arises when the emotional side of things gets
short shrift and is deemed unimportant or touchy-feely. But this imbalance
has been shifting recently. While emotions still get underweighted in many
discussions between investment advisors and their clients, the conversation
has improved over the past twenty years. (Throughout this book I’ll use the
labels investment advisor and investment manager interchangeably.)
Two fields of research have helped shift this focus. The first field is
known as behavioral economics or behavioral finance— it studies the
intersection of finance and psychology. The second field, neuroscience,
examines how the brain functions (or sometimes doesn’t function that well)
based on new discoveries and the evolution of the brain.

Transparent Investing: How to Play the Stock Market without Getting Played by Patrick Geddes