I recently finished Daniel Crosby's Behavioral Investor. It was a great read. I especially enjoyed the first half which talked more about us humans and our brains than anything to do with stocks and bonds.
The first chapter is titled Sociology. According to Google, sociology is defined as the study of the development, structure, and functioning of human society. I haven't come across to many investment books that talk about sociology.
Our ability to create social narratives distinguish us from the rest of the animal kingdom. What on earth does that mean? In short, humans like stories. As Crosby puts it, "To put it bluntly, we make up stories about the world and then act as if they are real:" This has enabled us to create many things such as money, laws, country borders, the stock market and so on. None of this stuff is "real". Crosby sums it up well, "our shared belief in them and behaving as though they are real brings about orderly civilizations steeped in mutual trust."
It is this unique ability that causes us to make very poor investing decisions. Because of our "complex" thoughts we are victim to self-deception and irrationality. We follow popular opinion and belief. We want to fit and/or boost our egos. Think about it... You have argument with someone and you are in possession of facts that completely destroy their hypothesis. Often this will not change that someone's mind. We remark in jest that "facts are obviously optional". Your opponent either doesn't want to look bad by conceding the argument or they simply ignore the facts as they contradict a widely held belief (even if that belief is obviously false!).
So to sum it up in easy to understand terms. We suck at investing. Why? Our brains are wired to reason in social rather objective terms (see paragraph above). Therefore, before we even think about investing we need to understand human nature.
In the chapters that follow, Crosby shows us how to go about this but those ideas will be for another blog post. I have also included a link to the book below. It is worth buying. (It is not some silly affiliate link or anything like that).
(As an aside, after reading this book I think I was able to explain how Donald Trump made it to the White House...)