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Behavioural Investing: A Practitioner's Guide to Applying Behavioural Finance
Behavioural investing seeks to bridge the gap between psychology and investing. All too many investors are unaware of the mental pitfalls that await them. Even once we are aware of our biases, we must recognise that knowledge does not equal behaviour. The solution lies is designing and adopting an investment process that is at least partially robust to behavioural decision-making errors. Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance explores the biases we face, the way in which they show up in the investment process, and urges readers to adopt an empirically based sceptical approach to investing. This book is unique in combining insights from the field of applied psychology with a through understanding of the investment problem. The content is practitioner focused throughout and will be essential reading for any investment professional looking to improve their investing behaviour to maximise returns. Key features include:
736 pages, Hardcover
First published November 6, 2007
About the author
James Montier
15 books84 followersJames Montier is an expert in behavioral finance, argues that investors would have a greater chance of spotting the formation of bubbles if they could only brush up on their history and have a greater awareness of human psychology. He has been a top-rated strategist in the annual Thomson Reuters Extel survey for the last five years. When not reading, writing, or speaking, Montier can usually be found swimming with sharks and blowing bubbles at fishes.
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Displaying 1 - 10 of 10 reviews
January 2, 2018
Greatest book on investor psychology ever written (in my opinion). Though it probably does help if you share James Montier's sense of humour...
It's thorough, yet extremely easy to read. Montier not only dives into investor psychology (with emphasis on biases and issues this creates for the broader market), but he also challenges economic theory and provides vast research to back up his claims.
This has been my most recommended book on investing for over 10 years. Truly exceptional.
It's thorough, yet extremely easy to read. Montier not only dives into investor psychology (with emphasis on biases and issues this creates for the broader market), but he also challenges economic theory and provides vast research to back up his claims.
This has been my most recommended book on investing for over 10 years. Truly exceptional.
August 22, 2018
James Montier, top ranked investment strategist at - in turn - Dresdner Kleinwort, Société Générale and GMO, is probably the most important apostle of behavioural finance there is and as such, should be mentioned right beside names such as Daniel Kahneman, Richard Thaler or Robert Shiller. For many investment professionals James Montier “is” behavioural finance. It’s largely through Montier that concepts like anchoring, hindsight bias, herding etc. has found their way into the phrasebook of many portfolio managers.
Even though investing is an intellectual endeavour most investors, as in fact most people, stop to improve their theoretical skills when they leave university thinking that when they enter the real world theory doesn’t really matter – “Those who can, do; those who can't, teach.” This then means that their knowledge gradually becomes obsolete. Too few read books, instead the source of information is papers from investment banks. Hence there is a need for a bridge between theoretical advances and investment practitioners. For behavioural finance Montier has been this bridge and a whole generation of investment professionals is wiser as a result.
This is Montiers second book. The first one builds on a number of lectures in behavioural finance held as a visiting professor at university. This second (but also the author’s third) book is really a collection of essays written while working as a sell side strategist. The essays are grouped after subject. My only objection is that it could have benefited from at least a small amount of editing. This is a very minor complaint. To me these essays are like old dear friends and I have read them over and over, even before they were published in a book. In such a way, editing would also have taken something away for me personally.
Behavioural Investing is rather an extensive book and large parts are devoted to both individual irrationality and collective behaviours and the bubbles those can create. In the introductions to his first book, Behavioural Finance, the author describes how he left university a devoted rational expectations-man. Perhaps it is his later conversion that gives Montier the enthusiasm and drive to try to make everybody see the same truth as he saw himself. Everything Montier writes is well researched, clever, unpretentious (with a twist of dry British humour), entertaining and above all important. But the content in these sections isn’t too different from any academic text book on behavioural finance – just a lot more fun to read.
The real strength of the author is when he combines his knowledge of institutional investors and his theoretical knowledge, i.e. when the sell side strategist Montier looks at his own clients with his behavioural finance-goggles. Irrational illusions of how things should be done are exposed for all to see. To an outsider it is perhaps hard to realize how controversial these essays were with investment banks at start as they pointed to “faults” among Montier’s clients. The clients however loved them and “The Seven Sins of Fund Management” is a classic paper. With investors as audience, what you write have to come to practical use and Montier gives extensive advice on how investment philosophy and process, organisation and incentives could be used to correct the biases investors exhibit. This could relate to anything from how they should view risk and minimize the use of forecasts to the opinion that they should become value investors. Montier in many ways gives a behavioural finance foundation for the value investing discipline.
I have long held the view that Montier and Michael Mauboussin at Legg Mason should be locked up in a room, not to be let out until they agree to co- write a book on investments. This should have the potential to become the definitive book on investments of all times.
Even though investing is an intellectual endeavour most investors, as in fact most people, stop to improve their theoretical skills when they leave university thinking that when they enter the real world theory doesn’t really matter – “Those who can, do; those who can't, teach.” This then means that their knowledge gradually becomes obsolete. Too few read books, instead the source of information is papers from investment banks. Hence there is a need for a bridge between theoretical advances and investment practitioners. For behavioural finance Montier has been this bridge and a whole generation of investment professionals is wiser as a result.
This is Montiers second book. The first one builds on a number of lectures in behavioural finance held as a visiting professor at university. This second (but also the author’s third) book is really a collection of essays written while working as a sell side strategist. The essays are grouped after subject. My only objection is that it could have benefited from at least a small amount of editing. This is a very minor complaint. To me these essays are like old dear friends and I have read them over and over, even before they were published in a book. In such a way, editing would also have taken something away for me personally.
Behavioural Investing is rather an extensive book and large parts are devoted to both individual irrationality and collective behaviours and the bubbles those can create. In the introductions to his first book, Behavioural Finance, the author describes how he left university a devoted rational expectations-man. Perhaps it is his later conversion that gives Montier the enthusiasm and drive to try to make everybody see the same truth as he saw himself. Everything Montier writes is well researched, clever, unpretentious (with a twist of dry British humour), entertaining and above all important. But the content in these sections isn’t too different from any academic text book on behavioural finance – just a lot more fun to read.
The real strength of the author is when he combines his knowledge of institutional investors and his theoretical knowledge, i.e. when the sell side strategist Montier looks at his own clients with his behavioural finance-goggles. Irrational illusions of how things should be done are exposed for all to see. To an outsider it is perhaps hard to realize how controversial these essays were with investment banks at start as they pointed to “faults” among Montier’s clients. The clients however loved them and “The Seven Sins of Fund Management” is a classic paper. With investors as audience, what you write have to come to practical use and Montier gives extensive advice on how investment philosophy and process, organisation and incentives could be used to correct the biases investors exhibit. This could relate to anything from how they should view risk and minimize the use of forecasts to the opinion that they should become value investors. Montier in many ways gives a behavioural finance foundation for the value investing discipline.
I have long held the view that Montier and Michael Mauboussin at Legg Mason should be locked up in a room, not to be let out until they agree to co- write a book on investments. This should have the potential to become the definitive book on investments of all times.
June 19, 2026
longer and worse than the other one, easier to digest, i skipped many sections, repeats ideas often, would prioritise section I > III > IV > VIII rest idrc
TLDR; common mistakes and basic biases, seven sins of fund management, zen, what is the perfect value investor
1. emotional decision making is necessary but often rules unchecked, self-control is a limited resource (recent losses -> irrationalities), plasticity, hard-wired for short-term
2. biases apply to all, be less certain in your views and especially forecasts, facts > stories, know less than you know, more information isn't better its what you do with the info (illusion of control, confidence), failures aren't just bad luck, judge statistical likeliness over memorability/direct ex (e.g. large events), earnings growth tends to be mean-reverting (look at 7-10 years, judge companies by how they are likely to sustain moat > how they appear)
3. empathy gaps (underestimate influence of emotions on actions/choices), look at similarities too alongside differences
4. risk is rewarded (addicts)
5. Ex-post excuses can be made to fit any situation (BC stock graph) -> explaining things is an existential desire even if movements are unrelated to fundamentals, don't shun seasonal results if you are going to assume things like the global investor population believes/worries about US inflation/some random event.
6. hindsight bias, attributing mistakes to bad luck, illusion of control -> distorts feedback and limits learning. Skinners pigeons making shit up = rain dance
7. [professionals are victims of this too]
8-17. seven sins + ways to deal with them
pride (forecasting -> overoptimism/confidence + anchoring | don't fall for ego defence mechanism (if only, ceteris paribus, almost right, just hasn't happened yet, single prediction), don't use analysts as storysellers (lowkey just don't trust them, they be pulling up bs for LGTR and using past 2 years data for a claim on "long-term assets"), trend reversals
gluttony (more info -> overconfidence) | don't get caught up trying to understand everything, cognitive overload, devote more time to using info wisely
lust (confirmation bias, cognitive illusions/authority) | they are as biased as us
envy (thinking you can outsmart everyone else) | keynes beauty contest (hard to image others can't see a solution we see = how many layers of thinking? 3 but no more), don't tend to think others think like us
greed (short-time horizons and over trading) | closet indexing, ADHD, extend time horizons, avoid human nature for quick results, good managers can have years of underperformance, stop trying to beat the gun
sloth (believing everything you read) | explanation-based decision making (falling for stories > reality), parallel to jurors/hopes of growth, copium framing
wrath (group-based decisions -> amplify biases without improving accuracy, bad at uncovering hidden information) | tendency to suffer cascades, polarisation -> echo chambers, groups only outperform (wisdom of the crowd) as a statistical group (independent), people tend to err in the same fashion so mistakes don't cancel out, illusional of invulnerability by the group,
21. desperation for constant outperformance -> go with the crowd (closet indexing) + risky assets = long high-quality to be variant,
22. mfs don't like quant even though its good bc it replaces their jobs + arrogance
23. the perfect value investor , highly concentrated portfolio, not obsessed with noise, understand valuation and risks (business > market), willingness to hold cash, long-time horizons (3-17 years, mean 5), accept they have bad years
24. genuine oldhead quote dropping:
- speculation management vs investment management -> stock-market movements or suitable securities at suitable prices
25. why not value: love for short-term, unsexy stories, overconfidence
26. buying cheap offers downside protection, value generally outperforms, identifying growth picks before they become expensive/deluded by stories is difficult
32. value and momentum investing work much better at stock-level than sector level (as sector in itself is made up of value/growth)
33. while we default to sector-relative factors (e.g. P/E), data shows not that much difference and only on 30-year period/10-year before bubble
35. CAPM is shit (underpredicts low-beta and overpredict high beta = basically no empirical correlation between beta and returns), assume position doesn't affect market price + everyone uses MO model, industry obsessed with tracking error (thus closet indexing thus no value added), performance management is too ADHD coded (trying to notion that everything can be quantised within short 2-3 year periods) + relative performance > absolute
37. Risk is the loss of quality/earning power through economic changes or deterioration in management, Sortino ratios only focus on downside risk (less than Sharpe)
- Business risk (broke/suffer in the future)
- Financial risk (leveraging, to survive near-term fluctuations you need resources for safety)
- Valuation risk (margin of safety and expensiveness)
When high PE stock disappoints/surprises, much worse than low PE
38... skipped all the bubble stuff
42. syllogisms = easy to believe arguments if we agree with conclusion instead of validity of logical framework behind them, analysts tend to love/loathe stocks simply due to predisposed factors (racism/sexism etc.) instead of logical, adopt zen-like attitude to avoid holding beliefs, don't equate confidence with ability or validity
52. incentives fail as they might not increase motivation (blood-tests) or people choke under pressure
53. the pursuit of happiness: happiness does not = money/materialism, people adapt to income shifts quickly, sleep, do not pursue happiness for its own sake, pause for reflection, experiences > possessions
next things: Graham Dodd PEs (based on 10-year moving average), Little Book Greenblatt
TLDR; common mistakes and basic biases, seven sins of fund management, zen, what is the perfect value investor
1. emotional decision making is necessary but often rules unchecked, self-control is a limited resource (recent losses -> irrationalities), plasticity, hard-wired for short-term
2. biases apply to all, be less certain in your views and especially forecasts, facts > stories, know less than you know, more information isn't better its what you do with the info (illusion of control, confidence), failures aren't just bad luck, judge statistical likeliness over memorability/direct ex (e.g. large events), earnings growth tends to be mean-reverting (look at 7-10 years, judge companies by how they are likely to sustain moat > how they appear)
3. empathy gaps (underestimate influence of emotions on actions/choices), look at similarities too alongside differences
4. risk is rewarded (addicts)
5. Ex-post excuses can be made to fit any situation (BC stock graph) -> explaining things is an existential desire even if movements are unrelated to fundamentals, don't shun seasonal results if you are going to assume things like the global investor population believes/worries about US inflation/some random event.
6. hindsight bias, attributing mistakes to bad luck, illusion of control -> distorts feedback and limits learning. Skinners pigeons making shit up = rain dance
7. [professionals are victims of this too]
8-17. seven sins + ways to deal with them
pride (forecasting -> overoptimism/confidence + anchoring | don't fall for ego defence mechanism (if only, ceteris paribus, almost right, just hasn't happened yet, single prediction), don't use analysts as storysellers (lowkey just don't trust them, they be pulling up bs for LGTR and using past 2 years data for a claim on "long-term assets"), trend reversals
gluttony (more info -> overconfidence) | don't get caught up trying to understand everything, cognitive overload, devote more time to using info wisely
lust (confirmation bias, cognitive illusions/authority) | they are as biased as us
envy (thinking you can outsmart everyone else) | keynes beauty contest (hard to image others can't see a solution we see = how many layers of thinking? 3 but no more), don't tend to think others think like us
greed (short-time horizons and over trading) | closet indexing, ADHD, extend time horizons, avoid human nature for quick results, good managers can have years of underperformance, stop trying to beat the gun
sloth (believing everything you read) | explanation-based decision making (falling for stories > reality), parallel to jurors/hopes of growth, copium framing
wrath (group-based decisions -> amplify biases without improving accuracy, bad at uncovering hidden information) | tendency to suffer cascades, polarisation -> echo chambers, groups only outperform (wisdom of the crowd) as a statistical group (independent), people tend to err in the same fashion so mistakes don't cancel out, illusional of invulnerability by the group,
21. desperation for constant outperformance -> go with the crowd (closet indexing) + risky assets = long high-quality to be variant,
22. mfs don't like quant even though its good bc it replaces their jobs + arrogance
23. the perfect value investor , highly concentrated portfolio, not obsessed with noise, understand valuation and risks (business > market), willingness to hold cash, long-time horizons (3-17 years, mean 5), accept they have bad years
24. genuine oldhead quote dropping:
- speculation management vs investment management -> stock-market movements or suitable securities at suitable prices
25. why not value: love for short-term, unsexy stories, overconfidence
26. buying cheap offers downside protection, value generally outperforms, identifying growth picks before they become expensive/deluded by stories is difficult
32. value and momentum investing work much better at stock-level than sector level (as sector in itself is made up of value/growth)
33. while we default to sector-relative factors (e.g. P/E), data shows not that much difference and only on 30-year period/10-year before bubble
35. CAPM is shit (underpredicts low-beta and overpredict high beta = basically no empirical correlation between beta and returns), assume position doesn't affect market price + everyone uses MO model, industry obsessed with tracking error (thus closet indexing thus no value added), performance management is too ADHD coded (trying to notion that everything can be quantised within short 2-3 year periods) + relative performance > absolute
37. Risk is the loss of quality/earning power through economic changes or deterioration in management, Sortino ratios only focus on downside risk (less than Sharpe)
- Business risk (broke/suffer in the future)
- Financial risk (leveraging, to survive near-term fluctuations you need resources for safety)
- Valuation risk (margin of safety and expensiveness)
When high PE stock disappoints/surprises, much worse than low PE
38... skipped all the bubble stuff
42. syllogisms = easy to believe arguments if we agree with conclusion instead of validity of logical framework behind them, analysts tend to love/loathe stocks simply due to predisposed factors (racism/sexism etc.) instead of logical, adopt zen-like attitude to avoid holding beliefs, don't equate confidence with ability or validity
52. incentives fail as they might not increase motivation (blood-tests) or people choke under pressure
53. the pursuit of happiness: happiness does not = money/materialism, people adapt to income shifts quickly, sleep, do not pursue happiness for its own sake, pause for reflection, experiences > possessions
next things: Graham Dodd PEs (based on 10-year moving average), Little Book Greenblatt
December 20, 2021
Long
A lot of information is not relevant to investing.
A lot of information is duplicated among multiple chapters.
A lot of information is not relevant to investing.
A lot of information is duplicated among multiple chapters.
October 29, 2017
LIMIT; IMPORTANCE OF FORECASTS, LOOKING AT EVERYTHING, SEEING MANAGEMENT, TRADING, BROKER STORIES AND GROUP INTERACTION.
Far from offsetting each others biases, groups usually end up amplifying them.
Members of groups enjoy competency and credibility in the eyes of peers if they provide information that is consistent with the group view. Using groups for stock selection seems to be a handicap on performance.
The game of professional investment is intolerably boring.
Our ability to exercise self-control over emotional impulses is limited and decreases with use.
We are wired for the ST. We find the chance of ST gain very attractive. ST gains make us feel confident, stimulated and generally good about ourselves.
We also appear to be hard-wired to herd.
To buy when others are despondently selling and sell when other are greedily buying requires the greatest fortitude and pays the greatest reward.
Be less certain in your views, especially if they are forecasts.
People have been found to dislike losses far more than they like gains.
We generally don't even acknowledge that we have made mistakes, let alone learn from them.
High turnover, large portfolios and ST horizons all relate to illusion of control.
Giving forecasting is difficult a mistake is putting forecasting at the heart of the investment process.
Over-confidence is whereby people are surprised more often than they expect to be.
Deliberation tends to reduce variance.
6 traits of the best value managers; highly concentrated, focussed, willing to hold cash, LT horizons, acceptance of bad years, prepared to close fund to new money.
An investment operation promises safety of capital and a satisfactory return. Otherwise = speculation.
In the world of deflation time is a killer rather than a healer.
Dont equate happiness with money- people adapt to income shifts relatively quickly.
Far from offsetting each others biases, groups usually end up amplifying them.
Members of groups enjoy competency and credibility in the eyes of peers if they provide information that is consistent with the group view. Using groups for stock selection seems to be a handicap on performance.
The game of professional investment is intolerably boring.
Our ability to exercise self-control over emotional impulses is limited and decreases with use.
We are wired for the ST. We find the chance of ST gain very attractive. ST gains make us feel confident, stimulated and generally good about ourselves.
We also appear to be hard-wired to herd.
To buy when others are despondently selling and sell when other are greedily buying requires the greatest fortitude and pays the greatest reward.
Be less certain in your views, especially if they are forecasts.
People have been found to dislike losses far more than they like gains.
We generally don't even acknowledge that we have made mistakes, let alone learn from them.
High turnover, large portfolios and ST horizons all relate to illusion of control.
Giving forecasting is difficult a mistake is putting forecasting at the heart of the investment process.
Over-confidence is whereby people are surprised more often than they expect to be.
Deliberation tends to reduce variance.
6 traits of the best value managers; highly concentrated, focussed, willing to hold cash, LT horizons, acceptance of bad years, prepared to close fund to new money.
An investment operation promises safety of capital and a satisfactory return. Otherwise = speculation.
In the world of deflation time is a killer rather than a healer.
Dont equate happiness with money- people adapt to income shifts relatively quickly.
April 8, 2015
This is one of the most comprehensive books on behavioral investing I am aware of. Packed with not only research study results and practical applications, Mr. Montier has a knack for showing results in a very concise way. I actually used the book in my behavioral finance course.
A couple of things could be improved if this text ever goes into a second edition (which I hope it does). First, many of the chapters are overlapping and share a lot of the same information. Addressing this issue could drastically cut down on the size of the volume. Second, and I don't mean to be nitpicky, in various chapters, the labeling of the graphs is insufficient, and the reader is left trying to figure out the meaning of the graph if not explanation can be found in the text itself.
Other than these two points, the text is thoroughly enjoyable and convincing to anyone with an interest in behavioral finance.
A couple of things could be improved if this text ever goes into a second edition (which I hope it does). First, many of the chapters are overlapping and share a lot of the same information. Addressing this issue could drastically cut down on the size of the volume. Second, and I don't mean to be nitpicky, in various chapters, the labeling of the graphs is insufficient, and the reader is left trying to figure out the meaning of the graph if not explanation can be found in the text itself.
Other than these two points, the text is thoroughly enjoyable and convincing to anyone with an interest in behavioral finance.
March 10, 2009
Montier doesn't quite make a smooth transition from research notes to book chapters, but despite that this is an encyclopaedic compendium of topics related to behavioural finance in all its guises. It's easy to read, and lovely to dip into as the mood strikes.
Want to Read
June 15, 2013ok
September 12, 2014
Nice collection of useful empirical finance literature.
Negative: most already often covered on popular value investing media.
Negative: most already often covered on popular value investing media.
November 30, 2014
Read it as part of my curriculum
Displaying 1 - 10 of 10 reviews