Saturday, February 27, 2021

Behavioral finance literature as highbrow self-help books - So what?


It is a secret pleasure. I read self-help books. Now, I want to win friends and influence people, so I won't admit this at a cocktail party or preach how others can get better on a range of activities. Self-help works, sort of. I read my new self-help material and change for a while, but then I get back into some old habits until the next article or book. The behavior change was not hard-wired. 

Behavioral finance and decision biases books can be a form of self-help - a form of high-brow self-help. Most of the articles will focus on some bad cognitive activity which harms rational behavior. They will offer a description and an explanation for its existence. The research may also offer a solution for avoiding the problem. 

They tell us why we will go to perdition if we continue down this path. We are then shown how so many engage in this bad activity and then told how there are real costs. If it is a dry academic piece, the focus will be focused on description and measurement. If it is a practitioner's journey, there will be offers of how this activity can be stopped and how life will be better through just following a different direction.

After an investor hears about the solution to this behavioral bias, he is supposed to change his irrational ways never to go down this path to ruin only to find that like a new year's resolution, the backslide will occur in weeks or months. Another article will be published discussing another bias and the process of self-help will begin again. There is  a repetitive process of new knowledge or a review of old concepts coupled with a solution followed by a swearing never to engage in such activities only to see backsliding. Perhaps there is some improvement, and a few biases are fundamentally changed but human nature is usually faced with  lack of discipline. That is why many need trainers for exercise, coaches for skill development, and teachers for overseeing activities.

The solution is clear good behavior has to be hard-wired through rules. The key advantage of systematic investing is hard-wiring good behavior. Predictive models may come and go but structuring good behavior will always provide gains.

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