The Behavioral Investor summary

If you study the stock market in relation to the weather, you’ll notice something strange: all around the world, people invest more in spring and summer. This behavior echoes that of our ancestors, who stockpiled food in warm seasons so they wouldn’t starve in winter.

Another interesting observation is that most markets have low returns on cloudy days. Scientists believe that this is because we aren’t as happy when it’s gloomy outside. That sadness makes us feel more vulnerable, so we’re less likely to take a gamble.

Imagine where we’d be without confidence. There’d be no scientific discoveries, innovative businesses, or countless other wonders of the modern world. 

But while our human tendency to be optimistic about our circumstances can fuel a positive mind-set, it can also go too far. That’s when overconfidence leads to destructive, ego-driven behavior.

Many people consider the Mona Lisa to be the pinnacle of artistic excellence. So, it may surprise you to learn that the painting was relatively unknown until 1911 when it was stolen from the Louvre.

For two days, no one even noticed it was missing from the museum. But newspaper articles about the theft created a media sensation. Two years later, when the painting was finally recovered, people flocked to see it. So, it was the painting’s scandalous story, not its artistic merit, that made it so popular.

In the 1690s, colonial Massachusetts was gripped by a fear of witches. Women accused of witchcraft were tried according to a ludicrous procedure. If a woman floated when thrown in deep water, she was convicted of witchcraft and sentenced to death. If she drowned, she was deemed innocent. So, regardless of the verdict, the accused would always die.

Why did the panicking residents fail to see the absurdity of the witch trials? Well, as humans, our attention is always drawn to situations that are high risk but low probability – in other words, those that whip our emotions into a frenzy. This attentional bias makes us fixate on limited information, ignoring other relevant data. 

How many emotions do you think a human being can experience?

Seventeenth-century French natural scientist René Descartes believed we had just six core emotions. But modern scientists take a different view. Dr. Watt Smith, author of The Book of Human Emotions: An Encyclopedia of Feeling from Anger to Wanderlust, has identified over 150 different emotions. What’s more, these emotions can combine to create complex secondary feelings like nostalgia, which blends longing and sadness with joy.

Your brain is a data-processing powerhouse. In fact, it can process over eleven million bits of data at any given time. And yet only around 50 of these bits become conscious thoughts. That means the vast majority of your brain’s processing power is dedicated to your subconscious mind.

When you consider how little processing power our brain dedicates to conscious decisions, it’s not surprising that many investors believe in trusting their gut instincts. But this is not a reliable investment strategy. 

During the dot.com boom, investors went internet-mad, buying up shares in companies with tech-sounding names. This led to some hilarious scenarios, like the share price for Mannatech Inc. skyrocketing by 368 percent in the first two days of its public offering. No one realized that Mannatech had nothing to do with the internet. It manufactured laxatives. 

Bubbles like the dot.com boom are a bit like falling in love. We become infatuated with an idea – such as the notion that every tech company will make us rich. We also get so caught up in our romance that we ignore all the warning signs. Eventually, reality sets in, the bubble bursts, and we have to pick up the pieces.