INVESTOR PSYCHOLOGY

“Just as a man working with a tool has to know its limitations, a man working with his cognitive apparatus has to know its limitations.” Charlie Munger

“Eighty percent of the market is psychology. Investors whose actions are dominated by their emotions are most likely to get into trouble." Adam Smith, The Money Game

"It is more especially with respect to those unconscious elements which constitute the genius of a race that all individuals belonging to it resemble each other, while it is principally in respect to the conscious elements of their character - the fruits of education, and yet more of exceptional hereditary conditions - that they differ from each other. Men the most unlike in the matter of their intelligence possess instincts, passions, and feelings that are very similar." Gustav LeBon 1895

“We must recognize that the psychology of the speculator militates strongly against his success. For, by relation of cause and effect, he is most optimistic when prices are highest and most despondent when they are at bottom.” Ben Graham, 1934

“Evidently the processes by which the securities market arrives at its appraisals are frequently illogical and erroneous. These processes are not automatic or mechanical but psychological, for they go on in the minds of people who buy and sell.” Graham & Dodd

"Before you begin studying companies for investment, study yourself." Roy Neuberger

“It’s not an exact science, it’s really trying to understand human nature and probably the most important person you want to understand is yourself, so usually we’re the one that put the barriers in front of rationality.” Francois Rochon

“One of the great things is to understand ourselves, and without that, we’re really in trouble.” Howard Marks

“Perhaps the most important learning for every investor is to figure out what psychological type they are.” Nick Train

"Study the psychology of the stock market as well as the elements of real value." Philip Carret

“Another crucial skill in successful investing—understanding investor psychology, both your own and that of others.” Steve Romick

“Take all the main models from psychology and use them as a checklist in reviewing outcomes in complex systems.” Charlie Munger

"The psychological factors that weigh on other investor's minds and influence their actions will weigh on yours as well. These forces tend to cause people to do the opposite of what a superior investor must do. For self-protection, then, you must invest the time and energy to understand market psychology." Howard Marks

"Is there, then, any area outside of such already recognised influences as business management, variations in interest rates and changes in such legislative fields as taxation, to which investors will be paying increasing heed? I believe there is. For lack of a better term I will call it the psychological factors affecting security prices." Phil Fisher 1960

"Psychology plays a major role in markets, and because it's highly variable, cause-and-effect relationships aren't reliable. An investment approach may work for a while but eventually the actions it calls for will change the environment, meaning a new approach is needed." Howard Marks

"Markets affect investor psychology, but investor psychology also affects markets." Leon Levy

"I think it's [investing] an art. There's a lot of psychology and emotion involved." Lou Simpson

"Psychological influences are a dominating factor governing investor behaviour. They matter as much as—and at times more than— underlying value in determining securities prices." Seth Klarman

"Don't underestimate the importance of psychology in the stock market. Many factors go into the buy or sell decision besides economic statistics or security analysis." Roy Neuberger

"Changes in mass psychology and in how the financial community as a whole decided to appraise the outlook either for business in general or for a particular stock can have overriding importance." Phil Fisher

“In order to be successful, an investor has to understand not just finance, accounting and economics, but also psychology.” Howard Marks

“If you totally divorce economics from psychology, you’ve gone a long way toward divorcing it from reality.” Charlie Munger

"To be a successful investor, you really need to understand psychology as well as history and philosophy." Jim Rogers

"Because sound decision making is heavily influenced by psychology, having a good grasp of the subject is vital to investment success." Allan Mecham

“My checklist is .. Is it cheap? Is it a good business? Who is running it? What did I miss? I go through all the checklist. When I go to ‘what did I miss?', it is hugely important to understand psychology and human cognition.” Li Lu

"It is important to gauge the psychology of other investors. How far along is the current trend?, what are the forces driving it? and how much further may it have to go?" Seth Klarman

“The main threats to persistent performance are all character related and lie strictly speaking outside the domain of fund management.” Paul Marshall

“When you get into psychology, of course, it gets very much more complicated. But it’s an ungodly important subject if you are going to have any worldly wisdom.” Charlie Munger

“Study successful investors, and you’ll notice a common denominator: they are masters of psychology. They can’t control the market, but they have complete control over the grey matter between their ears.” Morgan Housel

“The discipline which is most important in investing is not accounting or economics, but psychology.” Howard Marks

"Psychology is probably the most important factor in the market – and one that is least understood." David Dreman

"Understanding how our brains work - our limitations, endless mental short cuts and deeply ingrained biases - is one of the keys to successful investing." Seth Klarman

"Day-to-day market prices can tell you as much, if not more, about market buyers and sellers than about underlying values. Over my career, it is clear that an understanding of psychology has been as important as a degree in accounting.” Bruce Berkowitz

"Stock prices move around quite a bit more than the movement in underlying intrinsic value. Human psychology affects the buying and selling of fractions of businesses on the stock market much more than the buying and selling of entire businesses." Mohnish Pabrai

“Mood or investor psychology is as important to markets as is information.” Leon Levy

“An important part of investing in public markets is understanding the psychology of the market.” David Abrams

“Investing lies at the intersection of economics and psychology, the place where net present value meets greed and fear." Seth Klarman

"The investment business is one part having the right underlying philosophy, one part doing great research and analytical work, and one part a game, where you have to understand the mindset, psychology and emotions of people on the other side of the trade." Ricky Sandler

“The most challenging part of investing is psychological. Market fluctuations often stimulate strong feelings of, yes, greed and fear. Money is a fraught topic. Whether you are investing your own savings, overseeing a large endowment, or managing a hedge fund, you must grapple with not only your own state of mind but also that of your family members, other community constituents (e.g., faculty, alumni, boards), and clients.” David Abrams

“Investing in public companies can be psychologically draining. Share prices change minute by minute or even second by second, usually influenced by factors other than what is fundamentally happening inside the company.” Scott Miller

"Constant alertness, as to whether current mass psychology may be out of step with fundamentals and as to how long such a trend may continue, can help enormously in determining when to buy into an outstanding company." Phil Fisher

“I have had the privilege of talking to some of the leading psychologists studying market decision-making. Although they have provided outstanding research identifying many behavioural errors, they have yet fully recognised just how lethal these psychological pitfalls are for investors.” David Dreman

“Recognize that psychology swings much more than fundamentals, and usually in the wrong direction or at the wrong time. Understand the importance of resisting those swings.” Howard Marks

“Focussing on the quantitative is never enough. One must also have been able to integrate the soft sciences of individual and social psychology; the qualitative.” Frank Martin

"The psychology of misjudgement is every bit as valuable as the thoughtful analysis of a balance sheet. Possibly more so." Robert Hagstrom

"To ignore the psychological component of the flux of the markets is to miss seeing the elephant in the room. Psychology plays a role in all events in the market, from the actions of the day trader riding the momentum of Internet stocks to the broad shifts that become obvious and undeniable only over time." Leon Levy

"I came to the psychology of human misjudgement almost against my will; I rejected it until I realised that my attitude was costing me a lot of money." Charlie Munger

"Pundits often speak of the psychology of markets, but in investing it is one's own psychology that can be most dangerous and tenuous." Seth Klarman

"It is crucially important not to let psychological factors interfere with economic rationality in investment decision making." Bill Ackman

"Investing is as much a psychological as an economic act." Leon Levy

“Your biggest barrier is going to be behavioural, it’s going to be psychological. Do you have the fortitude to think rationally when others are not?” CT Fitzpatrick

"The psychologist far more than the economist may be of help in deciding when to buy." Phil Fisher

"The greatest mistakes investors make are not logical but psychological. They neglect simple analytical disciplines that would protect themselves from their emotions." Andy Redleaf

"At the heart of Marathon's Capital Cycle approach is the importance of behavioural factors among investors and the interaction of investor psychology, management action and business returns." Marathon Asset Management

"You must be aware of what's going on around you in terms of investor psychology." Howard Marks

“I needed to understand psychology. I got very interested in neuroscience, artificial intelligence and all of that, all related to decision making.” Ray Dalio

"The most useful and practical part of psychology—which I personally think can be taught to any intelligent person in a week—is ungodly important. And nobody taught it to me by the way. I had to learn it later in life, one piece at a time. And it was fairly laborious. It's so elementary though that, when it was all over, I felt like a fool. And yeah, I'd been educated at Cal Tech and the Harvard Law School and so forth. So very eminent places miseducated people like you and me. The elementary part of psychology—the psychology of misjudgment, as I call it—is a terribly important thing to learn. There are about 20 little principles. And they interact, so it gets slightly complicated. But the guts of it is unbelievably important. Terribly smart people make totally bonkers mistakes by failing to pay heed to it. In fact, I've done it several times during the last two or three years in a very important way." Charlie Munger

"Most people believe that markets are driven primarily by economic factors, and that psychology plays a minor role. I take the position that markets are driven by both psychological and economic factors. I owe a great debt to economists for their inability to acknowledge the degree to which psychology moves markets." Leon Levy

"This business is largely about psychology. If you're down a huge amount, you're not thinking straight. If the markets do something that completely surprises you, you can be a deer in the headlights. It's a huge benefit to not have your own psychology get interrupted." Seth Klarman

"Temperament is all important. I mean, if you can’t control yourself, no matter what the intellect you bring to the process, you know, you’re going to have disasters." Warren Buffett

“When push comes to shove, what you’re always going to be fighting is yourself. Panicking, overreacting, under-reacting, refusing to observe the present, living too much in the past, wanting too much to believe in the future. So, it’s all psychological traps, because the data is there, if you want to observe.” Charmath Palihapitiya

“If you want to avoid irrationality, it helps to understand the quirks in your own mental wiring and then you can take appropriate precautions.” Charlie Munger

"The power of psychological influences must never be underestimated. Greed, fear, suspension of disbelief, conformation, envy, ego and capitulation are all part of human nature, and their ability to compel action is profound, especially when they're at extremes and shared by the herd." Howard Marks

"Recognising the psychology of market extremes can lead to attractive points of entry." Sam Zell

"We simply think an attempt at understanding the psychology of the marketplace will give us a competitive edge.” Frank Martin

"The most enduring advantages are psychological. And the trick here is to first understand them. And then train yourself out of them!" Nick Sleep

"It is far safer to project a continuation of the psychological reactions of investors than it is to project the visibility of the companies themselves." David Dreman

"Investor psychology can cause a security to be priced just about anywhere in the short run, regardless of fundamentals." Howard Marks

"Of all the models that people ought to have in useful form and don't perhaps the most important lie in the area of psychology." Charlie Munger

“Successful investing is all about behaviour and psychology. You can have the best model or analysis in the world but if you panic, you lose. Said differently, everybody has a plan until they get punched in the face. The most important thing you can do to maximise the odds of success is figure out what, if any, behavioural advantages you have or can create for yourself. What rules can you live by that will prevent you from doing something stupid especially when everyone is losing their mind?” Chamath Palihapitiya

“Confucius said, ‘real knowledge is to know the extent of one’s ignorance.’” I think it’s a nice bookend to Buffett’s idea of Circle of Competence. I think investors often work on the Circle of Competence piece but spend little time on mastering themselves… If you are looking to improve your investing batting average, rigorous scrutiny of what makes you tick is a great place to start.” Jake Rosser

"A very significant part of my philosophy has to do with managing your psychology. Markets are about the psychology of others. When are they panicking? When are they greedy? But you have those same flaws or those same potential flaws, and managing your portfolio in a way that doesn't leave you where you're panicking or overexposed to greed. If you can rule those extremes out, you'll navigate the markets well." Seth Klarman

Further Reading:
‘The Munger Series - Learning from Robert Cialdini,’ Investment Masters Class. 2018.
‘Learning from Robert Cialdini - Part II,’ Investment Masters Class, 2018.
‘Learning From Robert Cialdini - Part III,’ Investment Masters Class. 2018.