This book will help you understand how your brain: processes randomness; overlooks evidence that is inapposite to prior beliefs; selectively perceives and reinterprets data; and engages in selective recall. It's how we all create an artificial story line to help make sense of otherwise incomprehensible data.
Once you finish this book, you will never look at investing the same way.
Note: This is purely psychology writing; If you prefer a more specific investing-related analysis, consider
Why Smart People Make Big Money Mistakes and How To Correct Them: Lessons From The New Science Of Behavioral Economics
by the same author (with Gary Belsky).
Hard-core fans of cognitive biases and economic anomalies (and other similar type of analyses) will also appreciate Richard H. Thaler's
The Winner's Curse
. Thaler is one of the most influential researchers in the field of behavioral economics.
If you want to see how cognitive and reasoning deficits manifest themselves, then the seminal book on the subject is
Extraordinary Popular Delusions & the Madness of Crowds
by Charles Mackay. There have been a lot more booms and busts then you imagine. This book details how they came about and their impact throughout history. Fascinating and instructive stuff.
Once you understand how our brains fool us into occasionally doing idiotic things -- funny, but it seemed perfectly reasonable at the time -- then you can start looking for ways to avoid making those gaffes. Humphrey Neill's
The Art of Contrary Thinking
will show you the way. He explains why "When everyone thinks alike, everyone is wrong." This intriguing thesis applies not only to markets, but to politics, academia, even sports.
What if human nature can never learn from its mistakes? What if we are doomed to repeat the aforementioned cognitive, reasoning and behavioral defects over and again? That provocative thesis is put forth by Robert R. Prechter in
. This is the book that explains why our own nature leads to history repeating so often.
A few caveats: I am not a devotee of Elliot Wave theory (Prechter's school of choice). Further, I hasten to add that many of Prechter's market calls have left much to be desired. However, his overarching perspective of human nature, and of history's cyclical tendencies, makes for utterly fascinating reading. Even though I found myself arguing with many of the premises in the book, I enjoyed this thoroughly. The cycle geeks out there will too.
In part 2 of the series we'll look at books focused on economics, Wall Street, technical analysis, fundamentals, shorting, and miscellany.