Behavior Gap: The psychology of investing
At Behavior Gap, Carl Richards is on a mission to help investors overcome the self-destructive behaviors that prevent them from prospering. Over the past week, while preparing for an upcoming presentation to a conference of financial planners, I've had the chance to e-mail and speak with Carl about his site and his goals. “Any way we can encourage people to think about money is good,” he told me. He wants people to become aware of how their behavior affects their financial position.
The classic example — and the source of his blog's name — is the “behavior gap”. “In general, we're bad investors,” says Carl. “We tend to buy high, sell low. This behavior creates a gap between investment returns and investor returns.”
Here's how Carl describes the behavior gap visually:
Carl believes that investment success isn't about skill, but about behavior. To the extent that you can control your emotional and psychological involvement with the process, you'll outperform your peers. That's not to say that you should be a cold mechanical machine with money. But that you should be aware of when you're making decisions based on irrational exuberance (or irrational fear) instead of financial best practices.
Behavior Gap includes great articles like these:
- The Great Reset, in which Carl argues that it's not a bad thing that consumers are saving more while spending less.
- Average is Not Normal, which explains why the market rarely returns the annual average.
- The Wealth-Management Paradox: Real people don't care about their returns; they care about the wealth they have available to fund their goals. (Also part two.)
- Media Fast, in which Carl argues that it pays to ignore financial news.
In addition to insightful articles and the occasional slideshow, Behavior Gap offers a nascent collection of sketches about behavioral finance. More impressive, the site boasts several “white papers”, short PDF ebooks on important topics such as:
- The Behavior Gap — “Your investing behavior matters.”
- The Family CFO — “When was the last time you examined your finances?”
- Investing Like an Adult — “Sometimes it is easier to complain about the market than to take the time to understand it, because it allows us to place blame on something or someone else.”
- A Manual for Scary Markets — “It's perfectly normal to feel nervous in a scary market. It's part of being human.”
It's rare that I find a site that completely enthralls me. Behavior Gap is one of them. After sharing ideas with Carl, I'm confident I'll be linking to his blog often in the future.