The Psychology of Finance (Wiley Trading) Book

Don't let the dire name of this book put you off. The author's entertaining, sometimes humorous style provides easy access to a complicated subject. In fact, the book could lull you into believing that you actually understand the markets well enough to make a killing. We all know that greed and fear drives the market, here Lars Tvede peels the onion to give more insight about how human instincts propel markets. The first stage of the journey is to the rational world, where analysts undertake to understand the fundamental truths about securities, currencies or other tradable items. Naive investors believe that a company's prospects alone drive the market and investors need only seek out "true value". Tvede says, "the worst problem faced in the hunt for the true value is not that constructing the right economic forecasting model is difficult ... The worst problem is that the better the economic simulation models describe the actual dynamics of the world, the more chaotic their behaviour becomes."The second stage of the journey shows that while sharp-pencilled advisors may recognise the fundamentals, the canny investor will understand how other investors are likely to react to these fundamentals. This is where the book take a step into the human mind. Because there is much irrationality in the markets, Tvede throws in a dash of chaos theory, describing the butterfly effect about "how a little old lady selling a few bonds in Brussels could cause a crash in Japan!" Finally, he closes in on why charts capture human nature, real economic events and chaos, and how to trade using them. He warns: "One of the most popular rules for the moving average is simply to select a specific average and then buy every time the price breaks about the average and sell every time it breaks below. The best thing to do with this rule is forget it: it doesn't work."In a detailed, yet not overbearing fashion, Tvede, a former derivatives trader, portfolio manager and investment banker, provides fascinating insights into what drives investors who drive the markets. --Bruce McWilliamsRead More