Behavioral Finance and Psychology in Investing: The Human Side of Wealth Creation

Today I want to share something I genuinely enjoy and honestly, something far more important than endlessly crunching numbers or tweaking valuation models. Investing isn’t won on spreadsheets alone. P/E ratios, discounted cash flows, and balance sheets matter, but they don’t explain why markets panic, overshoot, or stay irrational far longer than they should. That part is human.

Remember John Maynard Keynes' most famous quote on market irrationality , "Markets can remain irrational longer than you can remain solvent," highlighting that speculative bubbles or crashes can persist far beyond what logic dictates and emphasizes the unpredictable nature of financial markets and the risks of betting against them, even when you believe they are mis-priced or irrational.

At its core, investing is about people. Markets are a giant arena of emotions : fear, greed, overconfidence, and herd behavior playing out in real time. For value investors, this is not noise to ignore; it’s the source of opportunity. Mispricing exists precisely because humans are emotional and biased, not because spreadsheets are wrong.

That’s why understanding behavior is just as important as understanding fundamentals. If you can stay rational when others aren’t, patient when others chase momentum, and disciplined when narratives get loud, you already have an edge.

In this blog post , I want to explore the ideas of five giants in behavioral economics—Daniel Kahneman, Richard Thaler, Dan Ariely, Herbert Simon, and Robert Shiller , alongside Charlie Munger’s latticework of mental models. My hope is that this sparks a deeper interest in behavioral finance, because this is where value investing truly meets the messy, fascinating reality of the human mind.

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Daniel Kahneman: The Prospect of Losses and Gains

Let’s kick things off with Daniel Kahneman, the Nobel Prize-winning psychologist who turned the investing world upside down with his prospect theory. Kahneman, alongside his late collaborator Amos Tversky, showed that people don’t think like cold, rational calculators when it comes to money. Instead, we’re wired to feel the sting of losses way more than the joy of gains ,about twice as much, to be exact. This is called loss aversion, and it’s why you might panic-sell your stocks during a market dip, even when holding on makes more sense.

Kahneman’s prospect theory shows we hate losses about twice as much as we love gains and in his quote, “Losses loom larger than gains,” nails it. In investing, this makes us cling to losing stocks, hoping they’ll rebound, or panic-sell during crashes. With our passed experience, where FOMO runs wild, loss aversion can trap us in bad bets or make us shy away from smart risks. The fix? Set clear rules, review the business and fundamental if you want to DCA into lost making stocks, don't keep averaging down thinking that the price already dropped a lot and cheap. Remember,low can become lower and don't let the emotions to call the shots. 

Next ,let’s talk about survivorship bias, a sneaky trap in investing. This bias happens when we focus only on the winners : stocks, funds, or companies that made it big, while ignoring the losers that crashed and burned. As Daniel Kahneman might say, “We’re wired to see patterns in success, not failure.” Imagine you’re eyeing tech & AI stocks because giants like Apple or Nvidia dominate headlines. But for every Nvidia or Apple, countless startups went bust, invisible in the rearview mirror. Survivorship bias fools us into thinking success is more common than it is, leading to overconfidence. In Singapore’s hot investment scene, we might chase “proven” funds or hot stocks, ignoring those that folded or lagged behind. To beat this, dig deeper , look at the whole picture, not just the survivors. Study failed investments and learn why they tanked. It’s like checking the graveyard before buying a house.

Kahneman’s famous quote sums it up: “The idea that we are rational in our choices is a myth.” In investing, this means we often make decisions based on fear or overconfidence rather than logic. Ever held onto a losing stock hoping it’ll “come back”? That’s the sunk cost fallacy, another Kahneman gem. His work teaches us to recognize these cognitive biases ,like anchoring, where we fixate on irrelevant numbers, or over optimism, where we think we’re smarter than the market. As investors, Kahneman’s insights push us to pause, question our gut, and think twice before acting on impulse. Next time you’re tempted to chase a hot stock because “everyone’s buying,” remember Kahneman’s warning: our brains are wired to trick us.

Richard Thaler: Nudging Your Way to Better Decisions

Next up is Richard Thaler, another Nobel laureate who brought behavioral economics into the mainstream with his concept of “nudging.” Thaler’s big idea is that small tweaks in how choices are presented can lead to better financial decisions without forcing anyone’s hand. Think of it like setting your CPF contributions to auto-increase ( doing VC3A ) over time, you save more without even noticing. Same apply to Index Investing,when you set a "auto DCA " on monthly basis, you are buying into the market and not influenced by market volatility, good or bad time. Thaler’s quote, “People are not dumb, but they’re not as rational as economists thought,” hits the nail on the head.

In investing, Thaler’s work shines a light on why we make silly mistakes, like chasing trends or ignoring diversification. His book Nudge explains how we’re swayed by mental accounting—treating money differently based on where it comes from, like blowing a bonus on a fancy watch instead of investing it. Thaler also introduced the endowment effect, where we overvalue what we already own, like refusing to sell a stock just because it’s “ours.” For Singapore investors, Thaler’s nudge theory is a reminder to set up systems , like dollar-cost averaging into ETFs , that make disciplined investing effortless. By designing your environment to encourage smart choices, you can outsmart your own biases.

Dan Ariely: The Predictable Irrationality of Investors

If you’ve ever read Predictably Irrational, you know Dan Ariely has a knack for making behavioral economics fun and relatable. Ariely’s work shows that our irrational behaviors aren’t random , they’re predictable. As he puts it, “We are predictably irrational, and we can use this to our advantage.” In investing, this means understanding why we fall for traps like herd mentality or the illusion of control.

Take the 2021 GameStop frenzy, for example. Investors piled in because everyone else was, driven by what Ariely calls social proof. 

His research also highlights the pain of regret, which can paralyze us into inaction or push us to make reckless moves to “fix” past mistakes. Ariely’s advice? Embrace systems that counteract these tendencies, like setting strict rules for when to buy or sell. For us in Singapore, where FOMO (fear of missing out) can hit hard during property booms or crypto crazes, Ariely’s work is a wake-up call to stick to a plan and avoid getting swept up in the hype.

Herbert Simon: The Limits of Rationality

Herbert Simon, an early pioneer in behavioral economics, challenged the idea that humans are perfectly rational “economic men.” His concept of bounded rationality says we make decisions with limited information, time, and brainpower. As Simon famously said, “People satisfice rather than optimize.” In other words, we settle for “good enough” instead of chasing the absolute best outcome.

For investors, this is a game-changer. Simon’s work explains why we might pick a familiar stock like SIA, SingTel or DBS over a lesser-known but potentially better option—our brains can only handle so much.

It’s also why we rely on heuristics, or mental shortcuts, that can lead us astray. For instance, you might assume a company with a shiny brand is a safe bet, even if its fundamentals are shaky. Simon’s lesson for investors is to simplify without being simplistic. Use tools like robo-advisors or low-cost index funds to reduce decision overload, but don’t skip the homework entirely. By acknowledging our limits, we can make smarter, less stressful choices.

Robert Shiller: Emotions and Market Bubbles

Robert Shiller, another Nobel laureate, is the guy you call when you want to understand why markets go bonkers. His book Irrational Exuberance nailed the dot-com bubble and housing crisis, showing how emotions like greed and fear drive market cycles. Shiller’s quote, “Markets are driven by stories as much as by numbers,” is pure gold. He argues that narratives—like the crypto boom or AI / Tech fever—can inflate asset prices far beyond their true value.

Shiller’s work on heuristics, like the availability bias (overweighting recent or vivid events), explains why we panic during crashes or get euphoric during rallies. His research also highlights feedback loops, where rising prices fuel more buying, creating bubbles. For investors, Shiller’s insights are a reminder to stay grounded. When everyone’s talking about the “next big thing,” whether it’s AI, tech stocks or Crypto, take a step back and ask: is this a story or a solid investment? In the world's fast-paced market, Shiller’s work encourages us to focus on long-term value over short-term hype.

Charlie Munger’s Latticework: Connecting the Dots

Now, let’s talk about Charlie Munger, Warren Buffett’s right-hand man and a master of mental models. Munger’s latticework of mental models is about weaving insights from multiple disciplines—psychology, history, economics, even biology—to make better decisions. As he puts it, “You’ve got to have models in your head and you’ve got to array your experience on this latticework of models.” In investing, this means not just looking at numbers but understanding the broader context.

Munger’s approach draws heavily on behavioral economics. He’s a big fan of recognizing biases like confirmation bias (seeking info that supports your beliefs) or the authority bias (trusting “experts” blindly). His famous “circle of competence” concept urges investors to stick to what they know, avoiding the temptation to chase trends outside their expertise. For Singaporeans, where the pressure to “keep up” can lead to impulsive bets on hot sectors, Munger’s latticework is a call to build a robust framework for decision-making. Study history, learn from other fields, and always question your assumptions.

Final Thoughts: Investing with a Human Lens

So, what’s the big takeaway from these giants of behavioral finance and Munger’s wisdom? Investing isn’t just about math , it’s about mastering the human mind. Kahneman teaches us to watch for biases that cloud our judgment. Thaler shows us how to nudge ourselves toward better choices. Ariely reminds us that our irrationality is predictable, so we can plan for it. Simon highlights the limits of our decision-making, pushing us to simplify wisely. Shiller warns us about the stories that drive markets to extremes. And Munger? He ties it all together, urging us to think broadly and stay disciplined.

In Singapore’s high-stakes investing scene, where property, stocks, and crypto can feel like a rollercoaster, these lessons and understanding of human behavioral towards investing are utmost important. Build systems to counteract your biases, stick to what you know, and always question the hype. Investing is as much about understanding yourself as it is about understanding the market. So, next time you’re tempted to jump on the bandwagon or panic-sell, channel these thinkers and ask: what’s driving me right now , logic or emotion? Stay sharp, stay curious, and keep learning and thinking.

Cheers! till next time. 😄

大年初七,人日,祝大家生日快乐！健康長寿!马年马上發大財！Huat Ah !👏👏🎊😁

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