Snipped from The Sceptical Investor...
My BOOK, The Sceptical Investor, is now out, writes John Stepek, executive editor of MoneyWeek, in his free daily investment email Money Morning.
It's all about contrarian investing. Or as I've slightly cheekily rebranded it, sceptical investing.
The book is aimed at all levels of investor. Beginners should find it an approachable and realistic guide to the challenges investors face. But I reckon that even experienced investors should pick up some points to chew over or practical tips they hadn't considered.
If you're already sold on the idea, then please do feel very free to make an impulse purchase.
Meanwhile, below we have an exclusive extract for Money Morning – it's from Chapter 6, entitled "Beating your brain: Process versus outcome"...
When I was studying psychology at university back in the 1990s, one book in particular caught my imagination, principally because it was short and I was lazy.
It's called Three Psychologies: Perspectives from Freud, Skinner and Rogers by Robert D.Nye, and I'd highly recommend it. It's an excellent bluffers' guide to some of the most important theories in psychology.
It takes Sigmund Freud, Carl Rogers, and B.F.Skinner and looks at their own individual models of the world (broadly speaking, one pessimistic, one optimistic and one neutral), how they explained human behaviour, and their influence on our understanding of personality.
Freud was great at describing our inner world, with a poetic, if fatalistic, view of human nature. His idea that our conscious mind (the "ego") is the product of a raging war between our instincts (the "id") and our conscience and society's expectations (the "superego") is elegant and evocative.
But Freud wasn't great at explaining how to reconcile this turbulent, Jekyll-and-Hyde netherworld with the mundane demands of everyday life.
Rogers had a far more optimistic view of human nature, which by temperament appealed to me more. His view was that progress, fulfilment and happiness – "self-actualisation" – were possible, and that, once our basic physical needs are met, we all just want to be loved and accepted and given the opportunity to become the best version of ourselves that we can be.
But his theory lacked Freud's compelling darkness, and it also inspired a lot of the flakier type of self-help book.
The driest of the three was Burrhus Frederic Skinner (more frequently known as B.F.Skinner). But as I've got older, he's also the one I have the most time for.
Skinner believed that our behaviour was largely dictated by our environment, and our experiences of interacting with the world. Put simply, Skinner didn't see us as being much different to trained animals – positive reinforcement (good things happening) would make us repeat an action. Negative reinforcement (bad things happening) would put us off doing something.
On the face of it, it's a heartless, reductive view of humanity. Both the passion of Freud and the optimism of Rogers are more inspiring. And Skinner's theory was undoubtedly over-simplistic – like most of us, he saw his own world view as an all-encompassing "theory of everything" rather than a clever model with a wide range of useful applications.
Skinner placed too much importance on learned behaviour and the external environment, and not enough on genetic differences and our interior world (in the "nature vs nurture" debate, he's very much on the side of "nurture").
However, Skinner's great strength is that his theory lends itself to practical solutions to cognitive problems. Present a psychological problem to Freud, and he'd have you lie on the couch, raking over some repressed childhood trauma over and over again, until you reached "catharsis" and your troubles miraculously vanished.
Skinner was more interested in how to alter an individual's environment in order to change their behaviour, and thus make their life easier.
Take one minor example from his own life: as with many of us, Skinner found that as he got older, he often forgot to take his umbrella outdoors with him, even if the weather forecast was predicting showers later that day.
So he simply trained himself to hang his umbrella on the door handle as soon as he heard a forecast for rain. He didn't spend lots of time worrying about the cause – he just found a solution.
Why does all of this matter? Because while resisting the desire to run with the crowd is a big part of being a successful sceptical investor, it's not sufficient by itself. You also need to avoid falling prey to the tripwires in your own mind, of which there are plenty.
We'll be delving into some of the psychological quirks that make human beings entirely unsuited to the world of investment in more detail. But rather than spend too much time agonising about why this is, I want to focus on how you can tame your brain and control your environment – and help your mind to work with you, rather than against you.
Because being aware of your behavioural quirks, and knowing how to bypass them, are two very different things.