A few people have asked me over the past couple of weeks to share some of my favorite books outside of finance that are applicable to investing. The majority of these books are based on psychology because it plays such an important role in making better investment decisions. Here’s my list:
Mindless Eating: Why We Eat More Than We Think by Brian Wansink
The analogy between your finances and losing weight has been used over and over again throughout the years. It’s a useful analogy because the decisions in both activities are mainly affected by people’s behavior (or a lack of behavioral change). A couple of my favorites stats from this book: (1) People make an average of over 200 food-related decisions each day and (2) It’s estimated that 95% of all people who lose weight on a diet gain it all back.
Influence: The Psychology of Persuasion by Robert Cialdini
This one has been recommended by Charlie Munger on a number of occasions so I finally read it this year. It’s one of the best psychology books I’ve ever read. This book really helps you step into the shoes of the mind of a marketer or sales-person trying to get you interested in their product. These people are masters at getting into people’s heads to get them to act. Cialdini also touches on the social proof theory, which states that most people look to see what others are doing to figure out acceptable behavior.
The Signal and The Noise: Why So Many Predictions Fail But Some Don’t by Nate Silver
Forecasting is something investors are forced put up with on a daily basis. Silver does a great job of explaining how hard it truly is and what to look for in both good and bad forecasters alike. I love the parts in this book about forecasting the weather as it shows meteorologists are just as bad at economist at forecating what’s going to happen. A couple of my favorite stats from this one: (1) The government produces data on literally 45,000 economic indicators each year and (2) The Survey of Professional Forecasters gave a 1-in-500 chance of the economy shrinking by at least 2% in 2008, which it did.
The Science of Fear: How the Culture of Fear Manipulates Your Brain by Dan Gardner
Humans have a very difficult time assessing and reacting to risk because of the way we’re wired. In general, people tend to focus on low probability events that they have no control over and ignore much larger risks that they actually have some control over. This book does a wonderful job of putting risk into the correct context. Gardner spends a lot of time discussing how we prefer emotional stories to accurate data and how that affects our decisions.
Why Don’t We Learn From History by B.H. Liddell Hart
This one focuses on the history of war and battle strategy and the many mistakes that have been made. It also includes many useful lessons from philosophy and human psychology. See my prior write-up here.
Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely
Ariely is one of my favorites when it comes to dreaming up new and interesting ways to test out incentives and see how people will react to them. It’s amazing how minor tweaks and changes can affect our behavioral patterns and almost force us into making poor decisions.
How to Lie With Statistics by Darrell Huff
First published in 1954, you would think you’re reading a how-to book written by Wall Street, fear-mongering bloggers or the financial media about using graphs, charts, averages and other statistics to alter people’s perceptions on certain pieces of information. This is a really short book, but it’s well worth your time to put numbers into the correct context in any field. My favorite line from the book about how people lie with statistics was, “If you can’t prove what you want to prove, demonstrate something else and pretend that they are the same thing.”
Huff also gives 5 ways to talk back to a statistic to keep your self honest: (1) Who says so? (2) How does he know? (3) What’s missing? (4) Did somebody change the subject? (5) Does is make sense?
Feel free to leave any of your favorites in the comments as I’m always looking for new reading material.
An Investing Master’s Degree in History and Math
Moneyball is up there in terms of non-investing books about investing. Also, the entire freakonomics series.
Good call. Moneyball definitely has a ton of parallels to value investing. I’m a fan of the freakonomics series too, but still have to read the latest. Thanks.
Thinking Fast and Slow by Daniel Kahnemann is a must read to understand how we make decisions.
Absolutely. Great call. Should have been on the list.
Great list. One I would add is The Success Equation by Mauboussin. It does touch upon investing but is much more general than that and is an absolutely fantastic “quick read”.
Yes good call. Mauboussin is one of my favorites. If you haven’t yet, make sure to check out his earlier books: The More You Know and Think Twice.
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