Rethink Risk, Outwit Optimism, and Seize Opportunities Others Miss

A Conversation with Bob Koppel

Investing is fraught with uncertainty which gives rise to psychological issues that investors ignore at their peril. Awareness of these sometimes subconscious influences and understanding how they impact decision-making can improve performance.  Bob Koppel has written a fascinating, entertaining, and comprehensive examination of this multi-faceted area of inquiry, including the very latest research results. If you invest for a living, or even if you're just a student of the psychology of self, you will find beneficial insights in the pages of this book.
---Thomas Shanks, President and CEO, Hawksbill Capital Management

Investing and the Irrational Mind explores the crucial role psychology plays in economic decisions. We want to hear what strikes you as a particularly notable example, pulled from the news cycle, and what revelations you had about investing as you were writing the book.

Over the course of my career, I have witnessed some spectacular financial failures including the recent crisis, whose aftereffects are still blighting the lives of millions of Americans. It is important to remember that the meltdown didn't just happen.  It was made possible by investors, bankers, regulators and, yes, economists. What is to blame is a flawed understanding of finance, and those mysterious unconscious forces—emotions, social norms, delusional expectations, and greed—that shape the way we make economic decisions.

What is your particular vantage point when writing and speaking about these issues?

As a former exchange member, hedge fund principal, behavioral finance expert, and veteran author, I have a unique perspective on how our brain's hardwiring predisposes us to errors in judgment. Aggravated by emotional triggers, the mind's natural response to uncertainty is irrational and, what's worse, hazardous to our economic health. Irrationality means poor decisions, systematic errors, market inefficiencies, herd behavior, and "groupthink," the hasty, often detrimental collective decisions, which lead us, like lemmings, to inevitable bubbles and crashes.

Do you have a favorite anecdote that illustrates irrationality's role in investing and what investors can learn from your work?

When I was raising my family on Lake Shore Drive in Chicago, I shared a private elevator in my building with a surgeon who lived in the same tier. Most days we would meet in or near the elevator by chance. I would be going off to or returning from the exchange; he would be doing the same from the hospital that he worked in. It was after a particularly hellish trading session that my neighbor asked if he could have a word with me.

He told me how interested he had recently become in the stock market and that, whenever he was free, he turned on the financial news or took a sneak peek at CNBC in between operations. I listened, not saying a word. "Could you teach me how to trade?" he asked, adding matter-of-factly that he was free all of next Saturday morning. "Sure," I said, indicating how pleased I was that he had approached me because I too had an interest that I was hoping to pursue. "What is it?" he asked. I said, with restrained sarcasm, that I had recently seen an old Dr. Kildare movie on the classic film channel that had revived my lifelong interest in medicine. I then told him I was free Saturday afternoon and wondered if he could teach me everything I would have to know to perform surgery.

Drawing on my experience and the latest research from economics, psychology, and neuroscience, I have sought to answer, in my presentations and books, the surgeon's question and the fundamental challenge to every investor: how to overcome irrationality in our financial decisions.

"Koppel has written a book that marries tried and true principles of sound investing with the latest findings in the fascinating fields of behavioral economics and neuroeconomics.  It is an entertaining read with amusing anecdotes from Koppel's decades on the trading floor. All investors, including private equity investors in illiquid assets, will benefit from its insights."
---Mox Tan, Managing Director, Juno Investments LLC.