Dan Ariely’s book Predictibly Irrational is good. There’s a new edition out. And I’ve heard good things about Terry Burham’s Mean Markets and Lizard Brains, but I must admit I haven’t read it yet.

And a good book on how we’re not nearly as bright as we think we are is Daniel Gilbert’s Stumbling on Happiness.

It’s good to see you here. My recommendation is Shiller’s Irrational Exuberance.

Rob

Do you have any recommended reading on the topic of behavioral finance?

I remember reading a book on behavioral finance that pointed to the phenomenon of risk aversion (most of us are less willing to accept losses than we are excited about enjoying gains). The book argued that this meant that most people went with stock allocations that are lower than what is ideal. Unfortunately, the argument was being made during the years of insanely high stock prices, a time when millions of us were going with stock allocations that were two or three times what the historical stock-return data indicated were reasonable at those price levels. Risk aversion is real. But it is something that we focus on at times when we are trying desperately to rationalize taking on excessive risk.

The good news is that our understanding of the extent to which we permit emotion to influence our spending and saving and investing decisions is so minimal today that the gains we can make by turning our attention to these questions is breathtaking. I believe that learning a little about behavioral finance will permit us all to retire five or ten years sooner than is possible given the state of knowledge of personal finance topics today.

Rob

I believe most people fail at personal finance, because they neglect to train their emotions and thoughts.