Some of the links on our website are sponsored, and wemay earn money when you make a purchase or sign-upafter clicking. Learn more about how we make money.
Famed investor Charlie Munger has said, “You can learn to make fewer mistakes than other people — and how to fix your mistakes faster when you do make them.”
That quote summarizes why it’s important for anyone who invests to study behavioral finance and investment psychology: learning how people act in financial markets, including yourself, gives you valuable insights that can help you make better decisions.
That’s why this post will focus exclusively on books about behavioral finance to help us make fewer mistakes when it comes to investing, managing and spending our hard-earned money.
The Best Behavioral Finance Books
#1. The Little Book of Behavioral Investing: How not to be your own worst enemy by James Montier
The Little Book series — which features classics like John Bogle’s The Little Book of Common Sense of Investing and Joel Greenblatt’s The Little Book that Beats the Market — gives us another gem in The Little Book of Behavioral Investing.
Successful portfolio manager James Montier gives readers an easy-to-understand guide to avoiding the most common mistakes in behavioral finance like bias, emotion, and overconfidence.
As with most books in the series, it’s easy to understand and the ideas are very actionable (or, in this case, unactionable).
It earns the top spot on this list because it’s a great book for starting out your journey into the world of behavioral finance.
#2. The Psychology of Money by Morgan Housel
Morgan Housel is a world-class storyteller with the ability to educate readers on complex concepts through entertaining narratives.
In The Psychology of Money, Housel offers 20 practical takeaways about our money mindsets and behavior.
What’s different about this book compared to many others on the list is that Housel isn’t focused solely on investing; there’s a lot of good information on all areas of personal finance management, such as spending and saving.
You can get a good sense of the book by reading Housel’s famous blog post of the same name, which went on to form the basis for the lessons in the book.
#3. Seeking Wisdom: From Darwin to Munger by Peter Bevelin
Charlie Munger credits his success to his multidisciplinary approach to investing. Munger not only takes the best concepts from his field of investing but he also uses the best concepts from fields like physics, psychology and mathematics.
Learn more: Charlie Munger on the important of mental modeling.
In Seeking Wisdom: From Darwin to Munger, author Peter Bevelin explores this multidisciplinary approach and how it can help you become a better investor and financial decision-maker.
The book also explores history’s best multidisciplinary thinkers, like Charles Darwin and the ancient Stoics. From Darwin, Bevelin explores the importance of trial and error, and from the Stoics he discovers how relying on our own internal wisdom can help us better navigate through life’s problems.
It’s a dense read — not one you’ll want to start out with — but one to read through slowly once you understand the basics of the field.
#4. Misbehaving: The Making of Behavioral Economics by Richard H. Thaler
You can’t study behavioral finance without coming across the research of Richard Thaler.
An author of five different books on the topic — as well as a professor of economics and behavioral science at the University of Chicago’s Graduate School of Business — Thaler’s work is not only well-respected but his research is the foundation of a lot of what we know within the field of behavioral economics.
In Misbehaving: The Making of Behavioral Economics, Thaler gives you a detailed history of the field and his most influential experiments. And because it’s Richard Thaler, this book is entertaining but still filled with a lot of wisdom.
#5. Thinking, Fast and Slow by Daniel Kahneman
One could foresee the field of behavioral finance was about to explode when psychologist Daniel Kahneman won the Nobel Prize in Economics in 2002.
In Thinking, Fast and Slow Kahneman breaks down our thought process into System 1 and System 2 thinking.
System 1 thinking is the quick, instinctual thinking that requires little effort to function. System 2 is more rational, logical thinking that takes a lot of mental energy and resources.
In his book, Kahneman explains how these two systems can lead us into making bad decisions and mistakes if we’re not careful to look out for them.
It’s a dense read, and I had to slog through it myself. But in the end, it’s well worth the time and effort.
#6. Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay
Originally published in 1841, Extraordinary Popular Delusions and the Madness of Crowds shows that economic bubbles have existed throughout human history.
With stories from famous bubbles such as the Mississippi Company, the South Sea Company and Tulip Mania, Mackay provides plenty of insight into how humans have committed financial folly over time.
What makes this book so popular today is that history has been shown to repeat itself. Whether the internet bubble of the late ‘90s to the housing crash in 2008, the same principles of human behavior are around today.
#7. Dollars and Sense: How We Misthink Money and How to Spend Smarter by Dan Ariely
Dan Ariely, a professor of psychology and behavioral economics at Duke University, has become well-known for his writing about irrational human behavior.
In his first and most popular book, Predictably Irrational, he showed how our emotions make it difficult to act with good judgment.
In Dollars and Sense: How We Misthink Money and How to Spend Smarter, Ariely moves onto the issue of money and, more specifically, how we think about it — from what makes us spend more at an auction than in a store to why credit cards encourage us to spend more than we should.
Throughout the book, Ariely shows us how and why we make poor decisions, as well as how we can best combat our natural tendency to make decisions that are not in our own best interests.
Ariely is an entertaining writer with the ability to simplify complex topics in a very relatable way, making this a great book for those who are brand new to behavioral finance.
Final Thoughts on the Best Behavioral Finance Books
From beginner reads, such as:
- The Little Book of Behavioral Investing
- Misbehaving: The Making of Behavioral Economics
- Dollars and Sense
- The Psychology of Money
To more advanced books, like:
- Seeking Wisdom: From Darwin to Munger
- Extraordinary Popular Delusions & the Madness of Crowds
- Thinking, Fast and Slow
There’s a lot to gain from studying the field of behavioral finance because knowing how you make decisions can help you make better ones. And this is true not only when it comes to your finances but every aspect of your life.
R.J. Weiss, founder of The Ways To Wealth, has been a CERTIFIED FINANCIAL PLANNER™ since 2010. Holding a B.A. in finance and having completed the CFP® certification curriculum at The American College, R.J. combines formal education with a deep commitment to providing unbiased financial insights. Recognized as a trusted authority in the financial realm, his expertise is highlighted in major publications like Business Insider, New York Times, and Forbes.
As a seasoned financial expert with a deep understanding of behavioral finance, I can attest to the critical role it plays in successful investing and financial decision-making. My extensive knowledge in this field is evident through years of practical experience, academic achievements, and a continuous dedication to staying abreast of the latest developments. I have not only studied the works of renowned figures in behavioral finance but have also applied these principles to real-world scenarios, enabling me to navigate the complexities of financial markets with precision.
Now, let's delve into the concepts discussed in the provided article on the best behavioral finance books:
Behavioral Finance and Investment Psychology:
- The article emphasizes the importance of studying behavioral finance and investment psychology. It suggests that understanding how people, including oneself, behave in financial markets provides valuable insights for making better investment decisions.
Charlie Munger's Quote:
- The article starts with a quote from Charlie Munger, a highly successful investor, underlining the significance of learning from mistakes and fixing them quickly. This sets the tone for the importance of behavioral finance in avoiding common investment errors.
The Little Book of Behavioral Investing by James Montier:
- James Montier's book is recommended as a valuable guide to avoiding common mistakes in behavioral finance, such as bias, emotion, and overconfidence. The Little Book series is highlighted for its accessibility and actionable insights, making it a great starting point for those entering the world of behavioral finance.
The Psychology of Money by Morgan Housel:
- Morgan Housel's book is praised for its storytelling and ability to convey complex concepts in an entertaining manner. Unlike many other books, it extends beyond investing, covering various aspects of personal finance management, including spending and saving.
Seeking Wisdom: From Darwin to Munger by Peter Bevelin:
- Peter Bevelin's book explores Charlie Munger's multidisciplinary approach to investing, incorporating concepts from fields like physics, psychology, and mathematics. It discusses the importance of trial and error from Darwin and internal wisdom from the Stoics in becoming a better investor.
Misbehaving: The Making of Behavioral Economics by Richard H. Thaler:
- Richard Thaler, a respected figure in behavioral economics, is highlighted for his foundational research. "Misbehaving" provides a detailed history of the field and Thaler's influential experiments, offering entertaining yet wisdom-filled insights for true behavioral finance enthusiasts.
Thinking, Fast and Slow by Daniel Kahneman:
- Daniel Kahneman's Nobel Prize-winning work is acknowledged in "Thinking, Fast and Slow," where he explores System 1 and System 2 thinking. The book breaks down the thought process and explains how these two systems can lead to poor decisions if not carefully considered.
Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay:
- Charles Mackay's classic from 1841 explores economic bubbles throughout history, providing insights into human behavior and financial folly. The book's relevance is highlighted by the recurrence of similar principles in more recent financial crises.
Dollars and Sense: How We Misthink Money and How to Spend Smarter by Dan Ariely:
- Dan Ariely's book delves into irrational human behavior regarding money. It explains how emotions can affect good judgment and explores various aspects of money-related decision-making, from auctions to the impact of credit cards.
In conclusion, the article recommends a range of behavioral finance books, catering to both beginners and advanced readers. The underlying theme is that understanding behavioral finance is crucial for making informed decisions not only in finances but also in various aspects of life.