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Applying Behavioral Finance to Value Investing

“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ…Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” ~ Warren Buffett

We call ourselves rational beings. The truth is that we aren’t rational but rationalising beings.

The brain that sits on the top of your head isn’t a flawless machine. Yes, it is powerful. But it has its weaknesses. In everyday terms, we call such weaknesses as ‘biases’.

The good part is that while we cannot exchange our brains with other people nor can we upgrade it at a hardware shop, we can reduce the number of mistakes that our biases cause by just taking notice of them.

Of course, you still can’t eliminate all behavioural mistakes. As Prof. Sanjay Bakshi said in a recent interview with Safal Niveshak, despite forming a habit of practicing good behaviour…

…you can’t eliminate errors. Life is about making errors and learning from those errors. So when you’ll fix one error, you’ll have another one creeping in. But you’ll make fewer errors and certainly fewer of the devastating errors that can destroy your returns or your life.

Anyways, biases are holes in our brain’s reasoning abilities. And these biases can damage our decision making.

Here is an impressive document from Whitney Tilson, a noted American investor and author, which serves like a crash course in behavioral finance when applied to the subject of value investing.

I first read this document five years ago. But it has served me well time and again…each time I am in a need of cross-checking if my brain is fooling around with my stock analysis. 🙂

Click on the image below to download the document. If you can’t see the image below, click here.

Let me know the biases you can closely associate with from your recent investment operations.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.


  1. Good one Vishal…:)
    Initially I suffered from ‘First Conclusion Bias’. Now slowly getting rid of it…

    • Manish Sharma says:

      Yes Shankar, First conclusion, Risk Aversion, and Anchoring bias can be commonly recognised at the initial stage of learning 🙂 BTW, when I say initial stage, I am referring about myself, not you 😛

  2. sanjeevbhatia says:

    Great Work, Vishal.

    I was thinking of a list wherein one can see all the potential biases at one place and whoa, you have put up a great resource for all of us. This will serve as a checklist of sorts to keep reminding us of, and hopefully enabling us to get rid of, all the potential ways in which our mind can play tricks on us and make us do what actually we shouldnot do.

    Good one :), will need to further look up some of the experiments that have been mentioned though. Given the amount of reading that is pending, wonder when will its time come…. 🙂

    Since I have joined SN, it is as if I have joined some college again. The same zeal to read and learn, some excellent colleagues, nice shares, selfless pooling of resources and a strict but adorable headmaster ;P , just miss the girls now.. 😛 . Simply love the way my learning is progressing, all thanks to SN initiative.


  3. Manish Sharma says:

    Great presentation Vishal 🙂 , and thanks for posting relevant presentations even during your holiday 😛

    Indeed , it will serve as a good checklist to refer to, again and again, to prevent any bias creeping in. I particularly would love to read and know more about Slide No. 12

  4. “Psychology of human misjudgement” by Charlie Munger is another great piece ever written on human behavioural biases.Each investor should read it atleast a few hundred times to get it embeded in their personality.

    I am pretty sure I suffer from all the biases, but the toughest part is to identify and learn from them.After loosing a lot of money I am able to identify the following:
    3.Regret Aversion.

  5. Thanks Vishal for posting such a wonderful presentation on Applying Behavioral finance in Value Investing by Whitney Tilson.
    Saneev Rightly said it feel like joined college again, but main difference is its on very specialized & interesting subject of Value Investing . Whereas in college lecture is always boring.

  6. Thanks a lot Vishal for posting such a excellent presentation. I realised that inspite of reading about Behavioural biases we tend to again fall into it. Best example is anchoring and failing to buy when stock goes down, hoping that the decline will continue and we will be able to buy cheaper price at a later date. Being fully aware of anchoring bias, frequently I find it difficult to buy a stock which has recently run up by more than 30-40% or buying the same stock at a higher price, even though I know and understand the company better than earlier. So may be the need to go through material on behavioural biases more often and at regular intervals. Though, the entire presentation is great, slides on “Tips to applying behavioural Finance are worth pasting on our desk so we are reminded again and again.

  7. Intelligent investing Vs Emotional investing

    •Intelligent investing means never having to sell. If the price of your few chosen securities goes down, you buy more or simply wait for the long-term realization of its underlying value.
    •Emotional investing means revolving ownership chairs.

    •Intelligent investing waits for the best opportunities. This style knows that many opportunities are ahead and the longer it waits the better.
    •Emotional investing jumps quickly, frequently, and time is always of the essence.

    •Intelligent investing believes that you only need a few good ideas for an investment lifetime.
    •Emotional investing believes you never lose money taking a profit.

    •Intelligent investing takes the emotion out and will often dollar cost average and or buy an index fund.
    •Emotional investing takes the intelligence out and will leverage its short term bets.

    •Intelligent investing will hold forever. To death do they part.
    •Emotional investing will sell within minutes if the price is right.

    •Intelligent investing will buy in a concentrated fashion.
    •Emotional investing will never put all its eggs in one basket but would broadly diversify out of ignorance.

    •Intelligent investing allows you to turn off the market.
    •Emotional investing forces you to watch the ticker tape and tune in all the noise.

    •Intelligent investing considers the tax consequences.
    •Emotional investing generally disregards taxes as just something to worry about in the future. Besides, if you\’re making money it\’s just a cost of doing business. If you have some losses you can use them to offset some gains.

    •Intelligent investing considers the overall rate of return net of taxes and costs. And compares this net return to a benchmark.
    •Emotional investing is about an overall feeling you get about an investment and your style.

    •Intelligent investing permits the hiring of more intelligent minds to perform the investment duties.
    •Emotional investors believe that they know best.

    •Intelligent investing is about capital allocation.
    •Emotional investing is about market timing and stock selection.

    •Intelligent investing is boring.
    •Emotional investing is exciting. It\’s about technology. It\’s about the momentum. It\’s this new thing.

    •Intelligent investing is about inactivity.
    •Emotional investing is about rapid-fire, constant trading, and replacing those in favor yesterday with those in favor today.

    •Intelligent investing is about self-reliance.
    •Emotional investing is about relying on a broker or financial advisor. They take credit for the ups and have someone to blame when things go down.

    •Intelligent investing is about loyalty.
    •Emotional investing is about what have you done for me this week.

  8. Thanks once again Vishal 🙂

    I started reading these books but have not really progressed a lot, “Value Investing & Behavioral Financie” by Parag Parekh & “Beyond Greed and Fear” by Hersh Shefrin….

    Guess this presentation should be a nice summary of learning captured in these books…


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