Investing - The Behavior Gap

Last Updated Oct 8, 2011 6:28 PM EDT

If it's true that a picture is worth a thousand words, then I have a treat for you. At the annual Financial Planning Association conference in San Diego lost month, I spent some time with New York Times contributor, Carl Richards. He writes the Bucks Blog for The New York Times and has an upcoming book: The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money.

Though Richards insists that it's not art, he manages to illustrate points with some very simple diagrams that take me so much longer to get across with words. All of his diagrams explore the relationship between people and their money.

I knew I was going to like this guy when, upon introducing himself, he said "nice to meet a fellow trouble maker." Richards was kind enough to let me use some of his sketches, and here are a few of my favorites, with a bit of my own interpretation.

Knowledge or Feelings?
Jason Zweig noted that we have two brains: The reflexive brain, which acts on instincts (feelings) such as wanting that slice of artery-clogging pepperoni pizza. And the reflective brain, which acts on the knowledge gained by applying facts and logic.

In investing, it can be difficult to determine which brain is in the driver's seat. Take for example, jettisoning the stocks you bought earlier this year after the 20 percent off sale. Is it your logic telling you that this time it's different because of the global debt crisis, or is this your reflexive brain telling you that the sky is falling and causing you to repeat the cycle of buying high and selling low? Choose carefully.

Turn the page for "Slow and Steady"

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.