11. Behavioral Investing That Breaks the Boxes

Chapters 1 through 10 defined many of the boxes different investments are often categorized in, and hopefully helped readers familiar with investing in one box learn to diversify into one or more of the other boxes. This chapter steps outside these “textbook” investment boxes and discusses one of the most important differences between investment theory and investment practice affecting all these boxes: the fact that people don’t always act rationally. A good understanding of the principles and pitfalls in behavioral investing can both help investors better avoid such mistakes themselves and find ways to profit from irrational opportunities created by other investors. While these behavioral anomalies may cover some of the most obvious ways for investors to outperform the benchmarks using 100% public information, it is important to remember the John Maynard Keynes quote that “Markets can remain irrational longer than you can remain solvent.”