The Behavior Gap by Carl Richards

After reading The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money, by Carl Richards; I was encouraged that I didn’t need to be a genius to understand how investing works.

Don’t worry this isn’t your regular “boring investment book”. It’s a simple and easy to understand book that gives advice about investing and finances in general, with a different spin.

The illustrations (aka sketches) are done with a sharpie and white napkin. It’s this simplistic approach that’s intriguing and not boring at all. It easily makes the list as one of my favorite books.

 

What is the Behavior Gap?

The Behavior Gap is the difference between investment returns and investor returns. Here’s how Carl explains it:

“In general, we’re bad investors,” says Carl. “We tend to buy high, sell low. This behavior creates a gap between investment returns and investor returns.”

Carl believes success with investments and the stock market isn’t about skill, but rather behavior. This shifts more of the blame onto financial advisors (and ourselves) for reacting too emotionally and not using a little common sense.

Behavior Gap Book

 About the Book

This book is divided into 10 chapters totaling 176 pages:

  • Chapter 1 – We don’t beat the market, the market beats us
  • Chapter 2 – The perfect investment
  • Chapter 3 – Ignore advice, make fun of forecasts
  • Chapter 4 – Financial Life planning
  • Chapter 5 – Too much information
  • Chapter 6 – Plans are worthless
  • Chapter 7 – Feelings
  • Chapter 8 – You’re responsible for your behavior (but you can’t control the results)
  • Chapter 9 – When we talk about money
  • Chapter 10 – Simple. Not easy

At the very beginning of the book during the introduction, Carl talks about owning four pairs of skis. Which is a simple analogy for us to understand that sometimes having more options, means more confusion and less simplicity. Having too many complicated options causes a lot of stress and leaves room for too many mistakes.

 

Some of My Favorite Sketches

It’s pretty hard not to completely enjoy this book, since it caters to those who enjoy reading as well as a visual audience of readers. Here are two of my favorite sketches from the book.

Our current investing strategy
Our current investing strategy
Our current spending strategy
Our current spending strategy

Are you seeing the common problem here? When Carl explains it visually like this, it’s hard to refute that we don’t always use the smartest methods when it comes to our finances. These black and white sketches easily support “a picture is worth a thousand words”.

I highly recommend this book and once you start reading it, I promise you won’t want to put it down. It’s one of those books I’ll grab when I need to remind myself to calm down, and think about investing more logically.

 

About the Author

“Carl Richards became an accidental artist with his simple sketches that make complex financial concepts easy to understand for thousands of people every week on The New York Times Bucks blog. Richards’ art, which he refers to as Visualizing Finance, had its first showing at the Kimball Art Center, in Park City, Utah. His commissioned work is on display in businesses and educational institutions across the country.” – Source


 

Connect with Carl or Buy the Book

 

[I did not get paid to write this, and I did personally read the book. As always, the opinions expressed are my own.] 

Photo Credit: BHG

7 Simple Ways to Make the Most of Unused Gift Cards
5 Travel Hacks to Make the Most of Your Business Trip

6 comments

  1. Robb says:

    Sadly one of the side affects of people being able to do their own investing (E*Trade, etc.) is the injection of tons of people who don’t understand that stock market investing should be a marathon not a sprint – something that a financial planner will try to teach you. I remember back when the Market tanked down to 8000 and people were freaking out and jumping ship and I kept thinking “Do you honestly believe this thing will never recover?” Guess what now we’re back at 12,000! I have both 401ks and Mutual Funds but I’m looking at these investments on a 30-40 year timeline not what happens over a year or even a couple of years. Doing the whole “buy a stock, then a week later freak out and sell” thing is no better than gambling. Actually it is worse because if you go to Vegas to gamble you can also go to nice shows and nice restaurants.

    • Carrie Smith says:

      You make some excellent points Robb and I too share your idea of looking at investments as a long-term plan. Playing the stock market is very risky and in most cases makes for a very poor financial decision.

  2. Modest Money says:

    Sounds like a very interesting book.  I really like the approach of using diagrams written on napkins with a sharpie.  As someone who could use some basic investment knowledge, I should probably add this to my eventual reading list.  Thanks for sharing this Carrie.

  3. WorkSaveLive says:

    I might have to check this out…your graphs look very similar to the ones I made the other day in my asset allocation post! Although, you have better drawing skills than I do!

    I can’t remember the stats but over the last 20 years the market has returned 9.xx%. The study also showed that (sophisticated) investors with over $100k in their investment accounts only averaged 3.xx% over the same period of time.

    Why?

    The behavior gap. We try to time the market; we buy and sell; we allow fear and greed make the decisions in our life; we allow advisors and the media to make us believe that they actually know something, and we lose at the end of the day. 

    • Carrie Smith says:

      I agree! Carl has some great drawing skills and his sketches are easy to understand. That’s why I loved the book so much. His ideas were simple but profound. I really enjoyed the book.

Comments are closed.