Distressed Debt Investing's Book Recommendation: Priceless

Readers of the site know I am a big fan of William Poundstone. In the investing community, Poundstone is probably most well known for his book: Fortune's Formula - which details the Kelly Formula which has also been talked about on this blog repeatedly (Kelly Formula Post).

William Poundstone is out with a new book entitled Priceless: The Myth of Fair Value (and How to Take Advantage of It). A long story short, I highly recommend this book. It is probably my favorite book, and most eye-opening, that I have read this year.

Priceless, in short, is about behavioral economics. Poundstone develops the history and birth of this new school of thought and how it affects each and every one of us in our daily lives. He draws on the research of some of the great thinkers in the field (Thaler, Kahneman, etc) and shows, basically, how crazy people are when it comes to money.

Why is this important to investors? MANY of the concepts laid out in the book affect professional investors day in and day out in their analysis of stocks and bonds. Concepts like loss aversion, anchoring, "greater fool" theory are presented in the book with numerous examples from behavioral experiments and research. On a daily basis, I see these biases and cognitive foibles played out in the pricing of stocks and bonds.

Here's an example: Did you ever notice that when an investor hears an earnings estimate from the sell side that their own estimate is probably already skewed? Just hearing the number: "I think earnings will come in around $5.00/share" can taint your analysis. Why? And this is what behavioral economics is about but human use shortcuts to get through their daily lives. As security analysts we need to do our bests to identify these biases and cognitive errors to better our and our investor's results.

I highly recommend this book to all those that want to better their judgement as it relates to the numbers that are so important to investing (will probably help you with things like grocery shopping and buying a car - "always throw out the first number"). For those interested in more reader, Fuller & Thaler Asset Management, a buy side shop that literally exploits these inefficiencies (and have done so very efficiently according to their results), has a number of articles and white papers on their site which I also found to be great reads.