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There are hundreds of books out there trying to teach investors how to trade. There is certainly no shortage of reading material. Unfortunately, many of these books are more useful as a fire starter than a teaching tool. With a limited amount of time the challenge is knowing which books to read. Of course, I like many others have spent time wishing I knew the best books to read when I started investing. This article will outline three of the best behavioral finance books that in my opinion, any successful trader needs to read. These books will dive into our cognitive biases and help to get us to evaluate opportunities for making passive income. 
 

Book #1 - Thinking Fast and Slow - Daniel Kahneman

This book is arguably one of the best books of all time in behavioral finance. Daniel Kahneman has a pretty esteemed reputation, winning the Nobel Prize in Economic Sciences. 

In his book, Daniel Kahneman outlines two modes of thinking, system one, which makes impulse decisions, and system two which makes more analytical ones. He then outlines the major sort of cognitive biases individuals have in decision-making. These range from anchoring, and loss aversion to confirmation bias, to name a few. 

If these do not sound familiar to trading, turn off your brokerage and read the book. Most likely every trader will be weighed down by these biases at every turn.

“I am just hoping we get an up day so I can get out for a profit”

• Loss aversion theory

“I am buying Mcdonald’s stock, I spent 10 hours researching their potential last night”

• Confirmation bias

“Tesla was $800 only a few months ago, there is no way it could be worth $400 now”

• Anchoring

These are only a few examples I picked off of a trading Facebook group before writing this article. So while the book only has a few references directly to trading, the whole book is based on our biases in decision making and our challenge in finding a fair value. 

This book will help you not only in making unbiased investment decisions but also in making the right choices in life. 
 

Book #2 - The Laws of Trading - Agustin Lebron

Our second book dives deeper into behavioral finance and is the perfect compliment to solidify some of the concepts presented by Daniel Kahneman. 

Agustin Lebron was a prop trader at a top market-making firm, Jane Street Capital. After years in the industry, he decided to leave, in part to write this book. 

What the Laws of Trading do is really dive deeper into our decision-making process and give us some rules and guidelines to evaluate ourselves in our decisions. As opposed to Kahneman’s book this is more directed toward the trader, helping solidify some of the concepts of Thinking Fast and Slow. 

While this book perhaps does not have as much fame as others in the behavioral finance field, especially as it is still only a few years old. Despite this, a lot of its praise has been handed down directly from other investment professionals.

When an ex-hedge fund manager calls this the “bible of trading” it should definitely be read. Then read again. 

An amazing book. 
 

Book #3 - The Psychology of Money - Morgan Housel 

Being the number one bestseller on Amazon in their money management category does certainly count for something. While our second book is from a market maker this book is better intended more for the longer-term investor. For people with long time horizons and also people who want to come to terms with how money affects them this is a great read. 

Through 19 short stories, Morgan helps the reader really come to terms with what money means and how we view it. Oftentimes people get into trading and investing for a reason. This book may help to uncover that direction and help really quantify your goals and how money relates to that. 
 

Concluding Remarks

These are three of my favorite books on behavioral finance. I would say that having a grasp of these books will leave you in a very good place for evaluating trading and investing decisions. They will also help you in your day-to-day life in deciding what personal finance decisions to take. 

Have you read any other finance books that you enjoyed? If so I would love to hear of any in the comments below!