ABSTRACT

This introduction chapter presents an overview of the key concepts discussed in the subsequent chapters of this book. The book helps traders to improve their chances of trading successfully by understanding where cognitive biases cause them to make mistakes in stock analysis and, more importantly, in predicting the behaviour of others. Predicting the behaviour of others successfully is the only way to outperform in financial markets. This is what has been called “second-level thinking”. First level thinking is selecting stocks that traders think will perform well based on characteristics of the stock-issuing company. The book considers the effects of biases on trading decisions and shows the starting framework of Theory of Mind against which the various biases are deviations which often result in prediction errors. It then looks at belief-formation biases, quasi-economic biases, and social biases.