People often ask me for behavioral finance reading selections. The first book I always recommend is not written by a Nobel Prize winner or celebrity professor, is unavailable in any bookstore, and does not even mention the financial markets. The book is entitled The Psychology of Intelligence Analysis, written by Richards J. Heuer, Jr. as a training manual for analysts working at the Central Intelligence Agency. It is free to download from the Internet whether you pay U.S. taxes or not, and in my opinion is right up there with the U.S. highway system and the manned moon launches in terms of value created through government spending.

As we discuss in IOI training courses, the most important ability of an investor is the ability to consistently make good decisions. Modern companies are complex so usually you have to make decisions with only partial or seemingly contradictory information available. CIA analysts also operate under similar conditions — making high-stakes decision with only partial or contradictory information — but also have to worry that the source of their information is purposely trying to deceive them. Purposeful misrepresentation is one dynamic that investors don’t (usually) need to worry about, though company managers do seem very happy to disclose truths in a suspiciously selective manner.

The Table of Contents for The Psychology of Intelligence Analysis looks like the lesson plan for our IOI training on behavioral biases. Those of you who have taken a course will see immediately what I mean:


Chapter 1: Thinking About Thinking

Chapter 2: Perception: Why Can’t We See What Is There To Be Seen?

Chapter 3: Memory: How Do We Remember What We Know?


Chapter 4: Strategies for Analytical Judgment: Transcending the Limits of Incomplete Information

Chapter 5: Do You Really Need More Information?

Chapter 6: Keeping an Open Mind

Chapter 7: Structuring Analytical Problems

Chapter 8: Analysis of Competing Hypotheses


Chapter 9: What Are Cognitive Biases?

Chapter 10: Biases in Evaluation of Evidence

Chapter 11: Biases in Perception of Cause and Effect

Chapter 12: Biases in Estimating Probabilities

Chapter 13: Hindsight Biases in Evaluation of Intelligence Reporting

Before you rush out and buy the latest hardcover book on behavioral biases by Dan Ariely or Daniel Kahneman, do yourself a favor and download this book from the CIA’s library. Unlike the professors, who are interested in explaining what the problem is, the CIA’s book is interested in giving readers the tools to overcome the problem.

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