In-depth Analysis of Investors' Underlying Logic, Value Investing, and Behavioral Finance

Changes in investors’ underlying logic fundamentally reshape decision-making patterns, and this transformation has a profound impact on long-term investment performance:

: Nobel laureate in Economics Daniel Kahneman proposed in Thinking, Fast and Slow that human thinking is divided into the fast, intuitive “System 1” and the slow, analytical “System 2” [1]. Successful investors can activate System 2 for in-depth analysis and avoid impulsive decisions dominated by System 1. Behavioral finance research shows that over-reliance on intuition leads to cognitive biases such as and , which significantly reduce long-term investment returns [2].

: Traditional investors tend to look for clear causal relationships, but the market is essentially a complex adaptive system. Accepting correlational thinking can help investors make better decisions amid uncertainty. Studies show that investors with Ambiguity Tolerance have an average long-term return rate 2-3 percentage points higher than those seeking definitive answers [3].

According to investment psychology research, identifying and controlling cognitive biases directly affects investment performance [2]:

Cognitive Bias	Negative Impact on Performance	Improvement After Adjusting Underlying Logic
Confirmation Bias	Miss risk signals, over-concentrated positions	Multi-angle verification, reduce selective information reception
Loss Aversion	Stop losses too early, miss long-term compounding	Establish stop-loss and take-profit disciplines, reduce emotional impact
Overconfidence	Frequent trading, cost erodes returns	Acknowledge cognitive limitations, rely on systematic decision-making
Herd Mentality	Chase highs and sell lows, buy high and sell low	Contrarian thinking, independent judgment of market cycles

Value investing and behavioral finance have a profound complementary relationship, not opposition:

: The core concept of value investing—the “Mr. Market” theory—is essentially based on behavioral finance. Benjamin Graham proposed that the market often gives wrong quotes due to investor emotional fluctuations, which provides opportunities for rational investors. By using (Principle 3), value investors are greedy when others are fearful and fearful when others are greedy, essentially profiting from the cognitive biases of market participants [4].

: Traditional finance struggles to explain the “Value Premium” phenomenon—value stocks outperform growth stocks in the long run. Behavioral finance provides a more reasonable explanation through : investors’ aversion to losses is greater than their joy from equivalent gains, leading to overreaction and underreaction, thus creating opportunities for value investing [1].

: The “Margin of Safety” principle of value investing is highly aligned with statistical thinking (Principle 5). Charlie Munger emphasizes multi-disciplinary thinking models, requiring investors to use cross-disciplinary knowledge to evaluate investment targets [5]. By using to assess investment outcomes under different scenarios, value investors can build more resilient portfolios amid uncertainty.

: Behavioral finance research finds that investors have “Myopic Loss Aversion”—frequent portfolio checks increase fear of losses [2]. Value investing establishes a long-term perspective through (Principle 6) and (Principle 11), naturally overcoming this behavioral bias. Studies show that reducing account check frequency from monthly to annually can increase investors’ willingness to allocate to stock assets by 85% [3].

Principle	Behavioral Finance Correspondence	Performance Impact Mechanism
1. Diligently learn investment knowledge	Reduce information asymmetry, improve decision quality	Knowledge accumulation leads to more accurate fundamental analysis
2. Understand yourself	Metacognition ability	Identify personal cognitive biases, avoid repeated mistakes
4. Correlational rather than causal thinking	Tolerate ambiguity, accept probabilistic conclusions	Make more robust decisions in uncertain environments
5. Statistical and probabilistic thinking	Quantitative thinking, Bayesian updating	Avoid representativeness bias, dynamically adjust expectations

Principle	Behavioral Finance Correspondence	Performance Impact Mechanism
3. Contrarian thinking	Contrarian investment strategy, overcome herd mentality	Obtain excess returns at extreme market moments
7. Mindset management	Emotional regulation, reduce cortisol impact	Maintain rationality, avoid emotion-driven trading
8. Break narcissism and learn humbly	Reduce overconfidence bias	Continuously improve, acknowledge mistakes and adjust quickly
12. Acknowledge irrational behavior requires repeated practice	Willpower training, habit formation	Internalize rational decision-making into automatic behavior

Principle	Behavioral Finance Correspondence	Performance Impact Mechanism
6. Strategic thinking	Long-term perspective, reduce myopic loss aversion	Reduce unnecessary trading, lower transaction costs
9. Family support	Social support system, reduce emotional stress	Stabilize emotions, avoid irrational decisions under pressure
10. Focus on important things	Reduce decision fatigue	Protect limited self-control resources
11. Dialectical and cyclical thinking	Mean reversion thinking, avoid extrapolation bias	Identify market cycles, avoid wrong judgments at extreme points

: Draw on Charlie Munger’s “checklist” method to systematically verify before each major investment decision: Am I affected by confirmation bias? Have I fully considered the probability distribution? Is the margin of safety sufficient? [5]

: Convert investment decisions from “Will it rise?” to “What is the probability of rising, and what is the expected return-risk ratio?” This thinking shift can significantly reduce the emotionality of decisions [2].

: Preset buy and sell rules when emotions are calm to reduce emotional interference during trading. These include stop-loss disciplines, position management rules, rebalancing mechanisms, etc. [3]

: Limit the frequency of daily account checks and market news consumption; studies show this can significantly reduce investment anxiety and unnecessary trading [2].

: Regularly record investment decision reasons, review and analyze afterward, and identify systematic biases. This is the core practice of “Acknowledge irrational behavior requires repeated practice” (Principle 12) [1].

: Establish communication circles with investors who share similar ideas; this not only gains family support (Principle 9) but also discovers personal blind spots through others’ perspectives [4].

Changes in investors’ underlying logic affect long-term performance through three paths:

1. Cognitive Upgrading Path
   : Shift from intuition-dominated to analysis-dominated thinking, from causal thinking to probabilistic thinking, improving decision quality
2. Emotional Control Path
   : Reduce emotional interference in decisions through systematic methods and disciplinary constraints
3. Behavioral Cultivation Path
   : Internalize rational thinking into habits, maintain calm during extreme market moments

Value investing and behavioral finance are not opposites but complementary. Value investing provides a practical framework for profiting from behavioral biases, while behavioral finance provides theoretical explanations for the effectiveness of value investing. Successful investors need to master both the core concepts of value investing (margin of safety, Mr. Market, circle of competence) and the insights of behavioral finance (cognitive biases, emotional management, probabilistic thinking), integrating them into a complete investment system.

These 12 principles form a complete framework from knowledge, cognition, emotion to behavior, providing investors with a systematic method to understand the market from a behavioral finance perspective and seize opportunities from a value investing perspective. Adhering to these principles in the long run can significantly improve investment performance, maintain rationality amid market fluctuations, and accumulate wealth through compound growth [1][2][3][4][5].

[1] Wall Street Journal - “90-Year-Old Takes Active End of Life: The Final Choice of Decision Theory Master Kahneman” (https://cn.wsj.com/articles/90岁主动结束生命-决策理论大师卡内曼的最后抉择-9e28036a)

[2] Yahoo Finance Hong Kong - “[Investment Psychology] Common Psychological Biases You Need to Know for Smart Investing” (https://hk.finance.yahoo.com/news/投資心理學-精明投資你需要認識的常見心理偏誤-050521757.html)

[3] Investopedia - “Understanding Common Types of Bias in Investing” (https://www.investopedia.com/terms/b/bias.asp)

[4] Charlie Munger - Wikipedia (https://zh.wikipedia.org/wiki/查理·芒格)

[5] Baidu Encyclopedia Charlie Munger (https://baike.baidu.com/item/查理·芒格/4325934)