The Behavior Gap by Carl Richards: Book Review
TLDR
- Investors often earn less than expected due to emotional selling and buying at wrong times.
- Fear leads to panic selling, locking in losses, while chasing high-performing funds can lock in high prices.
- Richards uses simple sketches to illustrate complex financial ideas, making them memorable.
- The book suggests automation to remove emotional decision-making from investment processes.
The Behavior Gap by Carl Richards: Book Review
Understanding markets is only half the battle. The other half lies in understanding yourself - your emotions, your biases, and the gap between what you know you should do and what you actually do when money is on the line.
Carl Richards' The Behavior Gap addresses this problem head-on. Through simple, hand-drawn sketches and direct writing, Richards explains why the gap between investment returns and actual investor returns exists - and offers practical strategies to close it.
The Central Idea
At the heart of The Behavior Gap is a straightforward observation backed by decades of data: investors consistently earn less than the funds they invest in.
How is that possible? Because they buy and sell at the wrong times. They buy funds that have recently performed well (chasing performance) and sell funds that have recently declined (panic selling). They buy high. They sell low. The behaviour Gap is the difference between what the fund returned and what the investor actually received.
Richards illustrates this with his signature simple sketches. Where a typical financial diagram would require labels, axes, and statistical appendices, a Richards sketch captures the same insight in a few pencil strokes. The rollercoaster ride of market volatility. The gap between smart decisions and actual decisions. The way comfort and fear drive us away from our own best interests.
The Two Main Behavioural Traps
Panic Selling
When markets fall, the natural impulse is to get out. The pain of watching a portfolio decline overrides the rational knowledge that selling locks in the loss permanently.
Richards uses the image of a rollercoaster: the urge to jump off is strongest at the steepest drop, which is also exactly the wrong moment to exit. The problem is not that investors lack information. It is that fear overrides information.
The practical response Richards advocates: a pre-written plan. Know in advance what you will do when markets fall. Write it down. The version of you making decisions at the bottom of a crash is not equipped to think clearly - the version of you in a calm market is. This is essentially the same logic behind writing an investment thesis.
Chasing Performance
The opposite failure is equally destructive. When funds or asset classes perform well, investors pile in. The very performance that makes an investment look attractive often means it is already expensive.
Research consistently shows that funds experiencing large inflows (because of strong recent performance) subsequently underperform, while funds experiencing outflows (because of poor recent performance) subsequently outperform. Investors, on average, do the opposite of what would maximise their returns.
Richards' response is consistent automation: regular contributions to a diversified portfolio, regardless of recent performance. Remove the decision from the equation.
Simple Sketches, Complex Ideas
The format of The Behavior Gap is its most distinctive feature. Each chapter is short. Each insight is illustrated with a simple napkin-style diagram. The visual simplicity is not aesthetic affectation - it is a deliberate teaching choice.
Complex financial concepts resist retention in text form. The same idea rendered as a simple two-box diagram - "Smart" vs "Actual" decision, separated by a gap - is immediately memorable and retrievable under stress.
Richards makes the point explicitly: the goal is not to explain behavioural finance academically. It is to give readers a mental model they can actually access when they are scared and about to make a bad decision.
Practical Recommendations
The book's practical advice clusters around a few consistent themes:
Automate contributions. The most reliable way to avoid behavioural mistakes is to remove the decision. Set up regular investments by direct debit into a diversified portfolio. Automation means the money invests regardless of how scary the market looks that month.
Focus on long-term goals, not short-term prices. The price of a fund today is noise. The question is whether your strategy remains sound and your time horizon intact. Most of the time, the answer is yes.
Have a written plan. Before the next crash, write down what you will do. Decide in advance. Then follow the plan. Richards is explicit that pre-commitment - telling your future self what to do before the fear arrives - is far more effective than relying on willpower in the moment.
Who Should Read This Book?
The Behavior Gap is for any investor who has ever sold something in a panic, bought something because it was "hot," or found the gap between knowing the right thing and doing it uncomfortably familiar.
Which is most investors.
It is particularly valuable as a companion to more technical investing books. After reading about portfolio construction and asset allocation, The Behavior Gap addresses the deeper problem: you know what to do, but will you do it when it matters?
The book is short, readable in two to three hours, and likely to pay for itself many times over in avoided mistakes.
Frequently Asked Questions
What is the Behavior Gap in investing?
The Behavior Gap is the difference between investment fund returns and actual investor returns. Because investors tend to buy after strong performance and sell after poor performance, they capture less than the fund's total return. DALBAR's annual research consistently shows that average US equity fund investors earn significantly less than the S&P 500 over 20-year periods - not because the funds underperformed, but because investors moved in and out at the wrong times.
Is The Behavior Gap suitable for investing beginners?
Yes. Richards writes accessibly and does not assume technical knowledge. The book is about psychology, not financial mechanics. A complete beginner will find it useful for understanding why investing is harder than it looks. An experienced investor will find it useful for recognising patterns in their own behaviour.
What does Carl Richards recommend for avoiding emotional investing?
Automation, written investment plans, and simplicity. Automate regular contributions to remove the decision. Write down your investment thesis before a crash so your calm self can speak to your stressed self. Keep the portfolio simple - the simpler it is, the less there is to second-guess.
How does The Behavior Gap compare to The Psychology of Money?
Both books address the psychological and behavioural dimensions of money and investing. The Psychology of Money by Morgan Housel is broader in scope, covering wealth, greed, happiness, and long-term thinking. The Behavior Gap is more focused on the specific mechanism of buy-high-sell-low behaviour and how to prevent it. Both are worth reading; The Behavior Gap is shorter and more action-oriented.
What is the main lesson from The Behavior Gap?
The biggest threat to your investment returns is your own behaviour in moments of fear and greed. The solution is not more financial knowledge - it is pre-commitment and automation. Decide what you will do before you are scared. Then make it automatic so you do not have to decide in the moment.
The Behavior Gap - Carl Richards - Simple sketches that explain the gap between investment returns and actual investor returns caused by emotional decision-making. (Affiliate link - we may earn a small commission at no extra cost to you.)
Thinking, Fast and Slow - Daniel Kahneman - The academic foundation of everything Richards draws on, exploring the two-system model of thought and why the emotional brain consistently undermines rational financial decisions. (Affiliate link - we may earn a small commission at no extra cost to you.)
Predictably Irrational - Dan Ariely - A readable exploration of the hidden forces that make financial decisions reliably irrational, and what we can do to counteract them. (Affiliate link - we may earn a small commission at no extra cost to you.)
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