On Dinosaurs and Dividends

Mass Extinction
Sixty-six million years ago an asteroid blew its way through the Earth’s atmosphere and detonated in what we now know as the Yucatan Peninsula in the Gulf of Mexico. The result was a mass extinction event which wiped out about 75% of the world’s species including all of the flightless dinosaurs. As Black Swans go, it was a biggie.

Right now investors are experiencing their own version of the K-Pg event, with whole countries going into lockdown as homo sapiens once more shows its surprising capacity to act collectively when faced with real and present danger. As a side effect investors are discovering that dividends are rapidly becoming an endangered species; but there again – does it matter?

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Lockdown Learning: A Reading List for Behavioral Investing

If, like me, you find yourself with an unexpected amount of leisure time you may want to spend some of it catching up on your investing education. At the very least it’ll be a distraction from the chaos out in the real-world, and even if you don’t learn anything it’ll probably stop you from trading …

Read on…

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Pandemiconomics

Oops, Apocalypse

The pandemic that’s upon us is – obviously – a complete surprise, one that couldn’t be planned for. Understandably governments are reacting in real-time to an unfolding threat in the best way that they can. It’s – as they say – a Black Swan event.

Only – it isn’t. Pandemics are not unknown unknowns, they’re known unknowns. Just as in 2008 when governments had started to forget the lessons of the Great Depression so they have forgotten the lessons of the Spanish ‘flu pandemic of 1918. History will not be kind.

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Anchors A-weigh!

Lost At Sea
In these uncertain times, as the Covid-19 virus moves across the planet, we’re seeing markets yo-yoing with wild price fluctuations on almost a daily basis. Jumps or falls of over 5% are commonplace. This is not normal market behaviour.

However, it isn’t unusual behaviour either – in the context of market history. Anyone who remembers 2008 or 2000 or even 1987 will have seen this before. This is what happens when investors lose their anchors – with nothing to attach to they follow each other, and the result is very predictable and not at all pretty.

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Markets are a Confidence Trick

The Downside of Paradise

Many investors are experiencing the real downside of stockmarkets for the first time. Suddenly they’re no longer placid, happy holiday resorts where riches gently roll to shore simply by waiting. A volcano has erupted and everyone is running around with their hair on fire stealing each other’s coconuts and hoarding pineapples.

Of course, paradise always had a lurking dark underside and even an unexpected eruption will eventually lead to vigorous green shoots appearing in the fertile volcanic ash. However, people don’t really think rationally about these things – their behaviour is dictated by how confident they feel and right now certainty is not available. Well, things will get better, but we have a ways to go yet.

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Forecasts? I Haven’t Got A Clue …

Small Worlds

We predict things all the time, we can't help ourselves. And in the small world that constitutes our immediate bubble of experience those predictions may have some validity. But in the big world that we inhabit they often don't.  Which of those worlds do you think more accurately represents stockmarket investment?

It's difficult for us to accept that our small world experience doesn't scale up to the big world, but it's often true. To all intents and purposes we're infants teetering on the edge of the volcano: to all intents and purposes we know absolutely nothing worth knowing.

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Cursed By Momentum

Edgy Investors

Although most investors have no edge on the market there's a proportion of them that persist in trading actively, the main effect of which is to enrich their brokers. There are various explanations of why this occurs, but it seems to come down to some combination of inherent overconfidence and a perverse refusal to take account of negative information. 

This is particularly dangerous in calm periods such as those we’ve been experiencing in markets over the past few years.  In such times momentum strategies are particularly effective – and serve to supercharge the behavior of naturally overconfident individuals. The end results are usually not pretty..

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Bias In Action

Myopic Urges

The recent sharp correction in markets has clearly surprised a lot of investors. No doubt this is partly due to the standard myopia people seem to exhibit as soon as the last crash is out of sight, but it also seems to be connected to the fact that the seemingly inexorable rise in share prices and the continuing low interest rates on deposits has tempted new people into stocks. Faced, for the first time, with nasty losses they’re casting about for some kind of strategy to deal with the situation.

In truth if you need to find a strategy after markets have started falling it’s too late. For most of us the only sensible approach is to only buy things we’re comfortable holding through any kind of downturn and to then do nothing when volatility strikes. But even experienced investors face the urge to do something – anything – in the face of mounting losses. This is action bias, in action.

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Putting Pro-Innovation Bias on the Blockchain

Blockchain Bias

Over the past couple of years I've spent a lot of time listening to people wittering on about "the blockchain". They've claimed it can solve a plethora of society's ills – everything from the elimination of poverty to the overthrow of fiat currencies and the nation state.

Being charitable this is evidence of pro-innovation bias in all its perverse glory. Being cynical it's evidence of people trying to scam investment funds by capitalizing on the halo effect. The blockchain is a brilliant piece of innovation, which will one day – probably – lead to significant economic benefits, but in the end it's just another piece of technology.

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A Catalog of Investing Errors

Love Lists

We're attracted to lists like moths to flames and netheads to clickbait. The Big List of Behavioral Biases is by some way the most popular page on this website, but it actually provides very little insight into investing successfully.

Behind this, though, lies a deeper truth. Lists are processed more easily by the brain, and they're perfectly optimized for the click and go environment that is the Internet. Here I explain why. In a list. Obviously.

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Unbanked But Not Unwise

Tribal Finance

Lisa Servon has written a clever, accessible and pin-point clear piece of ethnographic research. It looks at how an underserved and underappreciated tribe, without access to regular financial services, has developed ways and means of coping in their absence. It's also a damning indictment of the organizations that claim to offer them these services.

The tribe, of course, is middle class America, and the organizations are the banks that fail to serve them.

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Age Makes You Happier – And Poorer

Avoidance Strategies

As the years pass I've noticed I'm increasingly unwilling to expose myself to sources of negative information or emotional stress. So news bulletins, soap operas and anything a film critic might regard as emotionally engaging are increasingly off-limits. Frankly I'd rather watch Guardians of the Galaxy than Moonlight, no matter how worthy the latter.

Slightly to my surprise it turns out that this isn't just me being more than normally antisocial, but is a commonly observed age-related change in preferences. By choice older people will habitually avoid stuff that they find negative. Which goes a long way to explaining a lot of things, including why older nuns tend to be happier and why we should avoid having to do anything difficult – like thinking or active investment – after we've reached 70.

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The Future is Made in the Bedroom, Not the Boardroom

RIP Hans Rosling

Hans Rosling was, if you’re a data geek like me, a hero. His life was spent not just combating fake facts and opinion based decision making but also in finding new and imaginative ways of visualising real data. And he was in demand by corporations across the world because his work showed them where to invest.

So obviously Rosling wasn’t an economist: he was a population statistician who built his ideas on data, rather than models. And what his data suggests is that the future is made in the bedroom, not the boardroom.

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Idiots in Investing Echo Chambers

Investing in the Dead

Some people like to wander round graveyards. I get the same sort of ghoulish pleasure out of frequenting investment discussion boards. They're full of Pollyannas, forever only able to see the good in the stocks they invest in.

Sadly they're almost always wrong. But it's kind of fun watching them keeping the reanimated corpses of zombie stocks moving about through the power of sheer stupidity.

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Blindsided by Brexit Bias

Unbalanced

The result of the UK’s referendum on the EU caught markets by surprise. They’d soared the previous day in the expectation of a Remain vote and were thrown into turmoil when it turned out a majority of the British were less concerned with economic stability and more with mass immigration.

The polls leading up to the referendum were finely balanced; if they were to be believed then the result was far from certain right up to the end. Yet many people took the market surge at face value – that markets were pricing in known information -  and that a Remain vote was in the bag. But it wasn’t, and the whole thing is behavioural bias writ large. Not that anyone will actually learn the lessons of course.

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Bad Investor Behavior Can Be Very Expensive

Brief interview with yours truly by Robin Powell from The Evidence Based Investor:

Also take a look at SmartInvestorTV for a bunch of other interesting resources.

Meme Reversion

500 and Counting

I’m now about 500 posts and a million words into the back-to-front world of financial psychology and you might think I'd have learned something useful by now. Well, it turns out there are only a couple of things you need to bear in mind: that mean reversion is the only certain thing about markets and that (almost) no one is interested.

The reason that no one is interested is that everyone is convinced that they can identify the narrative, the story, the meme that will find the next wonder stock that defies the law of mean reversion. And you might, but the chances are you still won't become filthy rich on the back of it, because only in hindsight is success inevitable. 

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Behavioral Bias 101: #3 Curse of Knowledge

Know What?

We're often told that knowledge is power. However, in reality, knowledge may be unexploitable leading to the paradoxical situation that high quality goods get overpriced and low quality ones underpriced. Insiders, it turns out, are often burdened by the curse of knowing too much.

Part 3 of 101 Ways To Lose Money

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Building An IKEA Portfolio

Cartoon Capers

If you get someone to build an IKEA sideboard – you know, one of those flat-pack conundrums that involves trying to work out what a cartoon character is doing with a hammer, a drill and forty three assorted metal dowels – they immediately place a higher value on it than anyone else would, even if it goes on to develop an alarming 45 degree tilt.  This is the IKEA effect.

It’s associated, sort of, with a more general behavior that’s been known about for years, the endowment effect, in which possession of an item immediately causes us to value it more highly. Just imagine what the impact might be if you build your own portfolio, no matter how wonky it might be.

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Less Is More

Error, Human

Much market analysis operates on the assumption that more data is better – more data leads to more accurate results. More data may require more complex processing, leading to greater and greater requirements for computing power but, in principle, the idea is that more is better.

Out in the real world, however, we don’t have the luxury of this kind of analysis. This leads to errors which sometimes we call biases. But surprisingly it also, often, leads to better results. It may just be that the reason we make so many mistakes is because we’re trying to process too much information, not because we’re naturally error prone.

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