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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Risky Shifts

Female Underwear (Not)

No doubt some will be disappointed to learn that a risky shift is not a slightly daring article of female underwear, but an outcome of the counterintuitive process of group polarization. This says that if you take a group of roughly like-minded people they will gravitate to a more extreme position than that of the average team member. 

Mostly people would expect the opposite, that the average would hold sway, but the fact that this doesn’t seem to happen is a concern in many spheres, some of them more important than investing.  However, as financial markets often seem to be populated by like-minded groups of wildly overoptimistic people, they’re excellent breeding groups for risky shifts.

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