Minding the Chastity Belts: Fiduciary Duties and 900 Pound Lemmings

 

"Today investors herd around short-term investment strategies adopted by other prudent experts who manage similar funds. This has unleashed a flock of 900-pound lemmings into the economy."

Back to the Future of Pension Fund Trust Fiduciary Duties, Keith Johnson

Crusading Fiduciaries

If you were a medieval knight embarking on the twelfth century equivalent of a Mediterranean cruise, aka going off on the Crusades, you would have needed someone at home to take care of the castle, the gold and the chastity belt keys.  That person was known as a fiduciary.

The fiduciary’s duties were those of loyalty and prudence; perfect qualities for today’s equivalent, the financial advisor.  Sadly most financial advisors don’t see themselves in this light.  Even sadder, those that do are usually to be found in that herd of 900-hundred pound lemmings that constitute the mass of behaviorally compromised investors. Time for a re-think, all round.

Read Full Post >>

B.F. Skinner’s Stockmarket Slot Machines

Win Big, Win Rarely, Win Never

Psychologists have long trailed in the wake of retailers and gaming companies when it comes to understanding the triggers that make people spend money. Slot machines, for instance, rely on the effect of variable interval operant conditioning to increase their takings.

Or, to put it in English, they pay out only rarely but when they do they pay out big. Turns out this makes people gamble more. Those investors who like to run small portfolios and look for big returns should take note.

Read Full Post >>

Markowitz’s Portfolio Theory and the Efficient Frontier

Managing Risk

You’d have thought that the management of risk in respect of stockmarket investment would have a long and reputable history. After all, the very idea of a share is all about allowing individuals to spread their capital and risks across multiple, partial investments.

This is not so, stockmarket risk management only really started with Harry Markowitz’s seminal paper Portfolio Selection in 1952. Typically the industry then ignored his ideas for twenty years before belatedly getting around to using them for, well, everything. And then some, leading eventually to the invention of the index tracker.

Read Full Post >>