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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Behavioral Bias 101: #2 Wishful Thinking

Permanently High

Famously the economist Irving Fisher predicted that stocks had reached a "permanently high plateau", just before the Wall Street Crash. He was talking his own book, having loaded up heavily in stocks. Fisher was engaged in wishful thinking, a cognitive bias that's rife among investors, a notoriously optimistic bunch when it comes to expecting the downright improbable.

Part 2 of 101 Ways To Lose Money

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The Chart Illusion

Timing Dragons

Although, logically, I’ve always felt that the idea of investing by charts should be something on the map between “Dragons” and “Free Lunches” I’ve never been so sure of this as to be outright skeptical. And I know a few smart people who insist that they are at least helpful in timing investing decisions.

Of course, the idea of “timing” anything in investment is fairly ludicrous anyway, but some recent research suggests the whole charting concept does actually help in prediction. Unfortunately what it predicts is a bunch of irrational self-fulfilling behaviour.

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Behavioral Bias 101: #1 Illusory Pattern Recognition

The Man In The Moon

Pareidolia’s that odd moment where you perceive a familiar pattern where none actually exists: it’s the man-in-the-moon, the elephant in the clouds, a religious figure in a pastry. Pareidolia is a specific form of pattern recognition; the human brain is hard-wired to see faces in things, presumably to ensure that babies attend more to other people rather than random bits of plastic.  More generally, though, pattern recognition is critical to human functioning, but has a nasty tendency to go wrong.

Part 1 of 101 Ways To Lose Money

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7 Investing Lessons from Behavioral Psychology

Click … bait

You could start by not wasting your time clicking on stupid clickbait articles, I suppose. But since you’re here you might as well learn something.

Investing should be mainly about hard work, slogging through accounts and trying to figure out where or why a company has a defendable competitive advantage. But that’s not much help if you have the self control of an octogenarian with prostate trouble.  Investing is 90% hard work and 10% mental discipline – but don’t even bother if you haven’t got the 10%.

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Scamming Journalists with Counterfactuals

Skim and Pump

Every so often there’s a story in the press about contactless payment cards being skimmed and money being extracted from them. Basically someone goes around tapping hapless commuters on the ass with a contactless card reader. Which given the state of the UK’s stupid prosecution service probably puts them more at risk of a charge of sexual assault than being arrested for theft.

This story is a recurring meme, and exemplifies what’s wrong with the state of financial journalism today. And on the way we get to look at real-world conspiracy theories and a bit of behavioral economics. What fun.

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