Wiki - Emotions and Investing (new investors - read this)

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Re: Wiki - Emotions and Investing (new investors - read this

Postby VictoriaF » Wed Jul 24, 2013 9:36 am

LadyGeek wrote:Check this reference: Daniel Kahneman It contains a brief explanation of prospect theory (the name doesn't mean anything) and a possibly relevant discussion about coin tossing and the law of small numbers. I don't think it changes the explanation of gambler's fallacy here (effects on market).


It was Kahneman's and Tversky's intention to come up with the names such as The Prospect Theory and Value Function that were not used in economics. That enabled them to describe new concepts before their work got marred in academics squabbles.

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Re: Wiki - Emotions and Investing (new investors - read this

Postby LadyGeek » Wed Jul 24, 2013 4:38 pm

Before we leave the topic, I updated gambler's fallacy: Behavioral pitfalls
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Re: Wiki - Emotions and Investing (new investors - read this

Postby LadyGeek » Thu Jul 25, 2013 9:27 pm

This thread is now in the Investing - Theory, News & General (investing theory).

After receiving a PM, I missed the obvious point that this thread is about investing. Behavioral and emotional aspects, but it's still about investing. :oops:
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Re: Wiki - Emotions and Investing (new investors - read this

Postby umfundi » Sat Jul 27, 2013 12:41 am

Sue,

It strikes me that there might be a list of life decisions that are fraught with behavioral issues.

Top of my list is when to claim Social Security. The next might be to take a lump sum or choose an annuity (pension). Another classic is DCA.

It might be worthwhile to consider adding with each behavior an example of an investing decision situation where the behavioral issue causes many people to make less than optimum decisions.

One obvious one is loss aversion and DCA.

After reading the thread a couple of times, I am coming to support the view that the gambling analogies are not that helpful. Better, I think, might be a description of the behavior and then examples of investing situations where it might apply.

Know thyself should, I think, be the message.

Best wishes,

Keith
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Re: Wiki - Emotions and Investing (new investors - read this

Postby technovelist » Sat Jul 27, 2013 1:03 am

livesoft wrote:Has there been any thought on writing up how an investor can take advantage of the emotions and behavioral mistakes of other investors?


Hmm, interesting. Suppose there is an asset class that is ignored by almost all investors. In that case, perhaps someone who does not ignore it could make outsized gains if his opinion is more correct than others'.
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Re: Wiki - Emotions and Investing (new investors - read this

Postby umfundi » Sat Jul 27, 2013 2:09 am

livesoft wrote:Has there been any thought on writing up how an investor can take advantage of the emotions and behavioral mistakes of other investors?


Don't make the behavioral mistakes? What else is there?

Your neighbor gets an inheritance and chooses to Dollar Cost Average. How can you exploit that bad behavioral decision?

Your boss retires early at age 62 and chooses to take Social Security immediately. How can you exploit that bad behavioral decision?

As an investor, I don't think there is anything to find from the foibles of others. As a salesman, there are many behavioral flaws to exploit.

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Re: Wiki - Emotions and Investing (new investors - read this

Postby LadyGeek » Sat Jul 27, 2013 8:45 am

To the point, behavioral finance is a broad topic and applies to other aspects of finance, not just investing. Since this is an investing forum, that's what we're focused on.

One non-investing example would be the purchase of lottery tickets, i.e. why do people buy them in spite of enormous odds against winning?

The use of a gambling example for the gambler's fallacy was debated earlier in the thread.

As to Dollar cost averaging vs. lump sum investing, I would not categorize that as a behavioral issue. There are good reasons to choose either side, with factors other than rational behavior at play. It's not a clear-cut decision.
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Re: Wiki - Emotions and Investing (new investors - read this

Postby IlliniDave » Sat Jul 27, 2013 9:11 am

umfundi wrote:
livesoft wrote:Has there been any thought on writing up how an investor can take advantage of the emotions and behavioral mistakes of other investors?


Don't make the behavioral mistakes? What else is there?

Your neighbor gets an inheritance and chooses to Dollar Cost Average. How can you exploit that bad behavioral decision?

Your boss retires early at age 62 and chooses to take Social Security immediately. How can you exploit that bad behavioral decision?

As an investor, I don't think there is anything to find from the foibles of others. As a salesman, there are many behavioral flaws to exploit.

Keith


Staying the course, especially if your still accumulating, I think is one way. The herd mentality can cause excessively high and excessively low prices. By avoiding it yourself (stick to your plan/allocation/rebalancing strategy) you gain the secondary benefit of (passively) taking advantage of (or dodging) part of the temporary irrationality affecting the herd.

I don't think there's ways to take advantage of an individual, unless you are on the shady side of the financial advising business. I don't think that was what livesoft was asking/suggesting.
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Re: Wiki - Emotions and Investing (new investors - read this

Postby Fallible » Sat Jul 27, 2013 1:35 pm

umfundi wrote:...

Know thyself should, I think, be the message. ...


It is the basic and final message. Behavioral economics/finance help us understand how emotions and biases affect our decisions and suggest ways to make better decisions. Ultimately, however, it's up to the individual to know which ways are right for him or her and that means "Know thyself."
"The first principle is that you must not fool yourself - and you are the easiest person to fool." ~ Richard Feynman
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Re: Wiki - Emotions and Investing (new investors - read this

Postby bayview » Sat Jul 27, 2013 4:01 pm

Fallible wrote:
LadyGeek wrote:Yes, it is more correct - I didn't notice the omission. I also changed the wording slightly:
In common gambling scenarios, the gambler's fallacy is a belief that a coin somehow knows about, and will try to fix, the fact that a long coin flipping streak of the same value (such as heads) must end by changing to the other value (tails)...

I most humbly apologize for dragging up the much-belabored gambler's fallacy again, but Fallible made a great suggestion in this first paragraph that didn't seem to get picked up upon, which I highlighted in red above. (She had bolded and underlined.)

The Wiki passage currently reads:
In common gambling scenarios, the gambler's fallacy is a belief that a coin somehow knows about, and will try to fix, the fact that a long streak of the same value (such as heads) must end by changing to the other value (tails).


Without the reference to coin flipping, the passage is a bit jarring, leading a reader to immediately think, "What streak? What coin??"

Otherwise, I think the new Wiki is great. If nothing else, knowing about behavioral risks in investing provides a powerful reason to have a written investment plan. :beer
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Re: Wiki - Emotions and Investing (new investors - read this

Postby LadyGeek » Sat Jul 27, 2013 7:46 pm

Thanks for finding the oversight, I made the update: Behavioral pitfalls

There's no need to apologize - the editors want to know if something is wrong. If you don't want to raise the issue here, just PM a wiki editor and we'll take a look.
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Re: Wiki - Emotions and Investing (new investors - read this

Postby LadyGeek » Thu Aug 01, 2013 8:41 pm

The second section, Theory and background, has now been posted for review in my sandbox page*: User:LadyGeek/Sandbox

I included the first section so you can see the article in its entirety.

Comments / questions / corrections are welcome. Wiki editors should edit the page directly (and post back here what you've done).

* Like Wikipedia, a sandbox page is where an editor can post draft content that is not connected to any other part of the wiki. Once the review is complete, the content will be moved to the Behavioral pitfalls article.
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Re: Wiki - Emotions and Investing (new investors - read this

Postby LadyGeek » Sat Aug 03, 2013 5:09 pm

Since there were no comments, I moved the Theory and background section into the "live" article. See: Behavioral pitfalls

The wiki is still open for comments (as usual).
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Re: Wiki - Emotions and Investing (new investors - read this

Postby LadyGeek » Thu Aug 29, 2013 8:09 pm

Thanks to freebeer, the wiki now has an example of the behavioral pitfalls encountered when purchasing homeowners insurance: Behavioral pitfalls. It's in the footnotes:

An example of framing effect (a form of anchoring) and confirmation bias on purchasing homeowners insurance is in this Boglehead forum post: Re: Sometimes Safer NOT to Carry Homeowners Insurance (!?)

I think Framing effect should be added. How's this look?

Framing effect: The large changes of preferences that are sometimes caused by inconsequential variations in the wording of a choice problem.* For example, purchasing an item. You would be more willing to pay by credit card if the price was advertised as "$10.00 with a $0.50 cash discount", instead of "$9.50 and a $0.50 credit card premium." The price is the same, but you would feel better paying by credit card with the first phrase, but not feel so good about the second phrase.

*Kahneman, Thinking Fast and Slow, Chapter 7. (The example uses the concepts described in Chapter 34, Frames and Reality.)
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Re: Wiki - Emotions and Investing (new investors - read this

Postby LadyGeek » Thu Aug 29, 2013 10:33 pm

Never mind, it's now in the wiki: Behavioral pitfalls (see "Framing effects")

I modified the wording from the previous post. I also alphabetized the behaviors.
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Re: Wiki - Emotions and Investing (new investors - read this

Postby VictoriaF » Mon Oct 21, 2013 4:29 pm

Phineas J. Whoopee wrote:
VictoriaF wrote:...
I now see antifragility wherever I look. It provides a good excuse for mishaps and failures.
Victoria

I'm all in!
PJW

FYI,
On 4-5 Nov 2013, Taleb will be teaching Antifragility: A User’s Manual at the New England Complex Systems Institute (NECSI) in Cambridge, MA.

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Re: Wiki - Emotions and Investing (new investors - read this

Postby umfundi » Mon Oct 21, 2013 6:00 pm

Know thyself:

Since this thread has been resuscitated, I thought I might mention that one of the first investment books I read was William T. Morris, "How to Get Rich Slowly, But Almost Surely", (Reston, 1973). Subtitled "Adventures in Applying the Decision Sciences" it is a wonderful guide for individuals making investment decisions.

Keith
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Re: Wiki - Emotions and Investing (new investors - read this

Postby umfundi » Mon Oct 21, 2013 6:48 pm

How to get rich slowly,: But almost surely; adventures in applying the decision sciences[Buy it!]

William Thomas Morris $2877.00 :shock: :shock: Amazon Amazon Marketplace USED, Reston Pub. Co 1973 Hardcover 0879093439

I suppose the market for used books is not always rational and efficient! :wink:

(addall.com/used)

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