Luck, skill, or Beardstown Lady?

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Fallible
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Re: Luck, skill, or Beardstown Lady?

Post by Fallible » Mon Feb 18, 2013 8:29 pm

AnimalCrackers wrote:...Luck, skill, or Beardstown Lady?
Answer: Good PR.
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Alex Frakt
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Re: Luck, skill, or Beardstown Lady?

Post by Alex Frakt » Mon Feb 18, 2013 9:49 pm

Akiva wrote:
LazyNihilist wrote:OK something is seriously wrong. 16 year old girls are giving out investment advice and getting tons of press.
Well that they are 16 year olds is surprising, but they they are girls isn't. Studies have shown that women investors tend to do better than men. So assuming that women have some slight edge on men and that some random number of people are going to try this as kids, then we'd expect an abnormally high percent of the "lucky" ones to be women.
Those studies find that women have better returns than men because women trade less than men and when an individual makes a trade on average the new holding underperforms the original position. I haven't seen anything that says women are better than men after controlling for the amount of trading. If you've seen something to the contrary, please post a link or title. I'd like to read it.

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Re: Luck, skill, or Beardstown Lady?

Post by Akiva » Mon Feb 18, 2013 10:17 pm

Alex Frakt wrote:
Akiva wrote:
LazyNihilist wrote:OK something is seriously wrong. 16 year old girls are giving out investment advice and getting tons of press.
Well that they are 16 year olds is surprising, but they they are girls isn't. Studies have shown that women investors tend to do better than men. So assuming that women have some slight edge on men and that some random number of people are going to try this as kids, then we'd expect an abnormally high percent of the "lucky" ones to be women.
Those studies find that women have better returns than men because women trade less than men and when an individual makes a trade on average the new holding underperforms the original position.
Studies also show that investors not only sell winners too quickly but also keep losers too long. So it's not strictly a matter of "less trading is always better".
I haven't seen anything that says women are better than men after controlling for the amount of trading. If you've seen something to the contrary, please post a link or title. I'd like to read it.
Hmm, I'll see if I can find an online version of the sort of research I'm thinking of. But maybe I should have used the word "traders" above instead of "investors" since the specific study I was thinking of dealt with managing a derivatives portfolio for hedging commodity price risk. (Which is probably more analogous to what a day trader does than a study on buy and hold stock investors.)

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Re: Luck, skill, or Beardstown Lady?

Post by VictoriaF » Tue Feb 19, 2013 6:38 am

Akiva wrote:Studies also show that investors not only sell winners too quickly but also keep losers too long. So it's not strictly a matter of "less trading is always better".
Assertions about "winners" and "losers" imply market inefficiencies that could be exploited.

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Re: Luck, skill, or Beardstown Lady?

Post by Akiva » Tue Feb 19, 2013 9:44 am

VictoriaF wrote:
Akiva wrote:Studies also show that investors not only sell winners too quickly but also keep losers too long. So it's not strictly a matter of "less trading is always better".
Assertions about "winners" and "losers" imply market inefficiencies that could be exploited.
No. The fact that position A is in the black for you and position B is in the red for you doesn't tell you anything about what the market is going to do. But ex post facto, the evidence is that people sell stocks like A and replace them with ones that do not do as well, but hold onto stocks like B and lose even more money on average before they do decide to sell.

I suppose another way to think about this is to say that selling winners and keeping losers gives you negative exposure to the momentum factor. And since this has positive expected return, you hurt yourself by trading this way.

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Re: Luck, skill, or Beardstown Lady?

Post by garlandwhizzer » Tue Feb 19, 2013 12:01 pm

akiva wrote
No. The fact that position A is in the black for you and position B is in the red for you doesn't tell you anything about what the market is going to do. But ex post facto, the evidence is that people sell stocks like A and replace them with ones that do not do as well, but hold onto stocks like B and lose even more money on average before they do decide to sell.
I find it hard to believe that there is solid evidence that aggregate investor behavior is this way. Please either show us this "ex post facto" evidence or give us a link to it.

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Re: Luck, skill, or Beardstown Lady?

Post by Akiva » Tue Feb 19, 2013 12:08 pm

garlandwhizzer wrote:akiva wrote
No. The fact that position A is in the black for you and position B is in the red for you doesn't tell you anything about what the market is going to do. But ex post facto, the evidence is that people sell stocks like A and replace them with ones that do not do as well, but hold onto stocks like B and lose even more money on average before they do decide to sell.
I find it hard to believe that there is solid evidence that aggregate investor behavior is this way. Please either show us this "ex post facto" evidence or give us a link to it.
The disposition effect is one of the most famous findings of behavioral finance. See, e.g. this or go read the original paper.
linked article wrote:We easily sell off stocks that have done well, but we have trouble letting go of stocks that have performed badly, holding onto them in the hope they will come back. This is ruinous on two levels. By selling winners and holding onto losers, we are setting ourselves up for a tax hit, because we face taxes on stocks that have appreciated. Because stock prices show momentum, the stocks we have sold tend to keep rising. And the stocks we hold tend to keep falling.
I haven't seen anything that says women are better than men after controlling for the amount of trading. If you've seen something to the contrary, please post a link or title. I'd like to read it.
Hmm, I'll see if I can find an online version of the sort of research I'm thinking of. But maybe I should have used the word "traders" above instead of "investors" since the specific study I was thinking of dealt with managing a derivatives portfolio for hedging commodity price risk. (Which is probably more analogous to what a day trader does than a study on buy and hold stock investors.)
So I did some digging and it seems like the evidence for gender differences caused by the disposition effect is decidedly more mixed than I thought. There are papers defending all three positions (men are less effected, men and women are equally effected, and women are less effected) and I don't have the time to read through them and make sense of which is the "better" position.

Consequently, my above statement that you responded to would need to be corrected to say that *if* you think that women are less impacted by the disposition effect, then it shouldn't surprise you that out of the kids whose trading became publicly recognized, there were more women than men.

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Re: Luck, skill, or Beardstown Lady?

Post by garlandwhizzer » Tue Feb 19, 2013 1:11 pm

I do see the opinions of Adler and others in the article which akiva listed, opinions which are based on their interpretations of aggregate individual investor psychology. I do not see any data that reliably backs up that claim. What they claim--that investors hold on to losers and sell winners for psychological reasons--would, if true in aggregate, completely destroy the momentum factor and in fact reverse it. The very existence of a momentum factor argues strongly that investors as a group pursue winners and abandon losers. Besides, completely apart from individual investor psychology, markets today are dominated by institutions, mutual funds, and professional investors, who are on short term performance leashes and must show results in the short term in order to keep their jobs, the opposite of holding on to losers for psychological reasons.

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Re: Luck, skill, or Beardstown Lady?

Post by Alex Frakt » Tue Feb 19, 2013 1:16 pm

VictoriaF wrote:
Akiva wrote:Studies also show that investors not only sell winners too quickly but also keep losers too long. So it's not strictly a matter of "less trading is always better".
Assertions about "winners" and "losers" imply market inefficiencies that could be exploited.

Victoria
Not if the costs of attempting to exploit the anomaly exceed the gross benefit of the anomaly. In this case, to exploit the underperformance of individual investors, all you need to do is hand over your trading activity to institutional investors. The problem, as always, is that the roughly 100bp gross advantage achieved by professionals is more than offset by the cost of hiring them and their trading costs.

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Re: Luck, skill, or Beardstown Lady?

Post by Akiva » Tue Feb 19, 2013 1:23 pm

garlandwhizzer wrote:I do see the opinions of Adler and others in the article which akiva listed, opinions which are based on their interpretations of aggregate individual investor psychology. I do not see any data that reliably backs up that claim.
There are plenty of behavior finance papers on this topic that do extensive econometric analysis. Try searching for "disposition effect" on Google Scholar. And here is a link to the Odean paper the article is about. (It comes up at the top of Google Scholar when you search for "disposition effect" and "Odean".)
What they claim--that investors hold on to losers and sell winners for psychological reasons--would, if true in aggregate, completely destroy the momentum factor and in fact reverse it.
Individual private investors aren't remotely representative of the market as a whole so I don't see why you think this contradicts the momentum effect. Furthermore, this assumes that momentum is behavioral to begin with and not an actual risk factor like small caps or value are typically considered to be.
The very existence of a momentum factor argues strongly that investors as a group pursue winners and abandon losers.
As the article explains, one of the main reasons why this trading behavior hurts investors is because they end up short the momentum factor...
Besides, completely apart from individual investor psychology, markets today are dominated by institutions, mutual funds, and professional investors, who are on short term performance leashes and must show results in the short term in order to keep their jobs, the opposite of holding on to losers for psychological reasons.
It seems like you haven't read the thread or the article I linked. Because this simply doesn't make sense in the context of this discussion. I said that if you believed that women were less effected by the disposition effect then men, then it shouldn't surprise you that the kids being recognized as "good traders" were women (because if they have some small statistical edge than probability will magnify this effect at the tails of the luck distribution). Then people said that they weren't familiar with the disposition effect, so I linked to a news article talking about the research and giving you enough information to google on if you wanted more.

Now you are saying that research that you haven't read has to be wrong because the summary news article only talked about the research and wasn't itself a research paper, because your intuitions tell you otherwise, and because people totally unrelated to those in question might do something different. None of this disproves the existence of this effect.

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Re: Luck, skill, or Beardstown Lady?

Post by umfundi » Tue Feb 19, 2013 1:29 pm

garlandwhizzer wrote:I do see the opinions of Adler and others in the article which akiva listed, opinions which are based on their interpretations of aggregate individual investor psychology. I do not see any data that reliably backs up that claim. What they claim--that investors hold on to losers and sell winners for psychological reasons--would, if true in aggregate, completely destroy the momentum factor and in fact reverse it. The very existence of a momentum factor argues strongly that investors as a group pursue winners and abandon losers. Besides, completely apart from individual investor psychology, markets today are dominated by institutions, mutual funds, and professional investors, who are on short term performance leashes and must show results in the short term in order to keep their jobs, the opposite of holding on to losers for psychological reasons.

Garland Whizzer
I don't buy any of this.

Momentum and reversion to the mean are only visible in your rear view mirror.

Also, there are two parties to every trade. For every chump on the one side there must be a genius on the other side.

The lambs are being fleeced by fees, not by the prices at which they choose to buy and sell.

Keith
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Re: Luck, skill, or Beardstown Lady?

Post by Akiva » Tue Feb 19, 2013 1:42 pm

umfundi wrote:
garlandwhizzer wrote:I do see the opinions of Adler and others in the article which akiva listed, opinions which are based on their interpretations of aggregate individual investor psychology. I do not see any data that reliably backs up that claim. What they claim--that investors hold on to losers and sell winners for psychological reasons--would, if true in aggregate, completely destroy the momentum factor and in fact reverse it. The very existence of a momentum factor argues strongly that investors as a group pursue winners and abandon losers. Besides, completely apart from individual investor psychology, markets today are dominated by institutions, mutual funds, and professional investors, who are on short term performance leashes and must show results in the short term in order to keep their jobs, the opposite of holding on to losers for psychological reasons.

Garland Whizzer
I don't buy any of this.
You don't believe that on average investors hurt themselves when they trade? That's kind of a key assumption behind the general investing attitude on these forums. The papers analyzing why this is (including the disposition effect) have been favorably received here in the past, so I think you'd be in the decided minority if you are rejecting this research out of hand. There are a variety of reasons that trading hurts you. One of them is the disposition effect.
Momentum and reversion to the mean are only visible in your rear view mirror.
Except that this is in conflict with the actual research on the topic.
Also, there are two parties to every trade. For every chump on the one side there must be a genius on the other side.
Which doesn't prove anything about the effect in question...

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Re: Luck, skill, or Beardstown Lady?

Post by umfundi » Tue Feb 19, 2013 2:04 pm

Akiva wrote:
Momentum and reversion to the mean are only visible in your rear view mirror.
Except that this is in conflict with the actual research on the topic.
There is actual research? As opposed to actual data mining? :P

Really, tell me about momentum from today going forward for the next month.

Keith
Déjà Vu is not a prediction

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Re: Luck, skill, or Beardstown Lady?

Post by Akiva » Tue Feb 19, 2013 2:43 pm

umfundi wrote:
Akiva wrote:
Momentum and reversion to the mean are only visible in your rear view mirror.
Except that this is in conflict with the actual research on the topic.
There is actual research? As opposed to actual data mining? :P

Really, tell me about momentum from today going forward for the next month.

Keith
The data is available right on French's website along with the two Fama-French factors. (So he has SMB, HML, and MOM; recent research suggests you should include a factor that accounts for differences in residual volatility as well.) You can read Carhart's paper where he constructs the MOM factor (or any of the follow on papers) to see how that factor portfolio is constructed. (I think it basically just goes long last month's winners and short last month's losers, but the construction rules are a little more elaborate to eliminate the other factor effects. Also, FWIW, AFAIK, the original *academic* paper documenting this effect is by Jegadeesh and Titman, but there are non-academic descriptions of the phenomena going back to at least the 1920s.)

This is a well documented phenomena, but there's a lot of debate about whether it is caused by "real" risk or merely psychological in nature. Either way, past winners tend to overperform and past losers tend to underperform. So it's not just something that you see after the fact by looking at a chart.

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Re: Luck, skill, or Beardstown Lady?

Post by bawr » Tue Feb 19, 2013 3:02 pm

umfundi wrote:Momentum and reversion to the mean are only visible in your rear view mirror.
Apparently not:

"Since the 1980s academic studies have repeatedly shown that, on average, shares that have performed well in the recent past continue to do so for some time. Longer-term studies have confirmed that this “momentum” effect has been observable for much of the past century. Nor is the phenomenon confined to the stockmarket. Commodity prices and currencies are remarkably persistent, rising or falling for long periods."

http://www.economist.com/node/17848665

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