Tag: behavioral-finance

Found an interesting paper (scribd embed below) where the authors hypothesize that superstition may be a symptom of a general cognitive disability in making financial decisions.

The authors constructed a “superstition index” and bucketed traders based on their trading activity in the Taiwan Futures Exchange. They found that the superstitious individuals (the top-quintile of the superstition index) under-perform their non-superstitious counterparts (the bottom-quintile of the superstition index) by 1.6 basis points within a trading day. The under-performance widens to 2.4 basis points for one day and 6.3 basis points for five days after the transactions.

Here’s an odd titbit: Did you know that India’s Independence Day falls a day after Pakistan’s because astrologers in India insisted that August 14, 1947, was an inauspicious day to become independent?

I came across some interesting articles on how urban legends are born and kept alive. This is especially true of readers who skim an academic discipline, for example, by reading Malcom Gladwell, and don’t put in the effort to stay updated. And just how the secret of advertising is repetition, repetition, repetition, some “truths” stick around long after they have been debunked simply because they get repeated often enough.

The 10,000 hour rule

Made famous by Outliers by Malcolm Gladwell, the 2008 book’s “10,000-hour rule” turned most “Soccer Moms” into “Tiger Moms.” However, we now know that Gladwell’s book mistook the average of 10,000 hours that experts took to master a skill with the total they required. Plenty of studies suggest that aside from practice hours, individual differences help explain success: from socioeconomics to coaching to I.Q.

However, they myth lives on as more and more people read the book and not the errata.

Source: National Geographic

Is Spinach a good source of iron?

In 1981 and again in 1995:
The myth from the 1930s that spinach is a rich source of iron was due to misleading information in the original publication: a malpositioned decimal point gave a 10-fold overestimate of iron content.

In 2011:
The story that the iron content of spinach was a myth based on a misplaced decimal point is itself a myth. Spinach has a lot of iron, just like other green vegetables, but it is unavailable for absorption.

So spinach is useless as a source of iron. But not because of a measurement error. Try to get your mom to believe it.

Source: SagePub

Here be dragons

Daniel Kahneman: “A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not easily distinguished from truth. Authoritarian institutions and marketers have always known this fact.”

People deal with statistical illiteracy by reacting with their gut. It makes us overreact to things that seem dangerous only because they’re unknown, and underreact to things that are dangerous but look benign.

But tell this to a guy who believes in technical analysis and he’ll probably kill you.

Source: Fool.com

When I was in high school, we were taught about “truth tables.” It is a mathematical table used in logic to tell whether a propositional expression is true for all legitimate input values. Watching pundits speak on TV is makes you wonder how they could ever have passed high school algebra.

The Can’t Lose Argument

Beware those who are never wrong. The “Can’t Lose Argument” goes something like this: A data point will be mentioned, and no matter what the net change in that data — up, down or neutral — it is somehow bad for markets.

Link: If You Can’t Lose,You’re a Loser

There is always a divergence

Sometimes they matter, sometimes they don’t. Sometimes one key divergence that was extremely important ends up meaning exactly zero the next time around. A single divergence, in and of itself, has all of the reliable predictive power of a bowl of chicken bones spilled out across the table.

Link: There’s ALWAYS a divergence

Macro-tainment

It’s crucial to recognize that macroeconomics is something that even the world’s smartest economists still don’t understand very well, and that political ideology and economic reality don’t mix.

Link: When Entertainment Passes for Investment Advice

Related: Musings on stock-market forecasts

Enjoy this video:

Josh Brown has an interesting observation up on his tumbler page about what investors understand intellectually, but don’t accept in reality.

Source: Seven Truths Investors Simply Cannot Accept

Quantitative Analysis of Investor Behavior

There’s an annual report, called the Quantitative Analysis of Investor Behavior, produced by the DALBAR organization, that tracks the behavior of individual investors. Here’s their key finding:

Although the report covers only retail investors in the US, its findings hold a mirror to investor behavior in general.

Investor education doesn’t help

Louis S. Harvey, President of DALBAR, argues that: “It is now past the time for the investment community and its regulators to understand that the principle of educating uninterested investors about the complexities of investing is unproductive.”

The report concludes:

“Attempts to correct irrational investor behavior through education have proved to be futile. The belief that investors will make prudent decisions after education and disclosure has been totally discredited. Instead of teaching, financial professionals should look to implement practices that influence the investor’s focus and expectations in ways that lead to more prudent investment decisions.”

Are our policy makers, SEBI included, taking notes?

Source: financial-math.org