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Friday, 9 March 2018

Cursed By Momentum

Edgy Investors

Although most investors have no edge on the market there's a proportion of them that persist in trading actively, the main effect of which is to enrich their brokers. There are various explanations of why this occurs, but it seems to come down to some combination of inherent overconfidence and a perverse refusal to take account of negative information. 

This is particularly dangerous in calm periods such as those we’ve been experiencing in markets over the past few years.  In such times momentum strategies are particularly effective – and serve to supercharge the behavior of naturally overconfident individuals. The end results are usually not pretty..

Monday, 12 February 2018

Bias In Action

Myopic Urges

The recent sharp correction in markets has clearly surprised a lot of investors. No doubt this is partly due to the standard myopia people seem to exhibit as soon as the last crash is out of sight, but it also seems to be connected to the fact that the seemingly inexorable rise in share prices and the continuing low interest rates on deposits has tempted new people into stocks. Faced, for the first time, with nasty losses they’re casting about for some kind of strategy to deal with the situation.

In truth if you need to find a strategy after markets have started falling it’s too late. For most of us the only sensible approach is to only buy things we’re comfortable holding through any kind of downturn and to then do nothing when volatility strikes. But even experienced investors face the urge to do something – anything – in the face of mounting losses. This is action bias, in action.

Monday, 24 April 2017

Putting Pro-Innovation Bias on the Blockchain

Blockchain Bias

Over the past couple of years I've spent a lot of time listening to people wittering on about "the blockchain". They've claimed it can solve a plethora of society's ills - everything from the elimination of poverty to the overthrow of fiat currencies and the nation state.

Being charitable this is evidence of pro-innovation bias in all its perverse glory. Being cynical it's evidence of people trying to scam investment funds by capitalizing on the halo effect. The blockchain is a brilliant piece of innovation, which will one day - probably - lead to significant economic benefits, but in the end it's just another piece of technology.

Monday, 17 April 2017

A Catalog of Investing Errors

Love Lists

We're attracted to lists like moths to flames and netheads to clickbait. The Big List of Behavioral Biases is by some way the most popular page on this website, but it actually provides very little insight into investing successfully.

Behind this, though, lies a deeper truth. Lists are processed more easily by the brain, and they're perfectly optimized for the click and go environment that is the Internet. Here I explain why. In a list. Obviously.

Monday, 10 April 2017

Unbanked But Not Unwise

Tribal Finance

Lisa Servon has written a clever, accessible and pin-point clear piece of ethnographic research. It looks at how an underserved and underappreciated tribe, without access to regular financial services, has developed ways and means of coping in their absence. It's also a damning indictment of the organizations that claim to offer them these services.

The tribe, of course, is middle class America, and the organizations are the banks that fail to serve them.

Monday, 3 April 2017

Age Makes You Happier - And Poorer

Avoidance Strategies

As the years pass I've noticed I'm increasingly unwilling to expose myself to sources of negative information or emotional stress. So news bulletins, soap operas and anything a film critic might regard as emotionally engaging are increasingly off-limits. Frankly I'd rather watch Guardians of the Galaxy than Moonlight, no matter how worthy the latter.

Slightly to my surprise it turns out that this isn't just me being more than normally antisocial, but is a commonly observed age-related change in preferences. By choice older people will habitually avoid stuff that they find negative. Which goes a long way to explaining a lot of things, including why older nuns tend to be happier and why we should avoid having to do anything difficult - like thinking or active investment - after we've reached 70.

Monday, 27 March 2017

The Future is Made in the Bedroom, Not the Boardroom

RIP Hans Rosling

Hans Rosling was, if you’re a data geek like me, a hero. His life was spent not just combating fake facts and opinion based decision making but also in finding new and imaginative ways of visualising real data. And he was in demand by corporations across the world because his work showed them where to invest.

So obviously Rosling wasn’t an economist: he was a population statistician who built his ideas on data, rather than models. And what his data suggests is that the future is made in the bedroom, not the boardroom.

Monday, 20 March 2017

Idiots in Investing Echo Chambers

Investing in the Dead

Some people like to wander round graveyards. I get the same sort of ghoulish pleasure out of frequenting investment discussion boards. They're full of Pollyannas, forever only able to see the good in the stocks they invest in.

Sadly they're almost always wrong. But it's kind of fun watching them keeping the reanimated corpses of zombie stocks moving about through the power of sheer stupidity.

Monday, 4 July 2016

Blindsided by Brexit Bias


The result of the UK’s referendum on the EU caught markets by surprise. They’d soared the previous day in the expectation of a Remain vote and were thrown into turmoil when it turned out a majority of the British were less concerned with economic stability and more with mass immigration.

The polls leading up to the referendum were finely balanced; if they were to be believed then the result was far from certain right up to the end. Yet many people took the market surge at face value – that markets were pricing in known information –  and that a Remain vote was in the bag. But it wasn’t, and the whole thing is behavioural bias writ large. Not that anyone will actually learn the lessons of course.

Thursday, 31 March 2016

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.