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Monday, 3 March 2014

Low Risk, High Rewards: The Low Volatility Anomaly

Axiomatic Memes

It’s an axiom of standard economics that you don’t get above average returns without taking above average risks. No risk, no reward.  It’s an appealing idea, an extension of the entrepreneur's creed: you don't become successful without taking chances.  It’s a meme that’s gone viral, an idea that permeates discussions about investment, drives hard headed analysis and leads us to celebrate the risk taking achievers in society.

And of course it’s a bucketload of hogwash. In fact, lower risk portfolios will tend to outperform higher risk ones.  High risk stocks are dangerous rubbish, and offer not excess returns but excess losses.  They’re a one way ticket to the seedy side of the market.

Thursday, 30 January 2014

You'll Never Grow Rich Taking A Profit

“I made up my mind to be wise and play carefully, conservatively. Everybody knew that the way to do that was to take profits and buy back your stocks on reactions. And that is precisely what I did, or rather what I tried to do.....They say you never grow broke taking profits. No, you don't. But neither do you grow rich taking a four point profit in a bull market.”

Monday, 13 January 2014

Brains, Bulls and Lucky Tossers

The Wile E. Coyote Moment

With the great post-Armageddon bull market party in full swing suddenly everyone's an investment genius again. Back in 2008, when stocks were languishing at lows not seen since talking movies were invented, no one wanted to know. And, as usual when the bull is running, logic is taking a quiet break and considering early retirement.

Well, logic needn't bother. At some point people are going to look down and realize that they've run over the cliff edge again. The question is not if, but when, the Wile E. Coy moment will happen.  The trouble is that bull markets get people thinking they’ve got brains when mostly what they’ve got is hope.

Monday, 30 December 2013

Behavioral Resolutions for Behavioral Investors

Death or (um ... ) Death

Apparently the ancient Babylonians would, at the start of each year, promise to pay off their debts and return stuff that they’d borrowed, like the lawnmower (or, as we would refer to it, the neighbor’s goat). As we saw in On Incentives, Agency and Aqueducts  they had good reason to be cautious as the punishment for theft was death. Although, to be fair, the punishment for everything in Ancient Babylonia was death. What they lacked in imagination they made up for in consistency.

These days we have less strict incentives to keep to our New Year Resolutions, but would probably find ourselves wealthier if we could stick to a few simple rules. The essence of being a psychologically aware investor is self-control, and what could be less modern and more ancient than that?

Monday, 13 May 2013

The Cherry Coke Effect?

Hunger Games

If you want a favorable decision from a judge pray that you get a hearing early in the day or straight after lunch.  In similar fashion you shouldn’t be making investment decisions on an empty stomach.  In the parlance, such arbiters of justice and seekers after profit are suffering from ego depletion; although we might perhaps just say that they’re hungry.

Anyway, ego depletion seems to have a real effect on our ability to make important decisions: we’re more likely to be decoyed, to procrastinate and to compromise over our decisions when we’re low in energy.  So this explains why Warren Buffett is such a good investor; it must be down to his addiction to Cherry Coke. Surely?

Thursday, 18 April 2013

Thatcherism: The Irony of Economics

Nuance-onomics

We’ve previously looked at some of the evidence that suggests Studying Economics Makes You Mean.  The general idea is that learning about the market economy and the benefits of natural selection tends to make us less generous and less empathetic towards the travails of others.

However, like so much research quoted here this only offers up part of the story. It’s possible that we’re looking at a false correlation – it may be that it’s not studying economics that makes you a nasty grasping son-of-a-bitch but that you study economics because you already are one.  And, as usual, the truth is, at best, nuanced.

Thursday, 28 March 2013

Where Two Strangers Never Meet: Self-Serving Bias

"If you can meet with Triumph and Disaster, and treat those two strangers just the same"
IF ... Rudyard Kipling
Problematic Pronouns

We all probably know someone who believes that their successes are entirely down to their own levels of skill and whose failures are someone else’s fault.  To some extent most of us will meet them in the mirror each morning.  This is self-serving bias in action.  As Donelson Forsyth explains it:
“Those told they failed attribute performance to such external factors as bad luck, task difficulty, or the interference of others, and those told they succeeded point to the causal significance of such internal factors as ability and effort.”
Now, what do you think will happen to a corporation if you put someone with a bad case of self-serving bias in charge?  Beware the CEO with a bad case of the personal pronouns, that’s what I say. And let's not talk about global warming.

Saturday, 23 March 2013

Free Zeitgeist

As the Eurozone undergoes another trial by stupidity and markets edge ever higher in the face of uncertainty and confusion, my publisher has kindly put The Zeitgeist Investor on free offer for the weekend.  If any Kindle owners out there haven't already picked up a copy now is the time to do so. Because, of course, there's nothing new in the markets, it's just that we don't live long enough to remember.

Read More >> The Zeitgeist Investor

Tuesday, 12 March 2013

Curiouser and Curiouser: Incentives Through the Looking Glass

Demotivated by Design

The world is full of schemes aiming to incentivize us; we’re spurred on to achieve new targets and scale new heights by the carrot of lucre-based incentivization schemes designed to appeal to our selfish natures.  Which is not surprising because we live in a society characterised by a belief that we’re all out for what we can get, wheeling and dealing in our own self-interest, forever trying to get the maximum reward for the minimum effort.

Which is like determining that 5 is the square root of 17.  Anyone who truly believes that money is the main motivation for most of our behavior is someone whose belief system needs to be carefully inspected with one of those devices used for stirring septic tanks.  Worse still, financial incentive schemes may actually miss the point by undermining our most cherishable quality: curiosity makes the man, even if it flattens the feline.

Thursday, 28 February 2013

Sapir-Whorf Economics: Your Language Predicts Your Future

A Resumption

Apologies for the recent temporary hiatus, been rather busy with that strange thing called real life.  More regular updates from now on but, for a while, they'll be more limited than in the past due to the need to fulfil a book contract.  Still, it’ll be something to add to the Christmas wishlist.

So … let’s look at something really odd, and why, if you’re a useless procrastinator  you should really want to learn German.  It seems that cultural stereotyping may not be quite so irrational as we may have thought …