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Friday, 3 July 2015

Lost In Your Own Memories: Age And The Room Effect

Remember ...

Old people, you may have noticed, have a much better recollection of past events than they have of current ones. Memory is a very odd thing; what we remember and what we don’t isn’t always entirely rational, and the lessons we learn from our memories aren’t always the ones we ought to.

For investors, who all too often rely on their unsupported memories for insight into what they should be doing, this opens up a world of potential dangers. Although, as it turns out, simply wandering from one room to another can be enough to ruin your portfolio.

Thursday, 25 June 2015

Corporate Bias: When Projects Go Bad

Bypass Surgery

As I recently blogged in Mobile Bypass Surgery For Banks over on Tomorrow’s Transactions, where the more technical side of my financial blogging occurs these days, the recent system outages at Royal Bank of Scotland, where customers were once again unable to access their own money, are just the tip of an industry-wide problem.  But that’s only half the story, because technology failures are always mediated by psychological ones.

As we know well enough – the Big List of Behavioral Biases is testament to the issue – individuals suffer from a vast range of behavioral issues, with predictably depressing financial consequences. But similar problems also afflict corporations, because managers suffer from the same issues as investors, and the results can be catastrophic for investors.

Tuesday, 24 March 2015

Gaia And The Ambivalent Investor

Delusional

We're very keen on people who are very definite about things - even if it subsequently turns out they're wrong or delusional (or both). We're less interested in people who are less certain about things. We don't value ambivalence in our gurus.

Unsurprisingly we're wrong about this. The ambivalent investor is sometimes that rare thing, a genuinely sensible expert in a field dominated by loud mouthed, impossibly certain charlatans. And mostly it doesn't matter which side of the fence you favour, you'll be better off sitting on it. 

Tuesday, 17 March 2015

Mr Popper's Predictions

In My Experience

In my experience whenever you hear someone saying "in my experience" you're about to get an earful of incoherent nonsense justified by the observer's single perspective. It's nearly always dangerous nonsense, justified by specific examples taken from a single snapshot in time.

Well, in my experience, personal observations are typified by overconfidence, colored by hindsight bias and impervious to evidence suggesting that they're wrong. They're flung about with gay abandon, but have as much in common with objective truth as a report from an analyst.  The future is unknowable, anyone who claims special knowledge is either lying or mad. And possibly both.

Tuesday, 10 March 2015

The Emperor's New Markets

Borderline

Markets often exhibit behavior bordering on the delusional - frequently from the wrong side of the border. Investors seem unable to disassociate specific investment opportunities from broader economic realities - how many corporations in the history of the world have ever justified a P/E of over 100? Yet, from time to time, people will fall over each other to invest in these "opportunities", seemingly oblivious to the enduring nature of competition in markets.

Of course, financial markets are just a peculiarly public forum for demonstrating this irrationality, and one in which it's possible to quantify the scale of it, albeit only in hindsight. But human mass delusional behavior isn't confined to markets, it's just other social settings make it more socially acceptable.  To be human is to be be mad, but we don't have to be poor as well.

Tuesday, 3 March 2015

I Don't Know What I Like (And I Don't Know What It's Worth, Either)

Axiomatic

One of the fundamental axioms of economics is that we know what we like: we have preferences, they're consistent across time and they can be revealed by careful experimentation. This, of course, is utter nonsense. Yet it's not just a guiding principle of economics but is also a rough and ready rule we live our lives by. We make decisions and then we justify them, after the event, because to do otherwise would make a mockery of our choices.

But because we do actually make decisions we must, in a sense, really know what we like, even if we're habitually inconsistent. Unfortunately, outside of our own specialised areas of expertise we don't know how to absolutely value things and all too often we assign a value based on entirely superfluous data intermingled with a bit of relative valuation, reckoning that a Porsche 911 Carrera is worth more than a child's teddy bear. We exhibit coherence but in an arbitrary fashion - a behavior known, rather unoriginally, as coherent arbitrariness.

Wednesday, 25 February 2015

Novelty, Unicorns and the Stressed Investor

Bad Hair Days

There’s a Groundhog Day effect in financial markets: wait long enough and another crisis will occur and everyone will be stunned and surprised. In fact they’ll be just as stunned and surprised as they were the last time one occurred. We’ve the attention span of a distracted goldfish when it comes to noticing the disconcerting regularity of market mishaps.

But although market upheavals are frequent they’re not so frequent that we get used to them. The steady state is a constant background hum of noise punctuated by occasional bouts of excitement over some stock or other. When a crisis occurs it’s a novelty – and for most of us our response to novelty is to get stressed, and then run around like our hair is on fire. By and large, I'd observe, this is not optimal investing behavior.

Thursday, 5 February 2015

Beyond the Dismal Science

The Passionate Science

Back in the nineteenth century Thomas Carlyle described economics as “the dismal science”, a term that’s been wheeled out ever since whenever some hackneyed journalist or febrile blogger feels the need to criticise something to do with money. It’s a snappy little phrase, and is all too often justified.

Well, now a couple of behavioral economists have written a book that attempts to refute that label. In the words of John List and Uri Gneezy in The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life economics is a passionate science – one that is:
“Fully engaged with the entire spectrum of the human emotions … and with the capacity to produce results that can change society for the better”.
So if you want to know how to price wine correctly, or to improve the performance of students or get people to donate more money to charity or level the playing field for women at work then this is the place to start. And if you want a tool kit to improve your performance at, say, investing, then you’re in the right place.

Thursday, 1 January 2015

Investing In Our Children

Live Long and Prosper

Statistically, a child born today is more likely to reach 100 than someone who is already 96 years old. And this is happening at a time when government resources are increasingly stretched and retirement ages are creeping upwards, when the populations of the developed nations are aging and the borders are increasingly closed to younger people from poorer countries.

As parents the one thing we can do for our children, to prepare them for this dystopian future, is give them the skills they need to survive and, hopefully, prosper. And chief of those skills, in a world dominated by the ideology we call capitalism, is a proper understanding of how to manage money: because the alternative is that money will manage them.

Friday, 19 December 2014

Saving the Appearances (of Standard Finance)

Unbalanced

Back in the Europe of the Middle Ages there existed a curiously schizophrenic attitude to the question of whether the Earth was at the center of the universe. The doctrine of the established Catholic Church decreed that it was. The practical evidence suggested that it wasn't and the orthodox scientific theory endeavored to fit the evidence to the theory, at the expense of commonsense and logic.

Today there exists a similarly curious attitude to the question of whether or not economics is governed by people making rational decisions in consistent ways. The doctrine of the established economic theory says that it is. The practical evidence suggest that it isn't. And the orthodox economic theories endeavor to fit the evidence to the theory, at the expense of commonsense and logic.