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A Few Notes on The Little Book of Behavioral Investing

  
Analysis, Education, LINKS
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The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy, author James Montier states: “I…highlight some of the most destructive behavioral biases and common mental mistakes that I’ve seen professional investors make. I’ll teach you how to recognize these mental pitfalls while exploring the underlying psychology behind the mistake. Then I show you what you can do to try to protect your portfolio from their damaging influence on your returns.” Biases he surveys include: action bias, bias for stories, confirmation bias, conformity bias (herding or groupthink), conservatism (including sunk cost fallacy), disposition effect, empathy gap, endowment effect, hindsight bias, illusion of control, inattentional blindness, information overload, loss aversion, myopia, overconfidence, overoptimism, placebo effect, self-attribution bias and self-serving bias). Value investing provides the context for discussion. Citing a number of studies, he concludes that:

“…we should do our investment research when we are in a cold, rational state–and when nothing much is happening in markets–and then pre-commit to following our own analysis and prepared action steps.”

“…fear causes people to ignore bargains when they are available in the market… The ‘battle plan for reinvestment’ is a schedule of pre-commitments…”

“We should get used to asking ‘Must I believe this?’ rather than… ‘Can I believe this?’” (more…)

Loss Aversion

  
  Education
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Changing behavior is one of the hardest things one can do, but as most successful marketers will tell you, it can be done in almost any circumstance. There are apps for the iPhone (I can’t speak for Android) which have succeeded in getting people to exercise or lose weight. Perhaps you might adapt one of them to suit your need.

Yes. If loss aversion is pervasive, then it should show up in regularities relating to price moves. The situation is complicated in futures where one person’s long profit when price goes up is the short’s loss. The endowment effect which is caused by loss aversion or the tendency to connect with what you own, could lead to holding something too long. The reference point effect, which is that people base their decisions on where they are, a variant of holding onto the status quo is also a factor. When there is a profit, a different type of endowment effect plays then when there is a loss. Especially when there has been a big loss and it turns into a profit, the loss aversion effect is greatest I believe. (more…)

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