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Steve Netwriter

The Psychology of Investing, a repeating pattern

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All investments rely heavily on the psychology of the individuals involved.

 

 

Bubble Psychology

 

The psychological phases of those involved in bubbles.

 

bubblepsychology.jpg

 

Japan-Land-Prices-Update-2007-11-RG.png

 

 

We all go through emotional phases:

 

MervinKing_StagesofView.jpg

 

 

Denial

 

Denial (also called abnegation) is a defence mechanism postulated by Sigmund Freud, in which a person is faced with a fact that is too uncomfortable to accept and rejects it instead, insisting that it is not true despite what may be overwhelming evidence. The subject may deny the reality of the unpleasant fact altogether (simple denial), admit the fact but deny its seriousness (minimisation) or admit both the fact and seriousness but deny responsibility (transference).

http://en.wikipedia.org/wiki/Denial

 

 

Cognitive dissonance

 

In psychology, cognitive dissonance is an uncomfortable feeling or stress caused by holding two contradictory ideas simultaneously. The theory of cognitive dissonance proposes that people have a fundamental cognitive drive to reduce this dissonance by modifying an existing belief, or rejecting one of the contradictory ideas.

....

This can result in rationalization when a person is presented with evidence of a bad choice, or in other cases. Prevention of cognitive dissonance may also contribute to confirmation bias or denial of discomforting evidence. If not corrected, this can lead to further bad choices for the sake of consistency, rather than learning from mistakes.

http://en.wikipedia.org/wiki/Cognitive_dissonance

 

 

The Stages of Grief

 

Stages_of_Grief.jpg

 

Markets are the collective actions of individuals, and the psychology of the markets can be broken down to the psychology of the individual participants who make it up.

 

When prices first drop and the market enters the denial stage, the individual market participants feel confusion and attempt to avoid the truth. This is motivated by fear they may have been wrong to purchase when they did, and they might lose money. They seek ways to quell these fears through drinking even more kool aid. Bulls in the denial stage will not come to a blog like this one because we will not feed their denial. Some will stop by, try to convince us we are wrong, and move on. The only person they are really trying to convince is themselves.

 

From this comprehensive article on bubble psychology:

http://www.irvinehousingblog.com/blog/comm...ref=patrick.net

 

 

Groupthink

 

Groupthink is a type of thought exhibited by group members who try to minimize conflict and reach consensus without critically testing, analyzing, and evaluating ideas. During groupthink, members of the group avoid promoting viewpoints outside the comfort zone of consensus thinking. A variety of motives for this may exist such as a desire to avoid being seen as foolish, or a desire to avoid embarrassing or angering other members of the group. Groupthink may cause groups to make hasty, irrational decisions, where individual doubts are set aside, for fear of upsetting the group’s balance. The term is frequently used pejoratively, with hindsight.

http://en.wikipedia.org/wiki/Groupthink

 

 

Panic

 

NorthernRock.jpg

 

 

Despair

 

mervinking.jpg

 

 

Resignation

 

ImpoverishedMiddleClassSellPossessi.jpg

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How this has been applied to the US:

 

Tuesday Morning: Irvine Blogger Goes Inside the Mind of the Bubble

http://latimesblogs.latimes.com/laland/200...ay-morning.html

 

bubblepsychology.jpg

 

"The above graph is an excellent depiction of the psychological stages of a market bubble. It is fairly easy to put time frames to each of these stages as displayed by our local housing market:

 

• Take off: 1998-1999

• First Sell Off: 2000

• Media Attention: 2001-2002

• Enthusiasm: 2003

• Greed: 2004-2005

• Delusion: 2006

• Denial: 2007

• Fear: 2008

• Capitulation: 2009-2010

• Despair: 2011-2013

• Return to the Mean: 2014

 

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Pride and Prejudice: Examining the Psychology of Those in the Housing Industry.

http://drhousingbubble.blogspot.com/2007/0...-examining.html

 

It is hard to be objective when your job depends on seeing things a certain way. Many people have a hard time accepting mistakes and would rather lament and lash out at others that contradict their view of the world. I remember posting in a housing forum 2 years ago the same analysis I’ve presented many times here on the blog. Those in the housing industry would dismiss the bubble argument as holding no merit and would simply pull out a nice upward trending chart, and point to the current median price. They were right. All the numbers pointed to incredible appreciation, quick sales, and no signs of stopping. My view was income in many areas simply did not support the current growth of the market. The only way the market was being supported was via exotic financing and bubble psychology. In a bubble market, psychology and perception is just as important as economic fundamentals.

......

The argument has psychologically shifted. There is no need to talk in obscure forums regarding the housing bubble. The mainstream media is now carrying the baton. Now the argument of many in the industry is one in which they are blaming all the negative press for popping the bubble. “Income is rising, population growth is occurring, and housing is still strong.” Or so they would like you to believe. Tell that to the tens of thousands of former mortgage workers. And this argument seems more of a self pacifying defense mechanism of convincing themselves that somehow the market will be back to its old tricks again. Deep down they pine for yesteryear when you could get Funky your mangy dog a $450,000 mortgage and move him into a 500 square foot home with no co-signer.

 

 

 

Manias, Panics, and Crashes

http://drhousingbubble.blogspot.com/2007/0...2007-first.html

 

#5 – Crash and Panic

 

Most bubbles pop quick and utterly fast. The unwinding of a bubble is likened to a cat grabbing the end string of your favorite grandma’s knitted sweater and darting off. Nothing can prevent the collapse because it is literally built on a house of cards. If an economy is build on the belief that housing will always go up and credit will always be freely accessible then it will fall.

 

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In psychology, cognitive dissonance is an uncomfortable feeling or stress caused by holding two contradictory ideas simultaneously. The theory of cognitive dissonance proposes that people have a fundamental cognitive drive to reduce this dissonance by modifying an existing belief, or rejecting one of the contradictory ideas.

....

This can result in rationalization when a person is presented with evidence of a bad choice, or in other cases. Prevention of cognitive dissonance may also contribute to confirmation bias or denial of discomforting evidence. If not corrected, this can lead to further bad choices for the sake of consistency, rather than learning from mistakes.

 

 

 

 

Great posts here Steve. Psychology is fundamental to the investment world and I believe an understanding of it is a lot more useful than technical chart analysis etc. Market changes, whether from bull to bear or from bear to bull, are based largely on pyschology. Fundamental conditions for the bull in PM may be set but only changes in the psychology of the general investing public will see it really take off. This no doubt will require further bad news from the banks.

 

One point about "cognitive dissonance". I suspect besides giving rise to rationalization, it itself arises from a overly rationalist frame of mind. An example of this is the way in which thinkers tend to devolve into two camps... such as we find in the inflation/deflation debate. Resulting rationalization leads to a reduction of reality which comes to be seen in black and white terms. In contrast, reality is more kaleidoscopic.

 

In my opinion, the uncertainty principle helps in avoiding "cognitive dissonance" and concomitant rationalizations. :)

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A Great Presentation from fund manager, James Montier:

 

Applied Behaviour Finance / Insight into Irrational Minds and Markets

===================

 

http://www.trendfollowing.com/whitepaper/James-Montier-2.pdf

An excellent piece on market + fund manager/analyst phschology

 

People are amazing, in how we delude ourselves:

 

Simple maths leads to anchoring

8*7*6*5*4*3*2*1 = median answer 2250

1*2*3*4*5*6*7*8 = median answer 512

Actual answer = 40,320

 

Representativeness Heuristic

Aka law of small numbers – belief that random samples of a population

will resemble each other and the population more closely than statistical

sampling theory would predict.

Which is more likely HTHTTH or HHHTTT?

 

Availability Bias

Which is a more likely cause of death in the US – being killed by a

lightening strike or as a result of a shark attack?

Shark attacks receive more publicity, they are easier to imagine (thanks to

Jaws). However, the chance of dying from a lightening strike are 30x

greater than chances of being killed by a shark.

 

Top tips for better decision making (& improved stock-picking?)

========================

This applies to me, you and everyone else

You know less than you think you do

Be less certain in your views, aim for timid forecast and bold choices

Don’t get hung up on one technique tool, approach or view – flexibility and

pragmatism are the order of the day

Listen to those who don’t agree with you

 

You didn’t know it all along, you just think you did

Forget relative valuation, forget market prices, work out what the stock is worth

(Use reverse DCFs)

Don’t take information at face value, think carefully about how it was presented

to you

 

Don’t confuse good firms with good investments, or good earnings growth with

good returns

Vivid, easy to recall events are less likely than you think they are, subtle

causes are underestimated

Try to focus on facts, not stories

Sell your losers and ride your winners

 

Beating the biases

Being aware of the biases is not enough. It is just an important first step.

Need to create a framework that incorporates mental best practice. Easier said

than done. Mental bad habits are persistent.

The good news, we continue to create new brain cells throughout our lives.

 

== ==

 

Groupthink Traps

=============

A tendency to examine too few alternatives

A lack of critical assessment on each other’s ideas

A lack of contingency plans

Poor decisions are often rationalized

Illusion of group invulnerability and shared morality

True feelings and beliefs are suppressed

Illusion of unanimity is maintained

Mind guards are appointed to protect the group from negative information

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You know less than you think you do

Be less certain in your views, aim for timid forecast and bold choices

Don’t get hung up on one technique tool, approach or view – flexibility and pragmatism are the order of the day

Listen to those who don’t agree with you

 

Agree :D

 

 

RH, sorry for no reply. I sometimes don't reply in the hope others will either reply, or see someone other than me posting, and want to see what is being said.

Please post the uncertainty principle for inflation/deflation & x & y :P:lol:

 

 

I am having a tough time at the moment psychologically, having listened to:

 

The Creature from Jekyll Island - A Second Look at the Federal Reserve by G Edward Griffin - 71 min - Sep 24, 2007 (56MB)

http://video.google.com/videoplay?docid=-8484911570371055528

 

I'm trying to work out WHY so many people seem to be completely blind to this.

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I am getting increasing interested in what it takes to BOUNCEBACK from Grief and Despair

 

The problem being that, once you reach that stage, and are feeling:

 

+ Overwhelmed, and

+ Helpless

 

You can stay stuck there for a long time.

 

BOUNCING BACK, through...

 

Here's an interesting point that I picked up from Ken Shreve at Investors Bulletin:

A new bull market, when it starts, always has new leadership when compared with the old bull market.

 

For example, if the last bull market was led by commodities, then they are not going to lead us up

into a new bull market. They can participate, but they are not going to lead. I am not sure what

sector will be the leading sector in the next bull market. (Maybe Eric Jansen will be right, and it will

be the Infrastructure Sector. I have started a new thread on this sector, if people are interested.)

 

Here's my interest here:

If this is true about the stock market, might it be true about the general economy too???

 

If so, then something critical to kicking off an upswing is INNOVATION.

 

Listless, overwhelmed and helpless people are not innovators. You need confidence for that.

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RH, sorry for no reply. I sometimes don't reply in the hope others will either reply, or see someone other than me posting, and want to see what is being said.

Please post the uncertainty principle for inflation/deflation & x & y :P:lol:

Unlike Heisenberg, I am no mathematical genius. I use the term loosely as a modern substitute for the enlightened skepticism of an earlier age. This skepticism was the scourge of the sophists with their fully thought out ideological systems. Today’s equivalent of the sophist is the rationalist who also pretends to divine the nature of reality. Behind all the systems is a certain psychology at play which a later age termed the libido scientia [a character flaw of the species apparently], the will to knowledge...which today we call ideology. An ideology reduces the world to a set of black and white logical axioms which in turn lead to binary opposites such as, to bring this post back on topic, inflation/deflation.

 

Unfortunately, given the rationalist frame of mind [almost all pervasive in our culture], we tend to see inflation and deflation in binary opposition. Accordingly, we have the “great inflation/deflation debate”; one of them must be true and the other nonsense. In actuality, this is itself nonsense.

 

To look at why it is nonsense in more practical terms, here is something Krassimir Petrov has to say on inflation and deflation:

 

http://www.financialsense.com/editorials/p.../2008/1102.html

Dow-Gold Ratio. The Dow-Gold ratio represents the most important ratio between the relative prices of financial assets and real assets. The Dow component represents the valuation of financial assets; the gold component – of real assets. When leverage in the financial system increases significantly, so does this ratio. A very high ratio is interpreted as an imbalance between financial and real assets – financial assets are grossly overvalued, while real assets are grossly undervalued. It also implies that a correction eventually will be necessary – either through deflation, which implies deleveraging and a collapsing stock market, or through inflation, which implies stagnant stock market for many years and steadily rising prices of real assets, commodities, and gold, usually associated with stagnant economy and typically resulting in stagflation. The first case—deflation—occurred during the 1930s, while the second case—stagflation—occurred during the 1970s

 

Petrov focuses primarily on the relative ratio between financial and real assets. He goes on to say that when an economy becomes unbalanced, due to an over-valuation of financial assets, a re-balancing of the ratio is required. How that re-balancing occurs is secondary. So for example, in the 30s financial assets deflated to bring the ratio back to a norm, whereas in the 70s real assets inflated in order to adjust to the norm. What is of prime importance here is the ratio between assets not whether the mere numbers go up or down. This time round, with the dollar unbacked by gold, we would expect real assets to inflate in order for a return to a balanced economy, but this may not necessarily be the case.

 

When you consider the relative ratio between assets to be the prime driver here, why could we not see both deflation in financial assets and inflation in real assets in order to achieve the norm. And in reality, that is what we are seeing, what many have referred to as biflation. In sum, my point is that given Petrov’s emphasis on the ratio between assets, it makes perfect sense to have both inflation and deflation at work [maybe poor wages will remain static in the middle]. It also makes nonsense of the “debate” which poses inflation/deflation as binary opposites and perpetuates the myth that thinkers must subscribe to one theory or the other.

 

The uncertainty principle allows a flexible approach to theories which, far from disparaging them, utilizes them in order to understand a complex situation better. It also reminds us that theories are theories, or hypotheses, or speculations... nothing more, nothing less.... and that unique situations may call for unique theories [though they usually come after the event with the benefit of hindsight].

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I think that Petrov quote is a classic. It's interesting that he manages to write in such a short text more or less what I have been thinking, but with less simple clarity !

That's why I've not been involved in the Inflation/Deflation debate.

 

Have you studied how neural networks work ?

If not, I think you would find it interesting.

 

The essence of which is "all things are shades of grey". An analogue system, not a digital one.

A result is a complex combination of many shades of grey. Much as you describe.

 

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One point about "cognitive dissonance". I suspect besides giving rise to rationalization, it itself arises from a overly rationalist frame of mind. An example of this is the way in which thinkers tend to devolve into two camps... such as we find in the inflation/deflation debate. Resulting rationalization leads to a reduction of reality which comes to be seen in black and white terms. In contrast, reality is more kaleidoscopic.

 

In my opinion, the uncertainty principle helps in avoiding "cognitive dissonance" and concomitant rationalizations. :)

 

I would argue that it is irrational thinking - particularly dichotomous thinking - that leads to creating the black & white worldviews that make people intellectually rigid & plonk themselves into camps of one belief or another, or at least the willingness to rationalise on the strength of very thin evidence, which to me is not being rational.

 

Of course, those thoroughly indoctrinated by their Worldview don't necessarily even reach a state of cognitive dissonance as they just filter the contrary evidence out by the process of gestalt (for instance when a creationist sees a fossil & deletes the fact that it is evidence of evolution or makes a false rationalisation based on no evidence that it is god testing their faith).

 

Cognitive Dissonance can also be triggered by the purely non rational creative thoughts. For instance, there is an argument in popular psychology that if we imagine ourselves confidant (visual creativity), we will unsettle our unconscious minds into either rejecting the picture (if it doesn't fit in with our reality), or we will unconsciously start moving toward becoming that image as reality. This is, where they argue, that cognitive dissonance can be used as leverage & a force for good.

 

Gestalt plays a big role in psychology factors/filters; the shaping of data into fitting our world views can also be irrational (or rather not as a result of any rationale). When you look at a cloud & see popeye's head floating about, it's a natural attempt to see something familiar & make the clouds fit a pattern, not necessarily the result of any rational thinking.

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All investments rely heavily on the psychology of the individuals involved.

 

http://www.informit.com/content/images/013.../0130422002.pdf

 

When i was researching about LCTM i stumbled across this. Even great mind's consider too narrow a choice of outcomes it point's out.

 

Not the full book, but throw's up some interesting investor psychology trait's and pitfall's.

 

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One point about "cognitive dissonance". I suspect besides giving rise to rationalization, it itself arises from a overly rationalist frame of mind. An example of this is the way in which thinkers tend to devolve into two camps... such as we find in the inflation/deflation debate. Resulting rationalization leads to a reduction of reality which comes to be seen in black and white terms. In contrast, reality is more kaleidoscopic.

 

In my opinion, the uncertainty principle helps in avoiding "cognitive dissonance" and concomitant rationalizations.

 

I would argue that it is irrational thinking - particularly dichotomous thinking - that leads to creating the black & white worldviews that make people intellectually rigid & plonk themselves into camps of one belief or another, or at least the willingness to rationalise on the strength of very thin evidence, which to me is not being rational.

 

Yet, I was wondering if we can be too rational at times. I was wanting to make the further point that "cognitive dissonance" could possibly arise from a rationalist [as opposed to a rational] frame of mind.

 

I see rationalism is an overly ideological/analytical way of thinking whereby thought proceeds from self-contained and clearly delineated axioms [surely synthesis is just as important as analysis]. I believe it is the fundamental reason we see thinkers devolve into so many "two camp systems".

 

Examples of which; inflation/deflation, socialism/libertarianism [the public sphere becomes all consuming/ the private becomes all consuming] and even irrationalism/rationalism. Authentic rational debate tends to then break down once the "two camps" develop and become entrenched.

 

 

 

Hmmm... how to get this back on topic? :huh:

 

Got it. The investor should not wear his ideological spectacles too closely but hold them at arms length. :lol:

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A Great Presentation from fund manager, James Montier:

Groupthink Traps

=============

A tendency to examine too few alternatives

A lack of critical assessment on each other’s ideas

A lack of contingency plans

Poor decisions are often rationalized

Illusion of group invulnerability and shared morality

True feelings and beliefs are suppressed

Illusion of unanimity is maintained

Mind guards are appointed to protect the group from negative information

 

Glad you liked it !!!

 

The group thing stands out for me "Overconfidence (simple repetition of views leads to people having greater confidence)" page 61 of presentation

http://www.trendfollowing.com/whitepaper/James-Montier-2.pdf

 

Observation - the views/thoughts/options of GEI members are perhaps a little different compared to the rest of the population ;)

 

It does strike me that the simple repetition of views leading to people having greater confidence could be influencing some members of GEI on certain threads here. Madness of crowds perhaps.

 

One needs to stay open minded, balanced and aware !

 

So we could actually do with some "normal" people who question (hopefully intelligently) what they see on GEI.

 

Ps what chance of getting James Montier on CWR now that would be interesting. But unlikely.

 

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Yet, I was wondering if we can be too rational at times. I was wanting to make the further point that "cognitive dissonance" could possibly arise from a rationalist [as opposed to a rational] frame of mind.

 

I see rationalism is an overly ideological/analytical way of thinking whereby thought proceeds from self-contained and clearly delineated axioms [surely synthesis is just as important as analysis]. I believe it is the fundamental reason we see thinkers devolve into so many "two camp systems".

 

Examples of which; inflation/deflation, socialism/libertarianism [the public sphere becomes all consuming/ the private becomes all consuming] and even irrationalism/rationalism. Authentic rational debate tends to then break down once the "two camps" develop and become entrenched.

 

I wonder if dichotomous thinking is in some part a result of our doctrinal programming, possibly even intentionally so, since it suits those with vested interests in maintaining the current systems of privilege & power to present the world to us in black & white.

 

History itself is presented to us as black & white by the education system; good versus evil; them or us. It is far easier to get a population to fight WWI, for example, when it is presented as fighting off the evil enemy rather than simply a realigning of Capitalist Powers. If you educate your own populations too much & train them to think for themselves & ask questions, it could prove problematic when calling them to arms.

 

Politics is often presented to us in black & white terms by the media systems too; left & right. It suited those on the right in America for example to blur the lines between left of center capitalists & communists to justify overthrow after overthrow of non-US-aligned states in Latin & South America under pretexts of Soviet subversion.

 

If somebody attacks the current system of Capitalism in America, most Americans reply that Communism is no better. The fact that the mainstream media has virtually kept hidden other alternatives such as Anarcho-Syndicalism or Anarcho-Capitalism is most definitely a key factor. Americans seem to be far greater black & white thinkers than average & I'm not so sure it's because they over-rationalize.

 

It's almost as if an Orwellian shrinking of concepts & actual opinions & possibilities has taken place, not so much Ingsoc (shrinking of the english language to reduce the range of thought & therefore dissenting opinion as in 1984) but more of a deliberate polarization of key concepts, to deliberately reduce the range of possibilities & alternatives to the current system in people's consciousness.

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Glad you liked it !!!

 

The group thing stands out for me "Overconfidence (simple repetition of views leads to people having greater confidence)" page 61 of presentation

http://www.trendfollowing.com/whitepaper/James-Montier-2.pdf

 

Observation - the views/thoughts/options of GEI members are perhaps a little different compared to the rest of the population ;)

 

Views here get repeated, and those who share them, gain confidence that they are right.

So posting here CAN BE DANGEROUS, unless one remains open to other points of view

(Gold CAN FALL- as it has- and so can Mining stocks).

 

Even Tim Wood can come up with ocassional brilliant calls

 

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I wonder if dichotomous thinking is in some part a result of our doctrinal programming, possibly even intentionally so, since it suits those with vested interests in maintaining the current systems of privilege & power to present the world to us in black & white.

.........

It's almost as if an Orwellian shrinking of concepts & actual opinions & possibilities has taken place, not so much Ingsoc (shrinking of the english language to reduce the range of thought & therefore dissenting opinion as in 1984) but more of a deliberate polarization of key concepts, to deliberately reduce the range of possibilities & alternatives to the current system in people's consciousness.

 

Yep... I think there is some truth to the idea we are susceptible to indoctrination. Great antidote to which is wide reading in a variety of subjects. One of my favorite subjects is the history of ideas and accordingly I am a little critical about our modern mode of thinking in that it has a tendency towards rationalism ...great if you are doing physics, maths or geometry but not so for politics, morality and economics.

 

The modern world also tends towards specialization where someone becomes disciplined into one.... discipline. How does this all relate to investment? Well, I think the prudent investor needs to be able to juggle many balls such as mass psychology, philosophy and history on the one hand with economics, mass media, and analysis on the other. This would be a dynamic and synthetic approach as opposed to a dry analytical one.

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Views here get repeated, and those who share them, gain confidence that they are right.

So posting here CAN BE DANGEROUS, unless one remains open to other points of view

(Gold CAN FALL- as it has- and so can Mining stocks).

 

Even Tim Wood can come up with ocassional brilliant calls

 

Would you not agree that the mechanism for getting carried away with the crowd is discipline? Whilst plenty would not sell gold because they have a long term view, it does make me wonder whether they are blanking out what they don't want to hear because of their strong long terms views, some of which i share.

 

But found this article interesting and almost acts as a warning for using stop losses:

 

http://www.equitymaster.com/detail.asp?dat...008&story=4

 

"The unwillingness to sell bad stocks is one of example of cognitive dissonance in stock market. An investor purchases a stock and then gets emotionally attached to the same. Consequently, he starts taking in only selective information and concentrates more on positive news and views about that particular stock, and selectively ignores bad news and views about the same. He comes up with reasons not to sell a stock like – "I have lost a lot of money and I would be punishing myself right now by selling it", or "It seems cheap to hang on to a loser."

 

Interstingly when Laffer was predicting oil to go to $35 everyone was calling him deluded, his explanations and prediction may still be wide of the mark, but the concept of cognitive dissonance in investing, takes in too narrow a mindset and limiting beliefs, this article concludes with the following comment

 

"It is very critical for an investor to constantly re-evaluate his investments and views and change them as situations require and new data becomes available. It is inevitable that investors are going to make mistakes when forecasting the future. The good investors will minimise the financial damage done by such errors and the poor investors will fail to minimise the damage and this can lead to a small number of errors causing large losses"

 

How many investors when oil was at $147, gold above $1000 , the FTSE above 6000, DOW above 11,000 etc are suffering positions and not wishing they had done this i wonder?

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Interstingly when Laffer was predicting oil to go to $35 everyone was calling him deluded, his explanations and prediction may still be wide of the mark, but the concept of cognitive dissonance in investing, takes in too narrow a mindset and limiting beliefs, this article concludes with the following comment

Should be remembered though that Laffer was predicting a falling oil price, but in a booming economy environment. He was right on oil, but for the wrong reasons.

 

"It is very critical for an investor to constantly re-evaluate his investments and views and change them as situations require and new data becomes available. It is inevitable that investors are going to make mistakes when forecasting the future. The good investors will minimise the financial damage done by such errors and the poor investors will fail to minimise the damage and this can lead to a small number of errors causing large losses"

 

How many investors when oil was at $147, gold above $1000 , the FTSE above 6000, DOW above 11,000 etc are suffering positions and not wishing they had done this i wonder?

 

Below from 13/01 John Mauldin's Outside the Box E-Letter‏

 

The Investor Psychology

 

People make mistakes when they invest. They do so as a result of their biases of judgment or mistake their perceptions as reality. There are several basic mistakes:

 

1. Over-Optimism: Most investors tend to exaggerate their own abilities.

2. Over-Confidence: Lends investors to overstate their knowledge, understate the risks, and exaggerate their ability to control the situation.

3. Cognitive Dissonance: Investors often have an incredible degree of self-denial.

4. Heuristic Rules: Rules of thumb that we employ for dealing with the daily information deluge by evaluating based on how closely a situation, person, etc., resembles someone or something, rather than examining and questioning; i.e., we "frame" and/or "anchor" the event/person/action.

 

Freud once said, "Thinking is rehearsing." What he meant was that after you accumulate the data and analyze the opportunities, then you have to take action. In the world of investing, there is no substitute for taking action. Therefore, as an advisor, I seek to understand our biases and attempt to make rational and prudent decisions based on fact and not perception. Savvy investors understand the risks inherent in their assumptions and adopt a more businesslike approach to investing by reducing and hedging risk. Investors are typically surprised when facing a loss, and the power of the loss far outweighs the power of gains. Each of you will always know of someone who made more money than we did: always. The critical thing we ask you to ask yourself is, What amount of risk was taken for the performance? Losses are inherent in any investment process; the key is to limit the size of the loss in order that you have more marbles to play with when good times return. Therefore remember the critical rule of compounding: Don't lose money.

 

As an investor, there are two steps you can take to improve your ability to handle the coming year:

 

* Actively Manage the Asset Mix -- look to be contrarian (this is our primary job).

* Develop Reasonable Expectations -- Wishful thinking is not a strategy.

 

It's not what you make, it's what you keep.

 

Market Vertigo

by Cliff Draughn

 

 

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Learn your anchors.

 

Learn to manipulate your own anchors.

 

Learn to manipulate other peoples anchors.

 

Do this with the highest ethics you are capable of.

 

http://en.wikipedia.org/wiki/Anchoring

 

Anchoring and adjustment heuristic

 

Anchoring and adjustment is a psychological heuristic that influences the way people intuitively assess probabilities. According to this heuristic, people start with an implicitly suggested reference point (the "anchor") and make adjustments to it to reach their estimate.

 

The anchoring and adjustment heuristic was first theorized by Amos Tversky and Daniel Kahneman. In one of their first studies, the two showed that when asked to guess the percentage of African nations which are members of the United Nations, people who were first asked "Was it more or less than 45%?" guessed lower values than those who had been asked if it was more or less than 65%. The pattern has held in other experiments for a wide variety of different subjects of estimation. Others have suggested that anchoring and adjustment affects other kinds of estimates, like perceptions of fair prices and good deals.

 

Some experts say that these findings suggest that in a negotiation, participants should begin from extreme initial positions.

 

As a second example, consider an illustration presented by MIT professor Dan Ariely. An audience is first asked to write the last 2 digits of their social security number, and, second, to submit mock bids on items such as wine and chocolate. The half of the audience with higher two-digit numbers would submit bids that were between 60 percent and 120 percent more," far higher than a chance outcome; the simple act of thinking of the first number strongly influences the second, even though there is no logical connection between them.

 

Oh and have fun. :)

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THIS is absolutely wonderful. All it needs is its author to do a CWR or similar to run alongside.

 

see http://www0.gsb.columbia.edu/students/orga...resentation.pdf

 

The above link was taken from

http://www.dailystocks.com/forum/showpost.php?pid/2155/

 

Columbia Business School has occupied an important place in the history of asset management. From the seminal works of Benjamin Graham and David Dodd to the prestigious Heilbrunn Center under the leadership of Professor Bruce Greenwald, CBS has provided an intellectual home base for the philosophies of value investing. Alumni of Columbia’s program include Warren Buffett ’51, Leon Cooperman '67, Mario Gabelli ’67, Glenn Greenberg ’73, Arthur Samberg '67, and William von Mueffling ’95.

 

The Columbia Investment Management Association builds from its philosophical foundation to consider the complexity of today’s investment theory and practice. Join us for our 12th annual conference, which provides an excellent opportunity to hear from some of the top names in the investment management business. This year’s presenters will discuss trends in the current investment climate in the midst of tremendously chaotic and historic times for the financial markets.

 

This year’s speakers and panelists include:

 

• Bill Ackman, Pershing Square Capital Management

• James Chanos, Kynikos Associates

• David Einhorn, Greenlight Capital

• Beth Lilly, Woodland Partners, GAMCO

• Bill Miller, Legg Mason

• James Montier, Société Générale

 

Presentation file by James Montier at the

Columbia Investment Management Association

--------------------------------

JAMES MONTIER has a healthy respect for the Benjamin Graham school and is one of those who forsaw the current crisis occurring

 

He also wrote this piece which I posted a while back and Dr Bubb liked - if you havent seen it it is well worth a look

http://www.trendfollowing.com/whitepaper/James-Montier-2.pdf

 

He also has a fairly expensive book out on Amazon

 

+ this piece is fairly recent

http://www.investorsinsight.com/blogs/john...er/default.aspx

 

You can find other stuff by googling his name

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