Investment Psychology

Question 1

Explain the psyche

Answer 1

The theory uses the Greek word Psyche to refer to the full human mind in its widest sense. It can be translated to mean Mind or soul.
The simple tripartite model of the Psyche we can study makes it up of three parts: Nouse, Logos, Pyr

Question 2

Relate a narrative and the formation of them to the psyche

Answer 2

Relating the psyche to the formation of narratives: narratives being analogous to Nous (heart) and analyses analogous to Logos (head) – and adding element Pyr(guts), for the amount of light and energy used to create and apply them.

Question 3

Define Nous

Answer 3

mind, thought or imagination for reality, intuition, reflection and the mind’s eye. It’s the mental picture of the world the individual is using. Considered the most important part of the psyche. A rational mindset implements the mind’s intuition

Question 4

Define Logos

Answer 4

logic or rational thinking. The function of logos is to condition the mental picture created by Nous. Logos is logic everyone understands - outsiders find logical also

Question 5

Define Pyr

Answer 5

Pyr - Fire in the belly or impulse and drive. It is the energy used in and by the psyche

Question 6

Define the ego in the context of investment psychology

Answer 6

An individual sees the world partly the way the world is and partly the way they are. Ego is a lense or filtwer through which a person sees the world. An individual’s Ego can defend them from realities that they don’t like and only the individual can open their eyes to these realities.

Question 7

What is a healthy ego and an unhealthy ego

Answer 7

A healthy ego means a person sees the world as it really is and constructively tries to engage with the world
An unhealthy ego means a person uses degrees of self-deception to excuse or justify their actions to make themselves feel better about the world - everyone does this, it’s just getting to know to what extent we do it.

Question 8

When do we hear ego talked about and what does a big ego or small ego mean

Answer 8

In ordinary conversation, individuals can sometimes be distinguished as having a ‘big ego’ or a ‘small ego’, but in investment psychology, the distinction is drawn between ‘healthy’ and ‘unhealthy’ Ego.
If an individual has a ‘big ego’, they have higher self-regard, and a greater sense of self, then they are more liable to ego-defence mechanisms being activated to protect their high self-regard. But it is possible to have a high self-regard and a healthy ego.

Question 9

Define a rationalisation

Answer 9

When an individual makes a judgment based partly on the way they are and partly on the way the world is, this is referred to as a rationalization

Question 10

What effects the likelihood and severity of our rationalisations in a situation?

Answer 10

The more emotional we feel in a certain scenario the higher our expectations of a certain outcome

Question 11

What are ego defence mechanisms and why do they occur?

Answer 11

Ego defence mechanisms are a type of rationalization caused by high emotion and high expectations of something that didn’t happen.

People are often defining themselves by their Ego - the greater sense an individual has of their self regard the more they are influenced by their ego and rationalisations

Question 12

How do we measure rationality?

Answer 12

Rationality is considered to be a spectrum rather than an absolute. At one end of the spectrum is Logos: dispassionate, neutral reasoning which in theory could be understood by all, while at the other end would be factually incorrect rationalizations, heavily distorted by Ego.

Question 13

What is the idea of the hill depicting?

Answer 13

Progressively meeting our needs in life is an uphill battle and it is harder to progress than it is to regress.
We ascend the hill according to how much we require of ourselves
“Nothing any good isn’t hard”

Question 14

What are the challenges people face engaging Nous

Answer 14

Involves opennes, vulnerability, not veiling the truth - uncomfortable situtaion
Individuals ego can fight against self reflection as it wants to feel good
Nous threatens ego defense mechanisms

Question 15

What are the challenges engaging Logos

Answer 15

Requires discipline, lack of distractions and taking everything in
The capacity to apply Logos is limited by the extent they applied Nous
Ego will always want a less realistic picture of the world

Question 16

What are the challenges of engaging Pyr

Answer 16

Needs motivation
The ego is typically inclines to risk aversion -risk not fully negaging pyr
Not engaging nous or logos then Pyr can cause problems with impulsive behaviour not thinking realistically

Question 17

What are challenges engaging the whole psyche?

Answer 17

The conflict between openness, uncertainty and vulnerability of Nous and the stability safety that aid logos
Engaging Pyr conflicts with engaging Nous and applying Logos. Nous requires a degree of disengagement from Pyr. And Logos requires disciplining it.
Person needs a healthy ego

Question 18

What are the four types of motivation

Answer 18

Positively motivated people
Negatively motivated people
Intrinsic motivation
Extrinsic motivation

Question 19

Describe intrinsic vs extrinsic motivation

Answer 19

Intrinsic - using your heart
Extrinsic - using your ego

Question 20

Explain the difference between a narrative and analysis

Answer 20

The analysis is in the narrative- the narrative will dominate and limit the analysis example of the investment manager job being within an outside market narrative. The analysis part is within the context of the world where the investor works

Question 21

What is a narrative

Answer 21

Big picture - the story
It’s important to note the narrative needs to be deep enough to show the big picture without taking sides. A simple to shallow narrative usually has another simple or shallow narrative contracting it. Shallow narratives can result in persuasive but erroneous speech prevailing over reason and logic

Question 22

When investing ha=ow can we balance ego and logos

Answer 22

When investing an investor’s Logos needs to be ego-critical to avoid the rationalizations that can arise this Logos needs to be somewhat pessimistic if anything to counteract the EGOs idealized view of the world

Question 23

Describe the conformist

Answer 23

The individual who does not engage their Psyche beyond their rationalisations, will passively rely on the narratives (Nous) and the analyses (Logos) of others. They can do so by conforming to a variety of norms and ‘accepted wisdom’.
Provides ready-made templates for understanding, coordinating and engaging with the financial markets and they lower the cognitive load of engaging with the world
Become part of the Group-ego.

Question 24

What are a conformists ethics?

Answer 24

They have some degree of expectation that others give things to them or do thing for them
Only carry out analyses in their narrative, challenging the narrative is too dangerous
Freedom for them is less responsibility
Adapting to the environment
Action and courage tend to be absent - want someone else to do this

Question 25

What is a EMH claim?

Answer 25

The EMH claims that asset prices fully reflect all available information. The consequence is that stocks always trade at their fair price so it is impossible to consistently pick individual stocks that will ‘beat the market’.

Question 26

What are the different deficiency points in EMH from the perspective of a competitive investor

Answer 26

Asset prices do not reflect all the available information
EMH can be seen as a group ego defence mechanism
Investors with market power are not considered to fit into this

Question 27

How does one go about Creating an investment narrative with a competitive advantage

Answer 27

Better understanding than average of the non-Logos behavior of other investors
Deep narrative - more capabilities for Logos
Recognition of deficiencies in current consensus
Allowance for the expected behavior of investors adhering to EMH and CAPM
Recognition and understanding of likely behavior of the bigger players in the market - winning and losing player

Question 28

Characteristic’s of an astute investor

Answer 28

Understanding implication of opposing theories like EMH
Exercises patience and humility
Considers it essential to have a disciplined psychological apporach to investing
Actively and critically looks at the world and creates a critical narrative
Creates a deep narrative when looking for causes and effects
Digs deeper into media narratives
Creates their own narrative that is a realistic as possible - questions existing narratives ina progressive manner
Are disciplines with losses
Learns to improve their narratives continuously
Ability to persist and start over
Understands the advantages and disadvantages of diversifying

Question 29

Look over the comparison of consensus vs competitive investor

Answer 29

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