Investor Psych

Question 1

X System

Answer 1

1. Emotional / Holistic
2. Most processing
3. Judgments based on similarity
4. Slow to change
5. Not conscious / passive

Question 2

C System

Answer 2

1. Logical
2. Slow
3. Deliberate
4. Conscious and can be changed

Question 3

hot-cold empathy gaps

Answer 3

When relaxed and calm, we underestimate how we will feel when stressed.

Question 4

Consequences of prolonged self control

Answer 4

1. Shift to higher risk taking
2. Become defensive and stubborn
3. Take immediate pleasures

Question 5

Chapter 1 Main Points (X vs. C)

Answer 5

1. Spock vs. McCoy
2. Primacy of Emotion
3. Self control is a Muscle
4. Hard-wired to Herd and for the Short Term
5. Plasticity as Salvation

Question 6

$DJI

Biases

Answer 6

1. I know better because I know more
2. Big does not equal Important
3. Show me what I want to see
4. Heads was skill, tales was bad luck
5. I knew it all along
6. The irrelevant has value as input
7. Judgments based on what it looks like
8. That’s not the way I remember it
9. If you tell me its so, it must be true
10. A loss isn’t a loss until I take it

Question 7

Bias #1

Answer 7

I know better…

Confidence leads to less accuracy

Question 8

Bias #2

Answer 8

Big doesn’t = important

There is a difference between strong information and information with a lot of weight (letter from mother = strong but low weight)

Question 9

Bias #3

Answer 9

Show me what I want to see

Confirmatory bias and ignoring disconfirming evidence

Question 10

Bias #4

Answer 10

Heads = Skill, Tails = Bad luck

Self attribution bias.

Question 11

Bias #5

Answer 11

I knew it all along

Hindsight bias - of course it was a bubble!

Question 12

Bias #6

Answer 12

Irrelevant has value

Anchoring, big round numbers

Question 13

Bias #7

Answer 13

What it looks like

What has been true in the past will continue to happen in the future. Ignoring mean-reversion. Straightline projections.

Question 14

Bias #8

Answer 14

That’s not how I remember it.

Recency effect makes it more likely to be influenced by dramatic stuff that has happened to you as “normal” or likely to happen again.

Question 15

Bias #9

Answer 15

You tell me it is true so it is

The power of framing can make it so that I ignore the forest for the trees. Zero-hedge

Question 16

Bias #10

Answer 16

A loss isn’t a loss until….

Holding losers longer than winners

Question 17

Impact Bias

Answer 17

Overestimating the impact of important events on your emotional state. I will be so upset if this stock drops!

Question 18

Empathy Gaps

Answer 18

Underestimate how much emotions will interfere with rational decision making.

Question 19

Solutions for Impact and Empathy Gaps

Answer 19

1. Remember past emotional events and how long it actually took to ‘get over it.’
2. Visualize the state when you will be required to make a decision and use rules to make it easier.

Question 20

Results of reduced ability to feel fear

Answer 20

1. More likely to take risks repeatedly (good for markets bad for life.)
2. More likely to avoid anchoring and ignore prior painful results

Question 21

7 Sins of Fund Managing / Bias / Solution

Answer 21

1. Forecasting / Anchoring / Don’t forecast - analyze
2. Knowledge illusion / Information processing / Use only required info
3. Meeting companies / Confirmation bias / Don’t visit or discount visits
4. Outsmart everyone/ Overconfidence / Don’t increase risk to outperform in short term.
5. Short time horizons and overtrading / confirmation bias and loss aversion / favor long term strategies and clients.
6. Believe what you read / Framing and representativeness “a good story” / Limit information sources, practice ‘unbelieving’
7. Group decisions / herding and confirmation bias / Employ secret ballots, devil’s advocate