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Barry Ritholtz
November 8, 2017
3. Learn how you can help prevent yourself from making these
self-inflicted investing errors
A brief intro to
Behavioral
Economics &
NeuroFinance
How Your Brain Interferes with Your Investing
Your brain weighs 3 pounds, and is 100,000 years old. It is a dynamic, opportunistic, self-organizing system
of systems. MRIs have revealed to Neurologists what our brains looks like when making decisions. We can
observe it 1) in real time; 2) under actual conditions, and 3) in reaction to financial risk/reward stimuli.
Once we begin trading stocks, however, our brains begin to undergo subtle physical change that we can
actually see in the MRIs of Traders . . .
This
is
your
brain
on
stocks
Lake Wobegone Effect
Dunning Kruger Effect
Dunning Kruger Effect: DK is a cognitive bias in which unskilled people make poor
decisions and reach erroneous conclusions, but their incompetence denies them the
metacognitive ability to recognize these mistakes.
Metacognition: The less competent you are at a task, the more likely you are to over-
estimate your ability to accomplish it well. Competence in a given field actually weakens
self-confidence.
. . . is not an animation
If u cn rd ths
When it absolutely positively
has to deceive your eyes overnight
Source: 11even.net
Herding
Mutual of Omaha
Lone Gazelle
-McKinsey study
Source: Zweig, Your Money & Your Brain; Grants Interest Rate Observer,
Confirmation Bias
Selective Perception & Retention
1. We tend to read that which we
agree with; We avoid that which
disagrees with our preconceived
biases, notions or ideologies;
Source: WSJ
Part II: Politics and Markets
2003: Politics and Asset Management Dont Mix
We begin the new century with over 20 million new jobs; the fastest economic
growth in more than 30 years; the lowest unemployment rates in 30 years; the lowest
poverty rates in 20 years; the lowest African-American and Hispanic unemployment
rates on record; the first back-to-back budget surpluses in 42 years. And next month,
America will achieve the longest period of economic growth in our entire history.
We have built a new economy. And our economic revolution has been matched by a
revival of the American spirit: crime down by 20%, to its lowest level in 25 years; teen
births down seven years in a row; adoptions up by 30%; welfare rolls cut in half to
their lowest levels in 30 years.
My fellow Americans, the state of our union is the strongest it has ever been.
[Soon after, markets collapsed and the economy suffered its worst decade in 80 years]
One in 10 Americans still cannot find work. Many businesses have shuttered. Home
values have declined. Small towns and rural communities have been hit especially
hard.
And for those who'd already known poverty, life has become that much harder. This
recession has also compounded the burdens that America's families have been dealing
with for decades -- the burden of working harder and longer for less; of being unable to
save enough to retire or help kids with college.
1
Possible Outcomes of Nuclear Conflict
2
Part III: Managing our bad behavior
Sentiment Cycle
Source: Ritholtz.com
Repeatedly Forecasting the Next Crash
What Makes the Market Tick?
Investor Performance (10 Years)
Source: DALBAR
Investor Performance (20 Years)
Fear of Deadly Viruses
Crime: The Trend is Your Friend !
Now I understand these
cognitive issues, what can I
do about them?
Barry L. Ritholtz