Posts Tagged ‘psychology’

Stop Crying, It’s Hurting Your Portfolio

Wednesday, November 25th, 2009
If investors just trusted classic investing strategies instead of getting so emotional, their portfolios would be much better off…
  • A new study found investors are making two big mistakes: 1) they get too emotional about their investments and make hasty decisions, and 2) they assume recent performance dictates future performance.
  • The study also explained that the most classic investment strategies – asset allocation and portfolio rebalancing – would help investors avoid these mistakes.

Facts & Figures

  • Over the past 2 years, a basic portfolio with conservative asset allocation and annual rebalancing dropped by only 3.5% compared to a 30% S&P drop during the same time.
  • During a boom, a basic portfolio with conservative asset allocation and annual rebalancing returned 8.3%, not so much less than 9.7% for the S&P.

Best Quote

“People spend all their time looking at the trees and not the forest. It’s the forest that’s important, and that’s asset allocation.” – Gary P. Brinson, Chicago-based Asset Manager

Could You Be Tricked Into A Trade By A Cute Name? Probably.

Thursday, November 19th, 2009

There are lots of risky and complicated investment vehicles available that can mislead investors with the power of cute-sounding acronyms…

  • A psychological phenomenon called “fluency” makes acronyms that sound like familiar words (like “ELKS,” “LYONS,” and “NINJAS”) more appealing than the complicated, clunky investment vehicles they stand for.
  • The same phenomenon extends to stock ticker symbols as well, with snappy and pronounceable symbols tending to outperform clunkier symbols in short-term gains.
  • Investors should be especially cautious when considering stocks or other investment vehicles represented by acronyms rather than their full names. Is it possible that the name is designed to deflect attention from potential risks?

Facts & Figures

  • In an experiment involving ordinary people judging the safety of various fake food additives, easily-pronounceable additives were perceived to be 29% safer than those with hard-to-pronounce names.
  • When Harley-Davidson changed its stock ticker symbol from HDI to HOG, the stock price rose by 5%.
  • Some choice acronyms and what they stand for: BIMBOs (Buy-In Management Buyouts); STRYPES (Structured Yield Product Exchangeable for Stock); SPARQS (Stock Participation Accreting Redemption Quarterly-Pay Securities); PRIDES (Preferred Redeemable Increased Dividend Equity Securities).

What If You Couldn’t Stop Shopping?

Friday, October 23rd, 2009

Do you consider yourself a shopper? A collector? Or is your habit something… more?

  • Hoarding, a psychological disorder that causes people to hold on to mountains of unnecessary items, is estimated to effect up to 2% of the U.S. population. Hoarders can collect anything from magazines to craft supplies to live animals, and are often unaware of the mess they live in.
  • Hoarding is often seen as a form of obsessive-compulsive disorder, but is different because it is less of a compulsion and more of a dissociated state focused on the frenzy and neurological rewards associated with acquiring something new. Many hoarders show signs of multiple background psychological disorders.
  • Experts recommend that concerned families avoid shaming the hoarder or trying to forcibly clean out their houses. Instead, focusing on the problems that the hoarding causes and dealing with some of the underlying psychological disorders seems to help.

Facts & Figures

  • The Collyer brothers became famous hoarders in 1947, when they died at home surrounded by 14 pianos, 25,000 books, thousands of newspapers, and part of a car.
  • Approximately 2% of the population, across all socioeconomic dimensions, meets diagnostic criteria for hoarding.
  • Experts at Tufts University have seen cases of animal hoarding with 1,000 animals living in the same home.

Best Quote

“Attorneys, surgeons, business executives—some very bright and successful people that you’d never suspect have this problem. Sometimes they’re the life of the party, but nobody’s ever been invited to their home.” – Michael A. Tompkins, Psychologist

Breathe In, Breathe Out, Breathe In, Breathe Out… Overreacting During Difficult Times

Tuesday, June 23rd, 2009

Making investments can sometimes be stressful. Now add a recession and you might be swept up in some pretty powerful emotions. If you feel yourself feeling this way, you should check out what several respected financial psychologists have to say.

  • During stressful times (like a recession), people’s tendency to react emotionally to a situation is greatly exaggerated. Emotionally charged investment decisions usually do not lead to higher earnings.
  • Behavioral finance tries to understand how people react to stressful situations and how they affect people’s investment choices.
  • These ‘biases’ are hard to overcome – we are emotional beings, but understanding how emotions influence decision-making can reduce the degree and scope of their impact.

Facts & Figures

  • The ‘anchoring’ bias is where an investor gets too attached to an asset and cannot make practical decisions involving it.
  • The ‘loss aversion’ bias is where investors do not sell a falling asset because they would be acknowledging the loss.

Best Quote

“What was a great trait for surviving and thriving in the jungle doesn’t work so well in the stock market.” – Brad Klontz, Financial Psychologist.