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Article Archive
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
| E.I. will wreck your portfolio | ||
| 03/04/10 Permlink Report Broken Link | Behaviour | ||
| "Now we learn that insensitivity training might also make you a better investor. If emotional intelligence attunes you to the moods of others it can only wreck your portfolio." | ||
| More articles on the same topic . . . | ||
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| How to tell when a CEO is lying | ||
| 08/25/10 Permlink Report Broken Link | Behaviour | ||
| "Assessing whether reported financial statements are intentionally misstated (or manipulated) is of considerable interest to researchers, creditors, equity investors, and governmental regulators. While there is a lot of information out there on deception detection, there is not a lot of useful information. This recent study, where the authors analyze linguistic features present in answers of CEOs and CFOs during quarterly earnings conference calls, caught my eye. Investors might want to pay attention" | ||
| Slime mould like humans | ||
| 08/12/10 Permlink Report Broken Link | Behaviour | ||
| "This style of 'comparative valuation' may seem uncannily human, but it's also one that's shared by hummingbirds, starlings, honeybees and many other animals. In fact, Latty and Beekman think that it's a 'common feature of biological decision-making'. Certainly, it's a much easier process - comparing two nearby options is less 'computationally intensive' than making absolute judgments about each of them." | ||
| Meet the $69 hot dog | ||
| 08/12/10 Permlink Report Broken Link | Markets Behaviour | ||
| "Absurdly priced menu items are more than a publicity gimmick. They're an application of "anchoring," a cognitive phenomenon discovered by psychologists Amos Tversky and Daniel Kahneman in the 1970s. Whenever we try to estimate a numerical value, we are unconsciously influenced by related numbers just considered. In this case, the diner in a touristy Manhattan restaurant is trying to decide how much he or she can afford to spend. The familiar prices back home don't apply. That diner isn't going to order a $69 hot dog, but might happily opt for an $17.95 cheeseburger. The hot dog makes the cheeseburger appear reasonable in comparison (even though $17.95 would be a ridiculous price for a cheeseburger almost anywhere else). In scores of careful laboratory studies, price contrasts like that affect decisions. Restaurateurs and consultants believe it works on menus, too." | ||
| The meaning of fair | ||
| 08/02/10 Permlink Report Broken Link | Behaviour | ||
| "Chapman University experimental economist Bart Wilson argues that fairness should not be construed as equality of outcome, but as a process in which everyone plays by the rules and honors agreements. When lawmakers obscure the definition of this word, it may result in policy that is ineffective, arbitrary, and fundamentally unfair." | ||
| Niederhoffer on being wrong | ||
| 06/24/10 Permlink Report Broken Link | Behaviour | ||
| "I made so many errors there it's pathetic. I made one of my favorite errors: "The mouse with one hole is quickly cornered." That is key. There are certain decisions you make in life that are irreversible, that lead you into a path you can't get out of, and unless you have more than one escape clause, the adversary can gang up on you and destroy you. What else? I didn't have a proper foundation. I was not sufficiently private in my activities. I was playing poker with men named Doc. I must've made a hundred errors on that one, but those are five or six that come to mind." | ||
| Something's wrong but you'll never know | ||
| 06/22/10 Permlink Report Broken Link | Behaviour | ||
| "Knowing what you don't know? Is this supposedly the hallmark of an intelligent person? ... That's absolutely right. It's knowing that there are things you don't know that you don't know. Donald Rumsfeld gave this speech about 'unknown unknowns.' It goes something like this: 'There are things we know we know about terrorism. There are things we know we don't know. And there are things that are unknown unknowns. We don't know that we don't know.' He got a lot of grief for that. And I thought, 'That's the smartest and most modest thing I've heard in a year.'" | ||
| His own worst enemy | ||
| 06/11/10 Permlink Report Broken Link | Behaviour | ||
| "Terrance Odean, a finance professor at the University of California, Berkeley's Haas School of Business, has spent his career studying a very specific type of investor: the one who is overconfident, shortsighted and far more likely to snap up a stock at the worst possible moment than to make the kind of contrarian bet that pays off in the long run. Odean's specialty, in other words, is the average investor." | ||
| Green from envy | ||
| 05/29/10 Permlink Report Broken Link | Markets Behaviour | ||
| "However, if our actions are based not on absolute wealth but relative wealth - an envy-based economy - the market would need no risk premium. Falkenstein developed the empirical case for this in his January, 2010, paper 'Risk and Return in General: Theory and Evidence.' But other researchers have pointed to similar envy-indicating results, including Cornell economist Robert Frank, whose research showed that most people would choose to live in a world where they made $100K and their peers made $85K, over a one in which they made $110K and their peers made $200K." | ||
| Metric mania | ||
| 05/17/10 Permlink Report Broken Link | Behaviour | ||
| "In the realm of public policy, we live in an age of numbers. To hold teachers accountable, we examine their students' test scores. To improve medical care, we quantify the effectiveness of different treatments. There is much to be said for such efforts, which are often backed by cutting-edge reformers. But do wehold an outsize belief in our ability to gauge complex phenomena, measure outcomes and come up with compelling numerical evidence? A well-known quotation usually attributed to Einstein is 'Not everything that can be counted counts, and not everything that counts can be counted.' I'd amend it to a less eloquent, more prosaic statement: Unless we know how things are counted, we don't know if it's wise to count on the numbers." | ||
| Do bonuses create cheaters? | ||
| 05/17/10 Permlink Report Broken Link | Management Behaviour | ||
| "The common practice of granting bonuses to people who hit a certain target is supposed to boost their productivity. Turns out, it may be encouraging them to cheat, according to a new paper by University of Guelph and Ryerson University researchers." | ||
| The disposition effect | ||
| 05/02/10 Permlink Report Broken Link | Behaviour | ||
| "Benjamin Graham once said, "An investor's chief problem, even his worst enemy, is likely to be himself." This is nowhere more true than when it comes to deciding to buy or sell a stock. We have an uncanny ability to buy stocks that are poor investments and sell stocks that are good investments. In essence, we buy high and sell low. In general, investors tend to shoot themselves in the foot - because they follow their instincts." | ||
| Risks hide in plain sight | ||
| 04/25/10 Permlink Report Broken Link | Behaviour | ||
| "The good news: By presenting a simplified emphasis on fees, the researchers tripled the number of investors who favored the lowest-cost funds. The bad news: That tripling brought the proportion up only to 9% from 3%. "We still ended up with a 91% failure rate," says Prof. Laibson. Encouraged to focus on fees, investors nevertheless fixated on - and chased - past performance." | ||
| Nudges gone wrong | ||
| 04/24/10 Permlink Report Broken Link | Behaviour | ||
| "But this starts to sound an awful lot like fine-tuned social engineering, which gets us away from the original vision of simple nudges making a better world. And it starts to sound exactly like the type of heavy-handed governing that Republicans may be quietly rebelling against by turning up their thermostats." [Spot the questionable math for extra fun.] | ||
| The new paternalism | ||
| 04/17/10 Permlink Report Broken Link | Government Behaviour | ||
| "Real people are susceptible to cognitive biases that can lead to poor decisions. It's only natural to want to help them make better choices. But no one is immune to bias. Not social scientists, and certainly not policymakers. In translating behavioral science into policy, we may be led astray by the very same cognitive defects we wish to correct. New paternalist policies, and indeed the intellectual framework of new paternalism itself, create a serious risk of slippery slopes toward ever more intrusive paternalism." | ||
| Nudge this | ||
| 04/15/10 Permlink Report Broken Link | Government Behaviour | ||
| "In the Weekly Standard, Andrew Ferguson notes the paradox of behavioral economics, that proving people are often irrational then begs the question as to why we think some subset of intellectuals or regulators are more rational" | ||
| Creativity: a crime of passion | ||
| 04/08/10 Permlink Report Broken Link | Behaviour | ||
| "Creativity seems to be the "buzz word" of the 2000s. Society values it, companies need it, and employers want it. Or do they? What society claims to want and what is actually rewarded in practice are two different things. We claim to want innovation, but are innovation and creativity actually encouraged, or even allowed in most environments? What types of creative behaviors are rewarded by society, and what types are punished?" | ||
| Why envy dominates greed | ||
| 03/29/10 Permlink Report Broken Link | Behaviour | ||
| "Economists generally think of self interest as maximizing the present value of one.s consumption, or wealth, independent of others. Wealth can be generalized to include not just their financial assets, but the present value of their labor income and even public goods. Adam Smith emphasized a self-interest that also recognized social position and regard for society as a whole, but this was well before anyone thought of writing down a utility function, which is a mathematically precise formulation of how people define their self interest. But what if economists have it all wrong, that self interest is primarily about status, and only incidentally correlated with wealth?" | ||
| Reward for punishment | ||
| 03/20/10 Permlink Report Broken Link | Funds Behaviour | ||
| "Short-term redemption fees may prevent investors from frequently trading in and out of mutual funds, which results in an implicit wealth transfer from long- to short-term fund investors. This paper studies the impact of short-term redemption fees of various structures on long-term fund performance. We observe that fund performance is increasing in the magnitude of the fee and the time period during which an investor would be subject to it. Redemption fees are associated with up to a 327 annualized basis point increase in average abnormal returns." | ||
| Confirmation bias in action | ||
| 02/23/10 Permlink Report Broken Link | Behaviour | ||
| "At least we can all agree it is the other guys' politics and ideologies that are twisting facts and obscuring evidence." | ||
| Be a sceptical economist | ||
| 02/11/10 Permlink Report Broken Link | Behaviour | ||
| "One of the biggest problems is one that psychology has faced since it began, to do with the authenticity of its experiments. If you take a bunch of people, shut them in a darkened room and make them do odd things, out of context, you might expect them to behave a bit peculiarly. Psychologists, on the other hand, tend to live in darkened rooms and regard doing odd things in them, often involving small, furry animals, as quite normal. So they see nothing wrong in this and are quite happy to write up the results of these experiments in order to help deepen our knowledge of human behaviour." | ||
| Underdogs have more motivation? | ||
| 02/09/10 Permlink Report Broken Link | Behaviour | ||
| "Bosses and coaches who manage groups competing against lower-status rivals should use that fact to motivate the people at their company or team." | ||
| What happens in the amygdala | ||
| 02/09/10 Permlink Report Broken Link | Behaviour | ||
| ""As you get older, you get less loss-averse," De Martino says, explaining that even the older control subjects were less fearful of loss. "Your perspective on life changes because you have fewer years to live." This effect could stem from age-related reductions in the volume of the amygdala - as we age, our brains shrink. De Martino says in addition to age, other factors such as income and education are also at play." | ||
| Garry Kasparov, cyborg | ||
| 02/01/10 Permlink Report Broken Link | Behaviour | ||
| "What I love about Kasparov's algorithm - 'Weak human + machine + better process was superior to a strong computer alone and ... superior to a strong human + machine + inferior process' - is that it suggests serious rewards accrue to those who figure out the best way to use thought-enhancing software. (Or rather, those who figure out a way that's best for them; people always use tools in slightly different, idiosyncratic ways.) The process matters as much as the software itself. How often do you check it? When do you trust the help it's offering, and when do you ignore it?" | ||
| In defense of home bias | ||
| 02/01/10 Permlink Report Broken Link | World Markets Behaviour | ||
| "Ideally, shouldn.t investors seek out the stocks that are likely to perform the best, regardless of where they are located in our world? Ideally, yes. Practically, there are difficulties." | ||
| Justice, medieval style | ||
| 02/01/10 Permlink Report Broken Link | Behaviour | ||
| "Modern observers have roundly condemned ordeals for being cruel and arbitrary. Ordeals seem to reflect everything that was wrong with the Dark Ages. They're an icon of medieval barbarism and backwardness. But a closer look suggests something very different: The ordeal system worked surprisingly well. It accurately determined who was guilty and who was innocent, sorting genuine criminals from those who had been wrongly accused. Stranger still, the ordeal system suggests that pervasive superstition can be good for society. Medieval legal systems leveraged citizens. superstitious beliefs through ordeals, making it possible to secure criminal justice where it would have otherwise been impossible to do so. Some superstitions, at least, may evolve and persist for a good reason: They help us accomplish goals we couldn't otherwise accomplish, or accomplish them more cheaply." | ||
| The self-fulfilling prophecy | ||
| 01/16/10 Permlink Report Broken Link | Behaviour | ||
| "Can you convince people that something is good merely by telling them that other people like it?" | ||
| Why so many Americans are broke | ||
| 01/14/10 Permlink Report Broken Link | Thrift Behaviour | ||
| "Bookstores are full of books about getting out of debt. Why, then, are so many Americans struggling to get by? One reason, according to Connecticut College Psychology Professor Stuart Vyse, is that when it comes to money, people are not as rational as many economists - and authors - think. In his book Going Broke: Why Americans Can't Hold on to Their Money, Vyse cites studies that consistently show that people commonly make mental mistakes when it comes to their money. This realization is the foundation of behavioral economics, which holds that people behave differently than in the supremely logical fashion that classical economics predicts." | ||
| Less intuition, more evidence | ||
| 01/12/10 Permlink Report Broken Link | Behaviour | ||
| "Those of us who aren't wine snobs or speculators probably don't care too much about the prices of first-growth Bordeaux, but most of us would benefit from accurate predictions about such things as academic performance in college; diagnoses of throat infections and gastrointestinal disorders; occupational choice; and whether or not someone is going to stay in a job, become a juvenile delinquent, or commit suicide. I chose those seemingly random topics because they're ones where statistically-based algorithms have demonstrated at least a 17 percent advantage over the judgments of human experts. But aren't there at least as many areas where the humans beat the algorithms? Apparently not. A 2000 paper surveyed 136 studies in which human judgment was compared to algorithmic prediction. Sixty-five of the studies found no real difference between the two, and 63 found that the equation performed significantly better than the person. Only eight of the studies found that people were significantly better predictors of the task at hand. If you're keeping score, that's just under a 6% win rate for the people and their intuition, and a 46% rate of clear losses." | ||
| The hidden persuaders of fast food | ||
| 01/12/10 Permlink Report Broken Link | Markets Behaviour | ||
| "The Starbucks menu uses the "rule of three." The menu offers three sizes of coffees, given the enigmatic names of Tall, Grande, and Venti. (They're 12, 16, and 20 ounces respectively; 24 ounces for cold Venti drinks, to allow for ice.) Since Starbucks newbies won't know what they're getting, they tend to order the middle choice, Grande. In the psychology literature, this is known as "extremeness aversion" - people instinctively favor a middle choice, figuring it's safer. Guess what? You've just ordered two cups of expensive coffee. The Grande's sixteen ounces is two regular cups." | ||
| The marshmallow and the cherry | ||
| 01/02/10 Permlink Report Broken Link | Behaviour | ||
| "Earlier in the year Jonah Lehrer explained in the New Yorker how cool deferred gratification is and how we need to teach it to our kids, the younger the better. Now, in the New York Times, John Tierney suggests that it's really an insidious habit for grownups, sacrificing real enjoyment for the mirage of an even better future. Can everything good be bad for you?" | ||
| Carpe Diem? Maybe tomorrow | ||
| 01/02/10 Permlink Report Broken Link | Behaviour | ||
| "For once, social scientists have discovered a flaw in the human psyche that will not be tedious to correct. You may not even need a support group. You could try on your own by starting with this simple New Year's resolution: Have fun ... now!" | ||
| The neuroscience of screwing up | ||
| 12/30/09 Permlink Report Broken Link | Behaviour | ||
| "The reason we're so resistant to anomalous information - the real reason researchers automatically assume that every unexpected result is a stupid mistake - is rooted in the way the human brain works. Over the past few decades, psychologists have dismantled the myth of objectivity. The fact is, we carefully edit our reality, searching for evidence that confirms what we already believe. Although we pretend we're empiricists - our views dictated by nothing but the facts - we're actually blinkered, especially when it comes to information that contradicts our theories. The problem with science, then, isn't that most experiments fail - it's that most failures are ignored." | ||
| Blame it on the brain | ||
| 12/26/09 Permlink Report Broken Link | Behaviour | ||
| "Willpower, like a bicep, can only exert itself so long before it gives out; it's an extremely limited mental resource. Given its limitations, New Year's resolutions are exactly the wrong way to change our behavior. It makes no sense to try to quit smoking and lose weight at the same time, or to clean the apartment and give up wine in the same month. Instead, we should respect the feebleness of self-control, and spread our resolutions out over the entire year." | ||
| Menu mind games | ||
| 12/11/09 Permlink Report Broken Link | Behaviour | ||
| "William Poundstone dissects the marketing tricks built into menus - for example, how something as simple as typography can drive you toward or away from that $39 steak." | ||
| Buying green makes you do bad things | ||
| 12/11/09 Permlink Report Broken Link | Behaviour | ||
| "While mere exposure to green products may 'prime' us to think about social consciousness and perhaps improve our behavior, if we actually buy a green product, we appear to take it as license to act like jerks." | ||
| The importance of checking | ||
| 12/11/09 Permlink Report Broken Link | Behaviour | ||
| "Newman said, 'ah, that's the spinach mistake.' Knowing only that spinach is good for me and unaware of any vegetable transgressions, I asked him to elaborate on his response. The story is that in 1870, a German chemist named Erich von Wolf collected the nutritional value of green vegetables, including spinach. In transposing the figures from his notebook to the final table, von Wolf apparently misplaced a decimal point, hence overstating spinach's iron content by a factor of ten. (Roughly 35 mg per 100 g serving versus 3.5 mg.) Once in print, the perception of spinach's nutritional value took on a life of its own." | ||
| How much choice would you like? | ||
| 11/24/09 Permlink Report Broken Link | Behaviour | ||
| "Benjamin Scheibehenne, a psychologist at the University of Basel, was thinking along these lines when he decided (with Peter Todd and, later, Rainer Greifeneder) to design a range of experiments to figure out when choice demotivates, and when it does not. But a curious thing happened almost immediately. They began by trying to replicate some classic experiments - such as the jam study, and a similar one with luxury chocolates. They couldn't find any sign of the 'choice is bad' effect." | ||
| Is there a method in cellphone madness? | ||
| 11/16/09 Permlink Report Broken Link | Markets Behaviour | ||
| "Here's a consolation prize to the millions who recoil in bafflement from cellphone companies' labyrinthine price plans, with their ever more intricate arrays of minutes, messages and megabytes: Economists don't understand them, either." | ||
| Paying a price for the thrill of the hunt | ||
| 11/14/09 Permlink Report Broken Link | Markets Behaviour | ||
| "The dollar auction game was invented by a pioneer of game theory, Martin Shubik of Yale, and it illustrates the concept of 'escalation of commitment.' Once people are trapped into playing, they have a hard time stopping. (Consider Vietnam.) The higher the bidding goes, and the more each bidder has invested, the harder it is to say 'uncle.' The best advice you can give anyone invited to play this particular game is to decline. Some games and battles are like that: even when you win, you lose. When you see at the start that such a dynamic is likely, you're better off just walking away." | ||
| What is expert advice worth? | ||
| 11/13/09 Permlink Report Broken Link | Markets Behaviour | ||
| "In the sixth century B.C.E., the Chinese philosopher and poet Lao Tzu made a timeless statement: "Those who have knowledge don't predict. Those who predict don't have knowledge." Well over 2,000 years later, it has yet to be better said. Yet the business press never tires of printing predictions by economists and other market animals. At what pace will the economy grow next year? In two years and in three? Whence stocks, up, down or nowhere special? These are common questions and the analysts generally stand tall and answer them with remarkable authority and confidence. How seriously should you take their forecasts?" | ||
| Bad decisions may be contagious | ||
| 11/13/09 Permlink Report Broken Link | Behaviour | ||
| "Like the flu, a person's emotional state can be contagious. Watch someone cry, and you'll likely feel sad; think about the elderly, and you'll tend to walk slower. Now a study suggests that we can also catch someone else's irrational thought processes." | ||
| Are liberals smarter than conservatives? | ||
| 11/06/09 Permlink Report Broken Link | Government Behaviour | ||
| "Who are smarter, liberals or conservatives? This is the kind of question that could spark fierce and endless debates between political opponents, but what if we could know, scientifically, that one side has the edge in brainpower? Should that change how we think about political issues? Though few partisans on either side are likely to admit it, most people at one time or another have suspected that their political opponents are dim bulbs." | ||
| Innovation is not rewarded | ||
| 11/06/09 Permlink Report Broken Link | Behaviour | ||
| "We all benefit from the Pasteurs, the Fords, even the Bill Gates. They create things with spillovers. Yet, you average innovator is simply wrong, hearing dog whistles others don't, and like Van Gogh getting his appreciation after dying, most innovators do their bidding for those they do not know. Deviating from the consensus produces all the things that has elevated us from hunter-gatherers, yet, the record for the individual innovators themselves, is decidedly negative." | ||
| Extremists share their opinions | ||
| 10/21/09 Permlink Report Broken Link | Behaviour | ||
| "People with relatively extreme opinions may be more willing to publicly share their views than those with more moderate views, according to a new study. The key is that the extremists have to believe that more people share their views than actually do, the research found." | ||
| How nonsense sharpens the intellect | ||
| 10/08/09 Permlink Report Broken Link | Behaviour | ||
| "Still, the new research supports what many experimental artists, habitual travelers and other novel seekers have always insisted: at least some of the time, disorientation begets creative thinking." | ||
| Marshmallows and self-control | ||
| 10/03/09 Permlink Report Broken Link | Behaviour | ||
| "Psychology professor Walter Mischel's 1960s experiment involving children, sugary sweets, and self-control has become a classic. The set-up is simple. A researcher lets a child pick a favorite food from a tray of cookies, marshmallows, candies, pretzels, and other sweets. The researcher puts that treat on the table in front of the child and makes an offer. The child can eat it now. Or the child can wait a few minutes while the researcher goes to check on something else, and get two treats when the researcher returns. If the child loses patience, she can ring a bell, the researcher will come right back, and the child can eat the treat right away. She does not get another one, of course." [Be sure to watch the cute video.] | ||
| The hazard of moral hazard | ||
| 09/19/09 Permlink Report Broken Link | Government Behaviour | ||
| "When someone insures you against the consequences of a nasty event, oddly enough, he raises the incentives for you to behave in a way that will cause the event. So if your diamond ring is insured for $50,000, you are more likely to leave it out of the safe. Economists call this phenomenon 'moral hazard,' and if you look around, you will see it everywhere." | ||
| Believing everything you read | ||
| 09/18/09 Permlink Report Broken Link | Behaviour | ||
| "You shouldn't believe everything you read, yet according to a classic psychology study at first we can't help it." | ||
| Flaw in markets: humans | ||
| 09/13/09 Permlink Report Broken Link | Markets Behaviour | ||
| "Memories are short. Immediately after a severe flood, most people are reluctant to build on a flood plain. But land on flood plains is cheaper, and the prospect of short-term advantage quickly lures many to abandon their caution. That is why many jurisdictions adopt strict regulations against building on flood plains. The same logic dictates regulation to limit the damage caused by financial bubbles. The list of financial practices that merit regulatory scrutiny is long. But the most important first step is to limit leverage." | ||
| Hunches prove to be valuable | ||
| 08/05/09 Permlink Report Broken Link | Behaviour | ||
| "Everyone has hunches - about friends. motives, about the stock market, about when to fold a hand of poker and when to hold it. But United States troops are now at the center of a large effort to understand how it is that in a life-or-death situation, some people's brains can sense danger and act on it well before others. do." | ||
| Thaler responds to Posner | ||
| 08/04/09 Permlink Report Broken Link | Behaviour | ||
| "The proposal that particularly draws Posner's ire is the idea that the Agency would designate a few types of "plain vanilla" mortgages and suggest that unsophisticated shoppers concentrate their search on those. The idea is very similar to the standard leases used in most rental agreements. The landlord can change the terms of the standard lease, but those changes are done in a way that makes them quite salient to prospective tenants, and the tenants are alerted to the fact that these terms are not the usual ones. The plain vanilla mortgages would all have the same terms (like the standard leases) and issuers who want to offer different kinds of mortgages would have to make their modifications clear. Only mortgages judged to be very dangerous would be banned." | ||
| When good thinking goes bad | ||
| 08/02/09 Permlink Report Broken Link | Behaviour | ||
| "What do Apple, Inc.'s craziest fanatics, Wall Street, and the case of the Harvard professor and the police officer have in common?" | ||
| Cocksure | ||
| 07/20/09 Permlink Report Broken Link | Behaviour | ||
| "From an individual perspective, it is hard to distinguish between the times when excessive optimism is good and the times when it isn't. All that we can say unequivocally is that overconfidence is, as Wrangham puts it, 'globally maladaptive.' When one opponent bluffs, he can score an easy victory. But when everyone bluffs, Wrangham writes, rivals end up 'escalating conflicts that only one can win and suffering higher costs than they should if assessment were accurate.'" | ||
| What's your financial IQ? | ||
| 07/16/09 Permlink Report Broken Link | Behaviour | ||
| "These particular questions are the mental equivalent of optical illusions. They appear to be easy, but aren't. Tests of similar complexity which are more obviously difficult yield more correct answers so it's not simply a question of basic maths skills. Something else is going on here. Something, it turns out, that may completely screw up psychology's ideas about the way people think about finance." | ||
| The invisible hand, trumped by Darwin? | ||
| 07/11/09 Permlink Report Broken Link | Behaviour | ||
| "Smith's basic idea was that business owners seeking to lure customers away from rivals have powerful incentives to introduce improved product designs and cost-saving innovations. These moves bolster innovators. profits in the short term. But rivals respond by adopting the same innovations, and the resulting competition gradually drives down prices and profits. In the end, Smith argued, consumers reap all the gains. The central theme of Darwin's narrative was that competition favors traits and behavior according to how they affect the success of individuals, not species or other groups. As in Smith's account, traits that enhance individual fitness sometimes promote group interests. For example, a mutation for keener eyesight in hawks benefits not only any individual hawk that bears it, but also makes hawks more likely to prosper as a species. In other cases, however, traits that help individuals are harmful to larger groups." | ||
| Trust | ||
| 07/07/09 Permlink Report Broken Link | Behaviour | ||
| "Being able to trust people might seem like a pleasant luxury, but economists are starting to believe that it's rather more important than that. Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest." | ||
| Mortgages made simpler | ||
| 07/05/09 Permlink Report Broken Link | Government Real Estate Behaviour | ||
| "In the past year, we have learned the hard way that when people take out mortgages they cannot repay, the entire economy can be disrupted. Fixing the problem is complicated. But a good first step is to make the mortgage lending process Homer-proof." | ||
| Timing Temptation | ||
| 06/22/09 Permlink Report Broken Link | Stingy Investing Behaviour | ||
| "Buy-and-hold investing is a crock. That's what many investors are saying these days and, after a bruising bear market, it's not hard to understand why. If only they had sold at the top and bought back at the bottom. Problem is, getting the timing right is much easier said than done." | ||
| Would you wear a serial killer's sweater? | ||
| 06/15/09 Permlink Report Broken Link | Behaviour | ||
| "So, would you wear a serial killer's sweater? No blood spatters or anything. Heck, let's even say it has been dry cleaned. Psychologist and cognitive neuroscientist Bruce Hood has been known to brandish a cardigan belonging to the serial killer Fred West in the lecture hall. West tortured, raped, and murdered at least 12 women. Of course, a moment's reflection will reveal that his sartorial choices probably had nothing to do with his grisly hobby. And there's no possibility of catching serial killer disease from his sweater, right?" | ||
| Take Benjamin Graham's advice | ||
| 05/23/09 Permlink Report Broken Link | Zweig Graham Behaviour | ||
| "It is sometimes said that to be an intelligent investor, you must be unemotional. That isn't true; instead, you should be inversely emotional. Even after recent turbulence, the Dow Jones Industrial Average is up roughly 30% since its low in March. It is natural for you to feel happy or relieved about that. But Benjamin Graham believed, instead, that you should train yourself to feel worried about such events." | ||
| Capitalism and the cheating ethic | ||
| 05/21/09 Permlink Report Broken Link | Markets Behaviour | ||
| "But when real neutral observers - a book agent, an editor at a newspaper, the paper's readers - no longer blanch at outright deviousness so frankly told, society has lost the mechanism that restrains its citizens from widespread cheating. That's exactly what happened in the mortgage meltdown, when untold numbers of applicants, their brokers, real estate agents and assorted others openly discussed how to collude in obtaining mortgages through fraudulent means without stopping to consider the implications for society as a whole. And without the slightest sense of embarrassment, apparently." | ||
| Tis better to have bet and lost | ||
| 05/21/09 Permlink Report Broken Link | Behaviour | ||
| "Regrets always have a bitter taste, and those involving gambling tend to linger more than most. But a new paper argues that worrying about regrets may be costing you money." | ||
| The secret of self-control | ||
| 05/11/09 Permlink Report Broken Link | Behaviour | ||
| "Angela Lee Duckworth, an assistant professor of psychology at the University of Pennsylvania, is leading the program. She first grew interested in the subject after working as a high-school math teacher. 'For the most part, it was an incredibly frustrating experience,' she says. 'I gradually became convinced that trying to teach a teen-ager algebra when they don't have self-control is a pretty futile exercise.' And so, at the age of thirty-two, Duckworth decided to become a psychologist. One of her main research projects looked at the relationship between self-control and grade-point average. She found that the ability to delay gratification - eighth graders were given a choice between a dollar right away or two dollars the following week - was a far better predictor of academic performance than I.Q. She said that her study shows that 'intelligence is really important, but it's still not as important as self-control.'" | ||
| Bankers would rather work for $0.00 | ||
| 04/17/09 Permlink Report Broken Link | Behaviour | ||
| "Sometimes asking someone to do something for nothing is more powerful than paying them." | ||
| A little cheating costs a lot | ||
| 04/17/09 Permlink Report Broken Link | Behaviour | ||
| "Behavioural economists are having a field day with the market meltdown, as traditional cost-benefit analysis and self-interest give way to more penetrating insights about how people can be systematically wrong - and how small acts can lead to broader failures." | ||
| So you want to be the next Warren Buffett? | ||
| 04/12/09 Permlink Report Broken Link | Behaviour | ||
| "The way I see it, there are really only four sources of economic moats that are hard to duplicate, and thus, long-lasting. One source would be economies of scale and scope. Wal-Mart is an example of this, as is Cintas in the uniform rental business or Procter & Gamble or Home Depot and Lowe's. Another source is the network affect, ala eBay or Mastercard or Visa or American Express. A third would be intellectual property rights, such as patents, trademarks, regulatory approvals, or customer goodwill. Disney, Nike, or Genentech would be good examples here. A fourth and final type of moat would be high customer switching costs. Paychex and Microsoft are great examples of companies that benefit from high customer switching costs." | ||
| Why we think it's OK to cheat | ||
| 04/10/09 Permlink Report Broken Link | Behaviour | ||
| "Behavioral economist Dan Ariely studies the bugs in our moral code: the hidden reasons we think it's OK to cheat or steal (sometimes). Clever studies help make his point that we're predictably irrational -- and can be influenced in ways we can't grasp." | ||
| Dan Ariely interview | ||
| 03/24/09 Permlink Report Broken Link | Behaviour | ||
| "Here's a reality check for you. The total cost of every burglary theft, fraud, autotheft in US in 2004 was $16-Billion dollars. That same year regular businesses in the US lost $600-Billion dollars to employee theft and fraud. So who's the cheat? Behavioural economists like Dan Ariely understand how dishonesty and cheating is part of our less than rational relationship with money." [Audio MP3] | ||
| Large stakes and big mistakes | ||
| 03/24/09 Permlink Report Broken Link | Academia Behaviour | ||
| "Workers in a wide variety of jobs are paid based on performance, which is commonly seen as enhancing effort and productivity relative to non-contingent pay schemes. However, psychological research suggests that excessive rewards can in some cases result in a decline in performance. To test whether very high monetary rewards can decrease performance, we conducted a set of experiments in the US and India in which subjects worked on different tasks and received performance-contingent payments that varied in amount from small to very large relative to their typical levels of pay. With some important exceptions, very high reward levels had a detrimental effect on performance." | ||
| Morals: the one thing markets don't make | ||
| 03/21/09 Permlink Report Broken Link | Behaviour | ||
| "Often, these past months, I have found myself going back to one of the most painful conversations I have had. It was with one of Britain's leading industrialists. He had led his company to consistent success for decades. When I met him he had retired and was near the end of his life. He was not a religious man but he was a deeply moral one. He spoke of the principles that had guided him in business and of the salary he had drawn. It was not negligible, but it was modest. What pained him was that his successor had awarded himself a salary ten times that amount, while systematically destroying the company he had so carefully built." | ||
| Confessions of a pundit | ||
| 03/11/09 Permlink Report Broken Link | Behaviour | ||
| "Prominent experts, therefore, are often simply those whose voices are in harmony with today's mood and who have an easier time selling their stories. That doesn't mean that the analysis is inherently flawed - only that it is inherently market-driven." | ||
| Outperform 99% of your neighbors | ||
| 02/11/09 Permlink Report Broken Link | Behaviour | ||
| "If all you had to do was buy good (versus great) investments and then behave correctly that changes everything. I decided that the search for alpha didn.t matter (turns out it.s a fool.s errand anyway, but I didn.t know that at the time) if you lost 7% in the process just because of bad behavior. I decided to leave the complex task of finding the best investment to smart guys with the big computers; I was going to focus on the simple problem of helping people behave correctly. It turns out that outperforming your neighbor is not about finding better investments, it is about behaving better." | ||
| 100 cents feels like it's worth more than $1 | ||
| 01/22/09 Permlink Report Broken Link | Behaviour | ||
| "We all know that $1 is equal to 100 cents. But a new study suggests that, in some situations, people may behave as if 100 cents actually has more value." | ||
| Failure of morality, not of capitalism | ||
| 01/20/09 Permlink Report Broken Link | Behaviour | ||
| "What we are hearing and seeing, in other words, is a failure of morality, not of capitalism. How do we get back to the old Adam Smith/Benjamin Franklin idea of free enterprise based on a moral foundation?" | ||
| Why you can't trust your gut | ||
| 01/11/09 Permlink Report Broken Link | Markets Behaviour | ||
| "Turns out, the people who had imagined the stressful events said they could identify more patterns in the pictures than did the control group. The pictures, by the way, were completely random. The patterns didn't exist. The academics weren't finished. They showed one group a headline that read "Rough Seas Ahead for Investors" and showed another group the headline "Smooth Sailing Ahead for Investors." The two groups then received some fragmentary information about a couple of companies. You guessed it: The group that was worried about "rough seas" spun out more unwarranted theories about what was going on with the companies than the other group did." | ||
| Everyone's watching | ||
| 11/03/08 Permlink Report Broken Link | Behaviour | ||
| "Markets work best when investors are thinking for themselves, and tend to go awry when the obsession with what everyone else is doing becomes a dominant concern. Maybe what investors really need is to periodically take a market-information vacation." | ||
| Take a deep breath, calm yourself | ||
| 10/18/08 Permlink Report Broken Link | Zweig Behaviour | ||
| "You can catch other people's emotions as easily as you can catch a cold. In an experiment by neuroscientist Elizabeth Phelps at New York University, people either watched someone else get a mildly painful electric shock or suffered the shock themselves. Their brain responses and their dread before the shock were highly similar in both cases, suggesting that seeing another person's fear is all it takes to make us afraid. Even encountering the circumstances under which the other person was shocked is enough to trigger your own fear. Viewed this way, today's financial markets -- in which tens of millions of investors watch each other's fears unfolding in real time on television and online -- constitute one giant panic-transmission machine." | ||
| The key to happiness is freedom not income | ||
| 08/19/08 Permlink Report Broken Link | World Behaviour | ||
| "Off and on, usually provoked by the release of a new study, the media will turn to the question of happiness and incomes. While the Wall Street Journal has exhibited a tendency to tout research that shows that the rich are happier, the results are far less clear-cut. Once a certain income level has been reached (typically, enough to provide for a middle class standard of living in that society and allow one to accumulate a cushion for emergencies) more money does not produce much if any gains in happiness. And some findings have been under-reported in the US. For instance, while some studies have found that being in the top income group or having high educational attainment is correlated with higher levels of happiness, living in socially stratified societies leads to less satisfaction across all groups. And remember, Nigeria, hardly a bastion of wealth, has scored as the happiest country in a multi-year international survey. An article today in the Financial Times suggests that researchers may have been looking at the wrong axis in looking for a strong correlation between income and happiness. Roberto Foa (a researcher in the same international survey mentioned above) contends that freedom is a far more important factor than economic attainment." | ||
| The wisdom of crowds? | ||
| 08/13/08 Permlink Report Broken Link | Economics Markets Behaviour | ||
| "When people discover that I am an economist, they rarely ask me for my views on subjects that economists know a bit about - such as how to respond to climate change or pay less at a supermarket. Instead, they ask me what will happen to the economy. Why is it that people won't take "I don't really know" for an answer? People often chuckle about the forecasting skills of economists, but after the snickers die down, they keep demanding more forecasts. Is there any reason to believe that economists can deliver?" | ||
| Perceptions about income influence lottery purchases | ||
| 08/09/08 Permlink Report Broken Link | Behaviour | ||
| "Do you feel poor ... or at least a lot poorer than your friends and neighbors or the people you pass on the street? Then be careful. There is evidence that this feeling will cause you to do ridiculous things with your money and perhaps undermine your opportunity to eventually become richer. You might even throw your money away on the lottery." | ||
| Do economists need brains? | ||
| 08/05/08 Permlink Report Broken Link | Economics Behaviour | ||
| "These new neuroeconomists saw that it might be possible to move economics away from its simplified model of rational, self-interested, utility-maximising decision-making. Instead of hypothesising about Homo economicus, they could base their research on what actually goes on inside the head of Homo sapiens. The dismal science had already been edging in that direction thanks to behavioural economics. Since the 1980s researchers in this branch of the discipline had used insights from psychology to develop more 'realistic' models of individual decision-making, in which people often did things that were not in their best interests. But neuroeconomics had the potential, some believed, to go further and to embed economics in the chemical processes taking place in the brain." | ||
| Bad news sparks a stampede | ||
| 07/23/08 Permlink Report Broken Link | Markets Behaviour | ||
| "After IndyMac Bancorp failed, customers waited in line for hours to collect their money. The police had to be called in to quell the crowd. The scenes brought to mind dire moments from the Great Depression. On the Federal Deposit Insurance Corp. Web site, IndyMac customers were told: ''If the balance in your account . . . is less than $100,000, no action is required on your part at this time.'' The money is insured. Many behavioral economists watching people herd in line at the bank -- or flush their portfolios of Fannie Mae and Freddie Mac stock -- sense a deep even primal, response at play. I suppose the only way to say this is to just say it: People are acting like frogs. When a group of frogs senses they are about to be visited by the dreaded snake, they do not hop in separate directions. They bunch up together. And they fight to get in the middle. Sheep do it. Minnows do it. It turns out that humans do, too, particularly in financial crashes." | ||
| How to control your fears | ||
| 07/21/08 Permlink Report Broken Link | Zweig Behaviour | ||
| "What goes on inside your head when your portfolio implodes? One of the fear centers in your brain, the amygdala, can respond to upsetting stimuli in 12 milliseconds, or one-25th the time it takes to blink your eye. These brain cells fire when an attack dog snarls at you, a spider drops down your shirt or the Dow Jones Industrial Average takes a dive." | ||
| The new economics and the pursuit of happiness | ||
| 07/01/08 Permlink Report Broken Link | Books Academia Behaviour | ||
| "The revolution begun by Kahneman and Tversky is now some three decades old, and it is generating excitement well beyond the borders of academe--and so this is a good time to examine whether it has lived up to its promise. Bruno S. Frey's Happiness and Dan Ariely's Predictably Irrational together offer a fine occasion to begin such a reckoning. Not all the revolutionaries in economics are discussed by Frey; the media star Levitt does not even make an appearance. Ariely, who teaches at MIT, helps to fill in the picture. Like Levitt, he has climbed the best-seller list with some of the most counterintuitive findings of behavioral economics. One is dry and humorless, the other is sprightly and inviting, but between them these books offer an overview of what this new economics is all about, and enable us to evaluate whether it is as innovative as its adherents claim." | ||
| It's mine, I tell you | ||
| 06/20/08 Permlink Report Broken Link | Behaviour | ||
| "The endowment effect was controversial for years. The idea that a squishy, irrational bit of human behaviour could affect the cold, clean and rational world of markets was a challenge to neoclassical economists. Their assumption had always been that individuals act to maximise their welfare (the defining characteristic of economic man, or Homo economicus). The value someone puts on something should not, therefore, depend on whether he actually owns it. But the endowment effect has been seen in hundreds of experiments, the most famous of which found that students were surprisingly reluctant to trade a coffee mug they had been given for a bar of chocolate, even though they did not prefer coffee mugs to chocolate when given a straight choice between the two." | ||
| Why we're gloomier than the economy | ||
| 06/19/08 Permlink Report Broken Link | Economy Behaviour | ||
| "Ask Americans how the economy is doing, and their answer is stark: It is not just bad, it is run-for-the-hills terrible. Consumer confidence is at its lowest level in almost 30 years. Only 12 percent of Americans think the economy is in good shape. On the Internet, comparisons to the Great Depression are widespread. But the reality is different. According to most broad measures of how the economy is doing, it's not all that grim." | ||
| 'Brainwashing 101 for dummies' (and investors!) | ||
| 06/18/08 Permlink Report Broken Link | Behaviour | ||
| "Yes, Wall Street's got a great con game going, but it only works because America's 95 million investors are willing victims, love playing along, actually letting Wall Street get away with it! I call it "Brainwashing 101 for Dummies." Insiders use fancier terms like neuroeconomics, behavioral finance and the new "science of irrationality." But labels aside, you're being brainwashed. And Wall Street's laughing all the way to the bank at how easy it is to dupe gullible investors by using the 11 rules of "Brainwashing 101 for Dummies." We got them for you: Everything you'll ever need to know about the big con." | ||
| Remember, Cassandra was right | ||
| 06/18/08 Permlink Report Broken Link | Taleb Montier Behaviour | ||
| "Some are trying to argue that the mess in the US economy/housing market/credit market is an example of Taleb's black swan. Nothing could be further from the truth. Black swan events are inherently unpredictable. However, the events unfolding now are sadly all too predictable. They are following the standard pattern for a debubbling process. Numerous psychological barriers prevent us from listening to Cassandra, but it may pay to remember that her predictions were all too accurate." | ||
| Value investing and behavioral finance | ||
| 06/03/08 Permlink Report Broken Link | Value Investing Tweedy Behaviour | ||
| "My partners and I at Tweedy, Browne have in the past been skeptical of academic studies relating to the field of investment management primarily because such studies usually resulted in the birth of financial paradigms which we believe have no relevance to either what we do or to the real world. A whole body of academic work formed the foundation upon which generations of students at the country's major business schools were taught about Modern Portfolio Theory, Efficient Market Theory and Beta. In our humble opinion, this was a classic example of garbage in/garbage out. One could have just as easily manipulated the data to show that corporations with blue covers on their annual reports performed better than corporations with green covers on their annual reports. Although none of the three of us was fortunate enough to have studied under the late Dr. Benjamin Graham when he taught at Columbia Business School, we were fortunate enough to have observed some of his best students who either worked at or were customers of Tweedy, Browne from the late 1950s through the present. Tom Knapp, who was a partner at Tweedy, Browne from 1958 until the early 1980s, both studied under Ben Graham and worked for Ben's investment firm, The Graham-Newman Corporation. Walter Schloss, another alumnus of Graham-Newman, has made his office at Tweedy, Browne since he set up his private investment partnership in 1955. Still going strong at 84 and still housed at Tweedy, Browne, Walter has what we believe is the longest continual investment record of any individual in our field. Among others, Warren Buffett was a frequent visitor to Tweedy, Browne in the 1960s and early 1970s. My father was the primary broker for Warren in his purchase of stock in Berkshire Hathaway, and I can remember posting trades in Berky at $25 per share when I started working in 1969. Our exposure to these legendary investors whose investment principles were based on the teachings of Ben Graham, was the reason for our skeptical view of more modern investment theories." | ||
| Want to be rich? Don't get too happy | ||
| 06/03/08 Permlink Report Broken Link | Behaviour | ||
| "University of Illinois psychology professor Ed Diener and others have established that while money won't buy happiness, happy people tend to earn more than sad people. A few years ago, however, investing legend John Templeton wrote Diener a letter that had the professor scratching his head. "Is life satisfaction always great?" Templeton asked. "Maybe a little bit of dissatisfaction is okay." "I started wondering," Diener recalls, "do you have to be happier and happier? How happy is happy enough?" Thus, a new study was born. Diener and his colleagues used data from the World Values Survey, which measures the happiness of respondents on a scale of 1 to 10 (with 10 the happiest). They found that income did indeed increase along with happiness but not at the very top." | ||
| The happiness ... gap | ||
| 06/02/08 Permlink Report Broken Link | Behaviour | ||
| "Here's a bit of bad news for all my latte-loving, liberal-leaning friends who believe that jobs in retail stink, traditional religion is for morons, and income inequality has made society a lot worse off. You're a miserable bunch. I don't mean miserable, as in contemptible. I mean that as a group, you are not particularly happy people. In fact, you're far less likely to be happy with your lives than, say, a gun-owning truck driver who goes to church, shops at Wal-Mart, and makes half the money you do." | ||
| Joining the dark side | ||
| 05/27/08 Permlink Report Broken Link | Value Investing Montier Behaviour | ||
| "So we have covered three potential sources of short ideas. What happens if we put them all together? The parameters I used to define my shorts were a price-to-sales > 1, an F score of 3 or less, and total asset growth in double digits. This proved to be a powerful combination. Between 1985 and 2007 a portfolio of such stocks rebalanced annually would have declined over 6% p.a. compared to a market that was rising at the rate of 13% p.a. in Europe" | ||
| How thinking costs you | ||
| 05/24/08 Permlink Report Broken Link | Indexing Behaviour | ||
| "Looking at data from every trade made by all investors in Taiwan from 1995 to 1999, Odean discovered that the "aggregate portfolio of individual investors suffers an annual performance penalty of 3.8 percentage points," which includes trading costs. If investors had simply bought the index and not traded at all, they would have done about 3.5 percent better. The amount of money lost was equivalent to 2.2 percent of Taiwan's gross domestic product." | ||
| Rebate psychology | ||
| 05/18/08 Permlink Report Broken Link | Government Behaviour | ||
| "Changing the way that identical income is described can significantly affect how people spend it. In an experiment I conducted at Harvard with my colleagues Dennis Mak and Lorraine Chen Idson, participants were given a $50 check. They were told that this money came from a faculty member's research budget, financed indirectly through tuition dollars. Roughly half of the participants had this money described as a 'rebate,' whereas the others had it described as a 'bonus.' When unexpectedly contacted one week later, participants who got a 'rebate' reported spending less than half of what those who got a 'bonus' reported spending ($9.55 versus $22.04, respectively). We observed this same pattern in other experiments when participants were asked to keep a written record of their spending, as well as in experiments in which the participants were allowed to purchase items in the lab. 'Rebates' are understood to be returns from money already spent. A rebate, psychologically speaking, is the return of a loss of one's own money rather than a pure gain provided by someone else, so it is unlikely to be seen as extra spending money." | ||
| The meritocracy paradox | ||
| 04/13/08 Permlink Report Broken Link | Management Behaviour | ||
| "In business, merit supposedly determines pay. But in fact, it's often the other way around, with pay determining merit. In controlled studies in which people were assigned random tasks with random pay, psychologists discovered people behave as if the higher-paid individuals have superior ability. And they do so even if they know that the pay scale was arbitrary. Outside of the laboratory the calculation of someone's ability is even more tricky." | ||
| And behind door no. 1, a fatal flaw | ||
| 04/10/08 Permlink Report Broken Link | Math Academia Behaviour | ||
| "The Monty Hall Problem has struck again, and this time it's not merely embarrassing mathematicians. If the calculations of a Yale economist are correct, there's a sneaky logical fallacy in some of the most famous experiments in psychology." | ||
| Behind Monty Hall's doors | ||
| 04/10/08 Permlink Report Broken Link | Math Behaviour | ||
| "Mr. Hall continued: "Now do you see what happened there? The higher I got, the more you thought the car was behind Door 2. I wanted to con you into switching there, because I knew the car was behind 1. That's the kind of thing I can do when I'm in control of the game. You may think you have probability going for you when you follow the answer in her column, but there's the pyschological factor to consider." He proceeded to prove his case by winning the next eight rounds. Whenever the contestant began with the wrong door, Mr. Hall promptly opened it and awarded the goat; whenever the contestant started out with the right door, Mr. Hall allowed him to switch doors and get another goat. The only way to win a car would have been to disregard Ms. vos Savant's advice and stick with the original door. Was Mr. Hall cheating? Not according to the rules of the show, because he did have the option of not offering the switch, and he usually did not offer it." | ||
| Asleep at the wheel | ||
| 04/08/08 Permlink Report Broken Link | Markets Montier Behaviour | ||
| "However, more importantly once earnings have peaked they often return to the low edge of the growth bands. This represents a 45%- 50% decline in earnings. This number holds for the US, Europe and the UK. So if you want to have a worse case scenario then a figure like this should be used." | ||
| Dan on BNN | ||
| 04/02/08 Permlink Report Broken Link | Markets Hallett Behaviour | ||
| Dan cautions against Ticker Temptation. Read his articles over here. | ||
| What makes a tightwad | ||
| 03/20/08 Permlink Report Broken Link | Behaviour | ||
| "The researchers were surprised to find that despite perceptions that people always overspend, chronic underspending was far more widespread than thought, with tightwads outnumbering spendthrifts by 3 to 2. But researcher Scott Rick from the University of Pennsylvania said they found it wasn't the cost of an item or someone's income level that had an impact on their spending. Tightwads reported feeling an emotional pain when handing over their money. Spendthrifts, on the other hand, felt pleasure making a purchase." | ||
| Sensation seeking, overconfidence, and trading activity | ||
| 02/20/08 Permlink Report Broken Link | Academia Behaviour | ||
| "This study analyzes the role that two psychological attributes - sensation seeking and overconfidence - play in the tendency of investors to trade stocks. Equity trading data from Finland are combined with data from investor tax filings, driving records, and mandatory psychological profiles. We use these data, obtained from a large population, to construct measures of overconfidence and sensation seeking tendencies. Controlling for a host of variables, including wealth, income, age, number of stocks owned, marital status, and occupation, we find that overconfident investors and those investors most prone to sensation seeking trade more frequently." | ||
| Why people believe weird things about money | ||
| 01/14/08 Permlink Report Broken Link | Behaviour | ||
| "Would you rather earn $50,000 a year while other people make $25,000, or would you rather earn $100,000 a year while other people get $250,000? Assume for the moment that prices of goods and services will stay the same. Surprisingly -- stunningly, in fact -- research shows that the majority of people select the first option; they would rather make twice as much as others even if that meant earning half as much as they could otherwise have. How irrational is that?" | ||
| A short course in thinking about thinking | ||
| 12/15/07 Permlink Report Broken Link | Behaviour | ||
| "And some fifteen years ago or so, I started studying whether people remembered correctly what had happened to them. It turned out that they don't. And I also began to study whether people can predict how well they will enjoy what will happen to them in future. I used to call that "predictive utility", but Dan Gilbert has given it a much better name; he calls it "affective forecasting". This predicts what your emotional reactions will be. It turns out people don't do that very well, either." | ||
| Of blind squirrels and flying pigs | ||
| 11/22/07 Permlink Report Broken Link | Behaviour | ||
| "The dollar is collapsing and global investors are dumping dollars so it will continue to fall. That in turn will lead to higher inflation and then the Fed will have to raise interest rates. Oil is closing in on $100 a barrel. We have the worst housing market since the Great Depression. There is a financial crisis caused by the subprime mortgage debacle. Banks are tightening credit standards. And if you needed more reasons to believe the stock market was headed south you could always throw in global warming. Given all of these obvious reasons to be bearish about stocks, what should investors do? The answer is nothing, except to adhere to their well-thought-out plans. There are many reasons for ignoring even what seems to be obviously bearish information. Let.s see why this is the case." | ||
| From ants to people, an instinct to swarm | ||
| 11/14/07 Permlink Report Broken Link | Behaviour | ||
| "By studying army ants - as well as birds, fish, locusts and other swarming animals - Dr. Couzin and his colleagues are starting to discover simple rules that allow swarms to work so well. Those rules allow thousands of relatively simple animals to form a collective brain able to make decisions and move like a single organism. Deciphering those rules is a big challenge, however, because the behavior of swarms emerges unpredictably from the actions of thousands or millions of individuals." | ||
| Are you really such a daredevil? | ||
| 11/04/07 Permlink Report Broken Link | Behaviour | ||
| "The point is to position your portfolio in a way that makes it less likely that your emotions will get the better of you in a sharp downturn, and to do so while giving up as little as possible of the long-term gains that stocks offer. There are several sensible ways to do that." | ||
| Can we turn off our emotions when investing? | ||
| 09/29/07 Permlink Report Broken Link | Behaviour | ||
| "How about understanding what our real tolerance for risk is? Mr. Zweig makes the usually overlooked point that our risk tolerance is not a fixed thing, but changes from day to day, even hour to hour, depending on our mood. Indeed, research has shown that the way we think about risk often depends on how others have framed the question for us. Amazingly, for instance, people tend to be more sanguine about risk when it is expressed as a percentage (10 percent, say) than when it is expressed as a frequency (one out of 10)." | ||
| Was Harry Potter inevitable? | ||
| 09/17/07 Permlink Report Broken Link | Behaviour | ||
| "The study's setup allowed for a very explicit test of social influence. The independent group, unswayed by the opinion of others, provided a reasonable indicator of song quality. If social influence is unimportant, you would expect the song rankings - and downloads - to be similar in all nine worlds. On the other hand, if social influence is important, small differences in the initial download pattern in the social worlds would lead to very different rankings. Cumulative advantage triumphs intrinsic quality. What did the study show? Well, song quality did play a role. A top-five song in the independent world had about a 50 percent chance of finishing in the top five for a social influence world. And the worst songs rarely topped the charts. Beyond that, the scientists found social influence played a huge part in success and failure. In the eight social worlds, the songs downloaded early in the experiment affected the songs downloaded later. Since the patterns of download were different in each social world, so were the outcomes. One song, "Lockdown" by 52metro, illustrates the point. The tune was ranked 26 in quality in the independent world, effectively average. Yet it was the number 1 song in one of the social influence worlds, and number 40 in another. Social influence catapulted an average song to hit status in one world and delegated it to the cellar in another." | ||
| Persistence of myths | ||
| 09/05/07 Permlink Report Broken Link | Behaviour | ||
| "The federal Centers for Disease Control and Prevention recently issued a flier to combat myths about the flu vaccine. It recited various commonly held views and labeled them either "true" or "false." Among those identified as false were statements such as "The side effects are worse than the flu" and "Only older people need flu vaccine." When University of Michigan social psychologist Norbert Schwarz had volunteers read the CDC flier, however, he found that within 30 minutes, older people misremembered 28 percent of the false statements as true. Three days later, they remembered 40 percent of the myths as factual. Younger people did better at first, but three days later they made as many errors as older people did after 30 minutes. Most troubling was that people of all ages now felt that the source of their false beliefs was the respected CDC." | ||
| Money isn't everything | ||
| 07/10/07 Permlink Report Broken Link | Behaviour | ||
| "Psychologists have known for a long time that economists are wrong. Most economists - at least, those of the classical persuasion - believe that any financial gain, however small, is worth having. But psychologists know this is not true. They know because of the ultimatum game, the outcome of which is often the rejection of free money." | ||
| You got your tissues in my peanut butter | ||
| 06/18/07 Permlink Report Broken Link | Behaviour | ||
| "Indeed, many shoppers are repulsed by the thought that packages of food are touching items such as toilet paper, feminine hygiene products, cat litter, or even, in some cases, mayonnaise - all items that subconsciously repulse a lot of people." | ||
| Benefiting from irrational investors | ||
| 06/06/07 Permlink Report Broken Link | Behaviour | ||
| "If you're like most people, you probably don't spend a great deal of time monitoring your investments. So when another company uses stock to acquire a firm in which you hold a stake, what do you do with the new shares you suddenly own of a company that you never intended to buy in the first place? Logic suggests that you would be likely to sell those shares. But research by Associate Professor Malcolm Baker, Professor Joshua Coval, and Harvard University professor Jeremy C. Stein shows that 80 percent of individual investors and 30 percent of institutional investors appear to be more inertial than logical. They take the default option, passively accepting the shares offered as consideration in stock mergers and acquisitions." | ||
| What I learned from 'The Price Is Right' | ||
| 06/06/07 Permlink Report Broken Link | Behaviour | ||
| "Bob Barker, who is taping his final "Price" episode today for broadcast June 15 on CBS, was one of my childhood idols. He was impeccably tailored, and he genuinely engaged the contestants, even when the outrageously T-shirted hoi polloi didn't match the effortless grace of the host. More important, watching "The Price Is Right" taught me an enormous amount about money. Naturally, I loved the showcases, the cars and "Barker's Beauties." But what kept me coming back was the daily lesson in the principles of behavioral finance. If you wanted to know how to exploit - or get trapped by - market inefficiencies and the often irrational behavior of competitors, "The Price Is Right" was essential." | ||
| It feels good to be good | ||
| 05/29/07 Permlink Report Broken Link | Behaviour | ||
| "The results were showing that when the volunteers placed the interests of others before their own, the generosity activated a primitive part of the brain that usually lights up in response to food or sex. Altruism, the experiment suggested, was not a superior moral faculty that suppresses basic selfish urges but rather was basic to the brain, hard-wired and pleasurable." | ||
| Is the market rational? | ||
| 05/07/07 Permlink Report Broken Link | Behaviour | ||
| "That brings us back to Thaler, who was working on a Ph.D. in economics at Rochester in the early 1970s. His dissertation was an attempt to put a value on human life by looking at how much more people were paid to work in risky fields like mining and logging. He was working on the assumption, of course, that people rationally weighed the risk of death in their decision to accept a job. Along the way Thaler decided to ask a few friends how much they'd be willing to pay to eliminate a one-in-1,000 chance of immediate death and how much they would have to be paid to willingly accept an extra one-in-1,000 chance of immediate death. What he found was that they wouldn't pay much for the extra margin of safety but demanded huge sums to accept added risk--which isn't, strictly speaking, rational. "I came to two conclusions about these answers," Thaler wrote years later. "(1) I had better get back to running regressions if I want to graduate, and (2) the disparity between buying and selling prices was very interesting." Thaler did discuss his subversive thoughts with a few trusted colleagues and people from other disciplines. One of those people happened to be a newly minted psychology Ph.D., who sent Thaler a copy of a 1974 article by Israeli psychology professors Amos Tversky and Daniel Kahneman. (Tversky died in 1996; if he were still around, he surely would have shared in this year's Nobel.) The article argued that in making decisions involving probability and risk, people rely on mental shortcuts that "are highly economical and usually effective but ... lead to systematic and predictable errors." It was that last part that was so significant. That people make judgment errors wasn't news, but if those errors were "systematic and predictable," well, that was something an equation-wielding economist could get up and run with." | ||
| Your brain on Gucci | ||
| 04/27/07 Permlink Report Broken Link | Behaviour | ||
| "Economists used to think consumers made rational purchasing decisions. But a new field of research is revealing neural forces that leave classical theorists scratching their heads" | ||
| The executioner of excellence | ||
| 04/10/07 Permlink Report Broken Link | Behaviour | ||
| "And speaking of successful money managers, while Warren Buffett has not exactly taken the same vow of "poverty," he does share Swensen's otherworldliness, living in the same modest house for several decades, fitting out his living room at the Omaha Furniture Mart, and subsisting on Coke and cheeseburgers. Is there a connection between Buffet and Swensen.s relative disdain of the material world and their brilliance as money managers and, more generally, of the superior performance of endowments and public pension plans? You bet there is. Cognitive psychologists have long known that we are very poor judges of what makes us happy: the pleasure from money, fame, possessions, and power turns out to be quite transient (and so is the pain from things which we think would permanently sadden us: the depression caused by sudden, permanent blindness or paraplegia, for example, is surprisingly short-lived). Three things provide long-lasting satisfaction, as quantitatively measured by academic psychologists: autonomy, meaningful contact with others, and the development and exercise of competence." [Correction: Illinois Tool Works generally pays 1.1 or less times annual revenue for its acquisitions.] | ||
| The riches of irrationality | ||
| 03/14/07 Permlink Report Broken Link | Behaviour | ||
| "Buy low and sell high. In other words, buy when it's cloudy outside but sell when the sun is shining. Yes, aspects of the weather do affect stock markets after all. In a 2001 paper, Ross School of Business Prof. Tyler Shumway and a colleague showed the existence of the sunshine effect, which says the amount of cloud cover in the vicinity of major international stock markets has a significant correlation with trading patterns for the day. Moreover, this significance rises into relevance as researchers show that the sunshine effect will deliver higher returns - even taking into account the transaction costs incurred with trading to the vicissitudes of meteorology." | ||
| Gimme more | ||
| 01/26/07 Permlink Report Broken Link | Behaviour | ||
| "The more money we have, the less we want to share with other people. Few of us like to think of ourselves as being greedy, although we might describe ourselves as being self-sufficient or financially independent. And many of us like to think that if we suddenly received a wind-fall, we'd share the wealth. Yeah, sure. The trouble is that self-perception is often very different from reality." | ||
| You are what you expect | ||
| 01/20/07 Permlink Report Broken Link | Behaviour | ||
| "A couple of decades ago, the psychologist Shelley Taylor proposed that 'positive illusions' like excessive optimism were critical to mental health. People who saw their abilities and chances realistically, she noted, tended to be in a state of depression. (Other psychologists, taking a closer look at the data, countered that depressives actually show more optimism bias than nondepressives: given the way things turn out for them, they are not pessimistic enough.) And there is new evidence that optimism may in some ways be self-fulfilling." | ||
| The triumph of unreason? | ||
| 01/18/07 Permlink Report Broken Link | Behaviour | ||
| "People's shopping behaviour therefore seems to have piggy-backed on old neural circuits evolved for anticipation of reward and the avoidance of hazards. What Dr Loewenstein found interesting was the separation of the assessment of the product (which seems to be associated with the nucleus accumbens) from the assessment of its price (associated with the insular cortex), even though the two are then synthesised in the prefrontal cortex. His hypothesis is that rather than weighing the present good against future alternatives, as orthodox economics suggests happens, people actually balance the immediate pleasure of the prospective possession of a product with the immediate pain of paying for it." | ||
| The voices in my head say 'Buy It!' Why argue? | ||
| 01/16/07 Permlink Report Broken Link | Behaviour | ||
| "Now that scientists have spotted the pain and pleasure centers in the brain, they.ve moved on to more expensive real estate: the brain.s shopping center. They have been asking the big questions: What is the difference between a tightwad's brain and a spendthrift's brain?" | ||
| Economics discovers its feelings | ||
| 12/20/06 Permlink Report Broken Link | Behaviour | ||
| "The hedonimeter was never invented, and for a century or so economists fell silent about both weights on man's scales. They studied outward behaviour, not inward feelings; choices made, not pleasures taken. But in recent years, economists have become newly confident that they can measure utility as Bentham conceived it: as a quantum of pleasure or pain. How do they do it? Mostly they just ask people. Daniel Kahneman, a psychologist at Princeton University who won the Nobel prize for economics in 2002, reckons people are not as mysterious as less nosy economists supposed." | ||
| Free to choose? | ||
| 12/20/06 Permlink Report Broken Link | Behaviour | ||
| "For millennia the question of free will was the province of philosophers and theologians, but it actually turns on how the brain works. Only in the past decade and a half, however, has it been possible to watch the living human brain in action in a way that begins to show in detail what happens while it is happening. This ability is doing more than merely adding to science's knowledge of the brain's mechanism. It is also emphasising to a wider public that the brain really is a just mechanism, rather than a magician's box that is somehow outside the normal laws of cause and effect. Science is not yet threatening free will's existence: for the moment there seems little prospect of anybody being able to answer definitively the question of whether it really exists or not. But science will shrink the space in which free will can operate by slowly exposing the mechanism of decision making." | ||
| I want it now! | ||
| 11/25/06 Permlink Report Broken Link | Behaviour | ||
| "One of my daughter's favorite bedtime stories is A Birthday for Frances. I like it, too, for the charming illustrations, hilarious dialogue, and instruction in cutting-edge behavioral economics. Frances, the story's young heroine, secures an advance on her allowance in order to buy bubblegum and a Chompo bar as a birthday present for her little sister Gloria. Yet, as she returns with her father from the sweet shop, Chompo bar in hand, Frances begins to think of all kinds of reasons why she, not Gloria, should eat the chocolate." | ||
| Whiff of cash can be a sour note | ||
| 11/16/06 Permlink Report Broken Link | Behaviour | ||
| "Merely the sight of money can change a person's behaviour, says a study done by an American marketing professor and financed by Canadian research institutions. Kathleen Vohs, an assistant professor at the University of Minnesota, and colleagues conducted a series of nine experiments in which people were asked to do puzzles or other tasks. The behaviour of people exposed to money was compared to others who were not prompted to think about it." | ||
| Boom and gloom | ||
| 11/13/06 Permlink Report Broken Link | Behaviour | ||
| "A few years ago, the Nobel Prize-winning psychologist Daniel Kahneman conducted an odd experiment. He had a group of students eat a bowl of their favorite ice cream while listening to a particular piece of music eight days in a row. After the first day, Kahneman asked them to predict how they'd feel about the whole experience once it was over. Their predictions turned out to be way off base. Some students who thought that they'd hate having to eat the same flavor eight days in a row became addicted to it. Some who thought they'd enjoy the experience were eventually repulsed by it. The upshot: people may know when they're happy, but they often don't know what will make them happy. That poses a problem for the basic tenets of modern economics: that people act in their own self-interest most of the time, and that they usually know what that self-interest is." | ||
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