094: Daniel Crosby on Stock Market Investment Errors and the Price Earnings Ratio

July 14, 2016 by Frank

094: Daniel Crosby on Stock Market Investment Errors and the Price Earnings Ratio

Dr. Daniel Crosby is a psychologist, behavioral finance expert and asset manager who applies his study of market psychology to everything from financial product design to security selection.

Daniel is author of 2 books – The Laws of Wealth: Psychology and the secret to investing success and You’re not that Great. He is co-author of the New York Times bestseller Personal Benchmark: Integrating Behavioral Finance and Investment Management.

Dr. Crosby is founder of Nocturne Capital. His ideas have appeared in the Huffington Post and Risk Management Magazine, as well as his monthly columns for WealthManagement.com and Investment News.

Daniel was named one of the “12 Thinkers to Watch” by Monster.com, a “Financial Blogger You Should Be Reading” by AARP and in the “Top 40 Under 40” by Investment News.

Daniel was educated at Brigham Young and Emory Universities.

Economics:

Volatility, stock markets, behavioral finance, investments, human error, behavioral bias, money, confirmation bias, loss aversion, price earnings ratio, CAPE, Quantitative Easing and central banks.

Economists:

Benjamin Graham, Christopher Geczy, Jeremy Siegel, Robert Shiller and John Paulson.

We lose 13% of our IQ when we are under stress, so even if you know all of these great lessons about the way the markets work, you tend to have least access to them when you need those lessons the most. – Daniel Crosby

5 consistent factors that underlie the 100 ways that we can make mistakes:

1. Ego – The belief that we are special or different.

2. Emotion – Allowing our feelings to drive our perception of risk.

When we’re in a good mood, the world seems to be a safe place to be. Equity markets seem to be a safe place to be. The opposite is also true.

3. Conservation – A preference for the status quo & Asymmetry – the way we see loses versus gains.

We are much more upset with a loss than a similarly sized gain.

4. Information – We have too much data available for our brains to absorb.

The Fed releases 45,000 pieces of economic data each month. There is no way that we can comprehend all of that. We have information processing problems and we mis-weight data.

5. Attention – Salience trumps probability.

The more vividly we’re able to think about something, the more probable it seems

Books:

The Laws of Wealth: Psychology and the Secret to Investing Success by Daniel Crosby
You’re Not That Great by Daniel Crosby
Personal Benchmark: Integrating Behavioral Finance and Investment Management by Chuck Widger and Daniel Crosby
The Behavioral Finance Reading List featured on Nocturne Capital.

Weatherman, Michael Fish gets it wrong with the 1987 Storm in England

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024: Greg Davies on Behavioral Finance and Controlling Your Emotions When Making Trading Decisions

March 19, 2015 by Frank

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024: Greg Davies on Behavioral Finance and Controlling Your Emotions When Making Trading Decisions

Greg Davies is Managing Director and Head of Behavioral Finance at Barclays. He joined the firm in December 2006 to develop and implement commercial applications drawing on behavioural portfolio theory, the psychology of judgment and decision making, and decision sciences.

Today Greg leads a global team of behavioural and quantitative finance specialists, and is responsible for the design and global implementation of Barclays’ Investment Philosophy.

Greg is an Associate Fellow at Oxford University’s Saïd Business School and his first (co-authored) book, ‘Behavioral Investment Management: An Efficient Alternative to Modern Portfolio Theory’, was published in January 2012.

He is co-curator and co-creator of Open Outcry – a reality opera based on the stock market trading floor.

Greg has authored papers in multiple academic disciplines, presents at academic and industry conferences, and is a frequent media commentator on Behavioural Finance. He is an Editorial Board Member of the Journal of Behavioural and Experimental Finance.

Greg studied at the University of Cape Town and obtained a degree in Economics, Philosophy and Finance. He followed this with an MPhil in Economics and a PhD in Decision Theory and Behavioural Finance from the University of Cambridge.

Economic Themes:

In this interview, Greg mentions and discusses:

Behavioral economics, behavioral finance, rationality, irrational behavior, heuristics, cognitive biases, system 1, system 2, homo economicus, trade-off, home bias, familiarity bias, risk, return, portfolio, efficient frontier, stochastic model, trading floor, noise, herding, bubbles, booms, bust, returns, standard deviation, deterministic model, decision theory, expected utility theory, mean variance and portfolio theory.

Economists:

In this interview, Greg mentions:

Danial Kahneman, Amos Tversky, Terence Odean, Warren Buffet, Charlie Munger and Harry Markowitz.

Influencers:

Jon Elster and Amos Tversky.

Advice:

Be multi-disciplinary. Look for links between fields. Be continuously curious.

Keep learning. Stay curious. Say ‘yes’ to things that are outside your comfort zone.

Find out:

what is Behavioral Economics/Finance

the disconnection between economics and psychology.

how Kahneman and Tversky were ‘swimming up-stream’ to bring common sense to economics.

why viewing the world through biases is harmful to behavioral finance.

why the ever-increasing list of biases may not be good for the behavioral finance field.

about System 1 and System 2 as popularised by Daniel Kahneman.

why it’s good to allow emotions to part of the portfolio decision-making process.

how to acquire the emotional comfort you need for your long-term financial objectives.

how to buy emotional insurance for your long-term investment portfolio.

how to avoid costly short-term emotional mistakes.

how psychometric tests can extract measures of financial personality.

why a set of nudges are designed to help high net-worth individuals to make better decisions.

how to build a tailored portfolio to meet your clients needs.

why you should consider including expected anxiety into your portfolio building along with risk and return.

what an opera experiment has to do with replicating the open outcry system of a trading floor.

how music can control your emotions while trading markets.

how Barclays Capital are improving the understanding of their clients by turning the lens on themselves.

Behavioral economics is the combination of finance theory and behavioral psychology. It’s about trying to understand how people actually do go about making financial decisions and, as a result, how we might make them better financial decisions.

Problems with Biases in Behavioral Finance:

Biases are only often biases if you view them through the lens of what economic theory very narrowly and mathematically deems to be rational.

There’s nothing irrational about having the need for a short-term immediate emotional comfort.

A lot of deviations from narrow economic thinking are not irrational at all. They are perfectly reasonable. It is just that other people are bringing other objectives to bear on the decision.

The other problem is the tendency to look at the world through a list of biases.

Classical Finance would typically remove irrational behavior from its theories and models. However, the position of Behavioral Finance is much more subtle. As humans, we need emotional comfort. We need to be comfortable with the decisions we make and with the portfolio we hold. There is nothing irrational about that.

You need to find a way of not switching off your emotions but utilising them effectively – Greg Davies

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