Economic Rockstar

Connecting Brilliant Minds in Economics and Finance

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

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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 daniel crosby economic rockstarapplies 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:

Links:

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

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047: Victor Ricciardi on The Psychology of Financial Planning and Investing

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047: Victor Ricciardi on The Psychology of Financial Planning and Investing

Victor Ricciardi is Finance Professor at Goucher College, Baltimore, Maryland where he teaches courses in Victor Ricciardipersonal financial planning, corporate finance, investments, behavioral finance, and the psychology of money.

Victor is the Coordinator of Behavioral & Experimental Research for the Social Science Research Network also known as SSRN.

Victor is the current Editor for seven SSRN eJournals including Behavioral & Experimental Finance, History of Finance, and Behavioral & Experimental Economics.

He received his PhD from Golden Gate University and his MBA from St. John’s University.

Victor’s current book Investor Behavior: The Psychology of Financial Planning and Investing with co-editor Kent Baker is now available and has 30 chapters on emerging research in behavioral finance.

In this episode, you will learn:

  • the difference between Behavioral Economics and Behavioral Finance.
  • the rational approach to investing and whether it exists.
  • what bounded rationality really means.
  • if companies help you make decisions for their own personal benefit.
  • how framing can be a powerful tool to help customers make decisions.
  • the importance of financial literacy at different stages of your life.
  • the similarities between behavioral economics and marketing.
  • the future of Behavioral Economics and Behavioral Finance.
  • how your mood, good or bad, can influence your buying behaviour and increase risk-taking.
  • about the importance of studying the subconscious mind in finance or neurofinance.
  • why people generally do not take losses, known as loss aversion.
  • why Victor disagreed with the traditional views of economics and decided to study behavioral finance.
  • how and why some governments are using behavioural finance and economics techniques to nudge us to make better financial decisions in our lives.
  • how status quo bias makes it harder for employees to opt out of an automatically enrolled savings retirement plan.
  • how mounting student debt and high youth unemployment in the US could make it difficult to service pensions leading to a pension ‘ponzi’ scheme or a crisis.
  • why Victor Ricciardi believes that there should have been a law designed to make retirement planning easier for the employee.
  • what you should do when investing so as to manage bull and bear market cycles.

Economics:

In this interview, Victor mentions and discusses: behavioral Economics, Behavioral Finance, rational, bounded rationality, heuristics, framing, annuity puzzle, investment, consumption, self-control bias, nudging, consumer behavior, mutual returns, savings, investments, neurofinance, risk tolerance, over-confidence, loss aversion, nudging, status quo bias, retirement planning and wage inflation.

Economists:

In this interview, Victor mentions and discusses: Richard Peterson, Douglas Rice, Daniel Kahnemann, Amos Tversky, Robert Olson, Richard Thaler and Hersh Shefrin.

Influencers:

William Sharpe, Harry Markovicz, Terence Odean, Robert Olsen, Dan Ariely, Mair Stockman, Hersch Shefrin and John Nofsinger.

Quotes by Victor Ricciardi in Episode 047 of the Economic Rockstar Podcast:

Behavioural Finance is the notion of integrating psychology with finance. So you’re looking at some major themes where people are not only rational but they make decisions based on emotions. – Victor Ricciardi

Risk tolerance is the maximum amount of risk a person is willing to take in their overall portfolio or risky asset. Typically, people are either very conservative risk-takers, they’re average or they’re very aggressive. The component of risk tolerance that’s related to it is known as ‘Risk Perception’, in which our feelings and emotions will increase or have an impact on our overall risk tolerance. – Victor Ricciardi

Takeaway:

Meet with a financial planner and get a financial plan done. In terms of investing, try to understand what type of investor you are and come with an asset allocation that you are comfortable with. Rebalance your portfolio on a year basis which allows you to stay within your risk tolerance. – Victor Ricciardi

Recommend Resources:

  • Twitter

Recommend Books:

Where to Find Victor Ricciardi:

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

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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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Emotions are actually a very good source of information for us if we use them in a thoughtful way – Greg Davies

Resources:

Farnam Street by Shane Parish 

Recommended Books:

Where To Find Greg Davies:

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