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Flashcards in Investor Psych Deck (21)
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1

X System

1. Emotional / Holistic
2. Most processing
3. Judgments based on similarity
4. Slow to change
5. Not conscious / passive

2

C System

1. Logical
2. Slow
3. Deliberate
4. Conscious and can be changed

3

hot-cold empathy gaps

When relaxed and calm, we underestimate how we will feel when stressed.

4

Consequences of prolonged self control

1. Shift to higher risk taking
2. Become defensive and stubborn
3. Take immediate pleasures

5

Chapter 1 Main Points (X vs. C)

1. Spock vs. McCoy
2. Primacy of Emotion
3. Self control is a Muscle
4. Hard-wired to Herd and for the Short Term
5. Plasticity as Salvation

6

$DJI

Biases

1. I know better because I know more
2. Big does not equal Important
3. Show me what I want to see
4. Heads was skill, tales was bad luck
5. I knew it all along
6. The irrelevant has value as input
7. Judgments based on what it looks like
8. That's not the way I remember it
9. If you tell me its so, it must be true
10. A loss isn't a loss until I take it

7

Bias #1

I know better...

Confidence leads to less accuracy

8

Bias #2

Big doesn't = important

There is a difference between strong information and information with a lot of weight (letter from mother = strong but low weight)

9

Bias #3

Show me what I want to see

Confirmatory bias and ignoring disconfirming evidence

10

Bias #4

Heads = Skill, Tails = Bad luck

Self attribution bias.

11

Bias #5

I knew it all along

Hindsight bias - of course it was a bubble!

12

Bias #6

Irrelevant has value

Anchoring, big round numbers

13

Bias #7

What it looks like

What has been true in the past will continue to happen in the future. Ignoring mean-reversion. Straightline projections.

14

Bias #8

That's not how I remember it.

Recency effect makes it more likely to be influenced by dramatic stuff that has happened to you as "normal" or likely to happen again.

15

Bias #9

You tell me it is true so it is

The power of framing can make it so that I ignore the forest for the trees. Zero-hedge

16

Bias #10

A loss isn't a loss until....

Holding losers longer than winners

17

Impact Bias

Overestimating the impact of important events on your emotional state. I will be so upset if this stock drops!

18

Empathy Gaps

Underestimate how much emotions will interfere with rational decision making.

19

Solutions for Impact and Empathy Gaps

1. Remember past emotional events and how long it actually took to 'get over it.'

2. Visualize the state when you will be required to make a decision and use rules to make it easier.

20

Results of reduced ability to feel fear

1. More likely to take risks repeatedly (good for markets bad for life.)
2. More likely to avoid anchoring and ignore prior painful results

21

7 Sins of Fund Managing / Bias / Solution

1. Forecasting / Anchoring / Don't forecast - analyze

2. Knowledge illusion / Information processing / Use only required info

3. Meeting companies / Confirmation bias / Don't visit or discount visits

4. Outsmart everyone/ Overconfidence / Don't increase risk to outperform in short term.

5. Short time horizons and overtrading / confirmation bias and loss aversion / favor long term strategies and clients.

6. Believe what you read / Framing and representativeness "a good story" / Limit information sources, practice 'unbelieving'

7. Group decisions / herding and confirmation bias / Employ secret ballots, devil's advocate