Posts filed under “Cognitive Foibles”
In a new project at Bloomberg I will interview some of Wall Street’s most influential thinkers. I’ll share more details with readers when we get closer to a launch date, but several consistent themes have become clear to me, even at this early stage.
The one I want to discuss this morning is the concept of noise.
Longtime readers of mine will recognize this theme from years ago. “Lose the News” is now almost a decade old; more recently, I discussed how to “Reduce the noise levels in your investment process.”
In speaking with strategists, money managers, economists and analysts one pattern that rapidly revealed itself was the schism between the commentariat and the markets. The noisy, click-hungry, traffic-seeking headlines of the online and TV financial news media often have a very different tone, focus and punch line than what is going in equity and fixed-income markets themselves. Indeed, the divergence between markets and the coverage is a key takeaway from these interviews.
I can’t emphasize enough the problems that investors succumb to due to the human love of narrative (see this and this). We can find smart articles and insightful commentary online, but when taken in its totality it is little more than a cacophony of headlines, conspiracy theories, invalid logical arguments and other distractions. It is impossible to keep up, much less debunk, the never-ending series of myths produced by the noise machine.
Here is a perfect example: U.S. equity markets hit bottom more than five years ago. The rally since then has produced a gain of about 175 percent and counting. During this run-up, the noise has led readers to expect the coming collapse back into the abyss and recession. The Federal Reserve’s zero-interest policy and quantitative-easing program were going to turn us into a third-world nation. That then morphed into how overpriced the equity markets had become, followed by a series of bubble arguments. Then about three years ago, the doomsters began saying the market had reached a top. The bull move was all but over, get out now before the next crash. It’s 1987! No, it’s 1929!
Yet the entire time, the markets have continued to rise.
Why is that? Markets respond to a variety of factors: Sentiment, valuation, liquidity, trend, demand, risk appetite, etc. At any given time, one or another of these, or some combination of them, is dominant.
The noise on the other hand merely reflects whatever meme is popular at that moment. The commentariat often resembles a hall of mirrors, with both good and bad thoughts and ideas getting bounced around and reflected continuously. Only on rare occasions, does the net result correlate with what is actually occurring in markets. Those instances seem like coincidences.
What purpose does all this noise serve? My conclusion after speaking with thoughtful, data-driven people is that its main purpose is to help create a two-sided market.
What noise are you listening to?
Late last year, we had a wholesaler from a major ETF firm in our office. At the time, the chatter was all about the upcoming Alibaba IPO. It was going to be (in his words) “huge, disruptive, incredibly powerful – and you cannot get any.” Never mind that IPO returns are on average mediocre or…Read More
This hour of Radiolab, a look behind the curtain of how memories are made…and forgotten.
Remembering is an unstable and profoundly unreliable process–it’s easy come, easy go as we learn how true memories can be obliterated, and false ones added. And Oliver Sacks joins us to tell the story of an amnesiac whose love for his wife and music transcend his 7-second memory
Let’s face it you suck at investing. Your adviser sucks at investing too. If you had picked the best stock to buy every day you could have turned $1000 into $264 billion by mid December. That is a 26.4 billion percent return. Did you even get a 1 billion percent return? How about 1 million…Read More
Over the past few weeks, I have been trying to push back against the usual contingent of bears. In particular, I have argued that this bull cycle is not yet over, markets are not in bubble and that people have been sitting for too long in way too much cash. John Coumarianos of the Institutional…Read More
Psychologists who study the fascinating phenomenon of change blindness know that merely looking at something is not the same as actively paying attention to it. As the demonstration in this video shows, people can be blind to significant changes in a visual scene that are obvious to someone who expects that these changes are going to happen
Originally posted at NOVA
This issue comes up every few years: Someone is rummaging about in their attic or basement (or less romantically, a safety deposit box), and they find some long forgotten stock certificates.
I first noticed this as an issue with EMC more than a decade ago. A Massachussetts area man found a few certs that had appreciated somewhat:
The man, a 62-year-old salesman who wants to keep his identity under wraps, recently found that some stock he thought he had sold long ago had been quietly gaining value for 13 years. A week ago, it was worth about $4 million. The investor said he bought 3,000 shares of EMC, the data storage company, on a tip from his cousin in 1987, but soon sold 2,000 of them to pay for his children’s college tuition. He forgot about the remaining 1,000 until the state’s Abandoned Property Division, noticing the inactivity, contacted him last month.
Sure enough, after spending three days in his cellar with a kerosene lamp, he found the still-sealed envelope with the stock certificates. The shares, for which he paid about $15.75 each, have split several times, making him the owner of 48,000 shares whose latest 52-week high was $104.94.
-New York Times, December 03, 2000
I was reminded of that story this week when this one showed up in the Guardian:
Man buys $27 of bitcoin, forgets about them, finds they’re now worth $886k
Bought in 2009, currency’s rise in value saw small investment turn into enough to buy an apartment in a wealthy area of Oslo.The meteoric rise in bitcoin has meant that within the space of four years, one Norwegian man’s $27 investment turned into a forgotten $886,000 windfall.
Kristoffer Koch invested 150 kroner ($26.60) in 5,000 bitcoins in 2009, after discovering them during the course of writing a thesis on encryption. He promptly forgot about them until widespread media coverage of the anonymous, decentralised, peer-to-peer digital currency in April 2013 jogged his memory.
These sorts of stories typically are used to extol the virtues of Buy & Hold investing, or Set & Forget portfolios.
Why is this an example of Selection Bias?
I am reminded of the Steely Dan song “Throw Back the Little Ones (and Pan-Fry the Big Ones)”. This method of collecting samples uses outliers — the Big Ones — the wildest and most improbable investing success stories to demonstrate their point. What you do not see are all of the Little Ones, the higher probability, more common versions of the found stock certificate. That narrative usually goes something like “Did you ever here of a company called First Amalgamated Something or Other?” These stories lack the sexiness and Wow! factor of improbably finding a few million dollars in your basement.
Here are the headlines that you did not see — because no one shares this information, and due to the natural selection bias of them:
• Man Finds Worthless Lehman Brothers Stock Certificates in Attic; “I thought I sold these,” he cried
• Man Inherits 10 million shares of now worthless GM Stock; Great Grandfather dies after 10 year coma “If only he went sooner”
• Forgotten AIG shares Almost Worthless; Post Bailout and Reverse Split, boy finds $11 dollars worth of stock; “it was once worth millions” dad laments
Or most likely:
• Forgotten Penny Stock Certificates Still Worthless
I bet for each one of the found millions story, there are 100 worthless unpublished stock cert tales.
Steely Dan song after the jump . . .
@TBPInvictus here. An IBD editorial picks up on a story originally run over at CNS News. Here’s the lede at CNS (emphasis mine): (CNSNews.com) – Americans who were recipients of means-tested government benefits in 2011 outnumbered year-round full-time workers, according to data released this month by the Census Bureau. They also out-numbered the total population…Read More