Posts filed under “Cognitive Foibles”

Once Again, The Narrative Fails

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 worse, or that chasing hot syndicate deals is not in our wheelhouse. This guy had a great story to tell, and to the uninitiated, it was enrapturing.

“This is going to be the hottest Tech IPO of the year, bigger than Twitter, bigger than Facebook. Only firms on mainland China are going to have access to it. (Not you). The way to play it is to own all of similar companies in China that are in the Technology and Internet space.”

The story, as it turns out, was completely and utterly wrong. No, thius is not listing in China. Alibaba Group Holding Ltd. is listing on the NYSE, and anyone who wants to can buy its stock. Whether you should is an entirely different matter, but not the subject of this column.

Continues here

Category: Cognitive Foibles, Investing, IPOs

Radiolab: Memory and Forgetting

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

SOURCE: WNYC

Category: Cognitive Foibles, Psychology, Science, Video

Greg Harmon: We Are All Useless Morons that Suck

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

Category: Cognitive Foibles, Psychology, Think Tank, Trading

Am I Too Bullish?

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

Category: Apprenticed Investor, Cognitive Foibles, Investing, Sentiment

Change Blindness

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

Category: Cognitive Foibles, Video

Personal Finance for Engineers (Twitter, 2013)

This is an updated version of my talk “Personal Finance for Engineers” given at Twitter HQ in San Francisco on October 9, 2013. Personal Finance for Engineers (Twitter, 2013) from adamnash Oct 09, 2013

Category: Cognitive Foibles, Investing

Critical Thinking

A look at some of the principles of critical thinking.

Category: Cognitive Foibles, Video

Found Stock Certs: Spot the Selection Bias

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 . . .

 

Read More

Category: Cognitive Foibles, Financial Press, Investing

Makers and Takers

@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

Category: Cognitive Foibles, Economy, Employment, Financial Press, Really, really bad calls

More Signal, Less Noise

Its Friday, the day I like to step back and get all Zen on y’all. As promised yesterday, our subject this morning — indeed, over the past few months — is how to reduce the meaningless distractions in your portfolio (and your life). You want less of the annoying nonsense that interferes with your investing,…Read More

Category: Cognitive Foibles, Financial Press, Investing, Psychology, Rules