Posts filed under “Cognitive Foibles”

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 . . .

 

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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

Look Out Above, I Dont Know Why Edition (part II)

click for updated futures Source: Bloomberg     Yesterday morning I wrote Look Out Below, I Don’t Know Why Edition. Today, the market half is a mirror image — up about as much as yesterday was down. The only thing that remains the same is my ignorance — I really don’t know why markets are…Read More

Category: Cognitive Foibles, Investing, Markets

NYT Discovers Confirmation Bias

  “Perhaps something more complicated than sketching out voting districts is at play. The polarized political map is now accompanied by a media ecosystem that is equally gerrymandered into districts of self-reinforcing discourse.”   From the better-late-than-never files: I want to direct your attention to an article from David Carr, titled It’s Not Just Political…Read More

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

15 Biases That Make You A Dumb Investor

I am off to Toronto, where I am presenting at the annual CFA forecasting dinner. (I am the counter-programming, which means I get to explain why you humans are so bad at forecasting. From Morgan Housel, here are several cognitive biases that cause you to do dumb things with your money. Be sure to check…Read More

Category: Cognitive Foibles, Psychology

Biased Assimilation and Attitude Polarization

Biased Assimilation and Attitude Polarization: The Effects of Prior Theories Lord, Ross & Lepper (1979) People who hold strong opinions on complex social issues are likely to examine relevant empirical evidence in a biased manner. They are apt to accept “confirming” evidence at face value while subjecting “disconfirming” evidence to critical evaluation, and, as a…Read More

Category: Cognitive Foibles, Psychology, Think Tank

Is the Market Rallying on Syria or Summers?

There is a certain school of thought — and I use that word loosely — that seemingly tries to tie each twitch of the market, every noisy jag up or down — to some broader issue. Partisan politics, economics, technology, and of course, presidential elections becomes fodder for this school of thought rationalization. Flip on…Read More

Category: Cognitive Foibles, Current Affairs, Markets, War/Defense

Paul Farrell: Beware of Predictions, Optimism Bias

The following assortment of quotes comes from Paul Farrell   2007-2008 bank credit meltdown — the top nine happy-talking gurus False predictions made before the 2008 subprime credit meltdown: ‘Mad Money’ Jim Cramer: “Bye-bye bear market, say hello to the bull.” Ken Fisher: “This year will end in the plus column … so keep buying.”…Read More

Category: Cognitive Foibles, Really, really bad calls, UnGuru

Reagan’s Million-Jobs Month Revisited

* Sigh.* @TBPInvictus here I see once again that the canard about Reagan’s million-jobs-month is making the rounds: “Reagan’s best job month garnered the very top ranking since WWII with 1,114,000 jobs added in September 1983. A single month with more than a million jobs added. So far Obama can only wish for such a…Read More

Category: Analysts, Cognitive Foibles, Data Analysis, Financial Press, Really, really bad calls