Posts filed under “Psychology”

(Why) You Suck at Investing


USA Today had an interesting article this past week (it happens). The discussion was on the fact that Most Americans no good at investing.

A more accurate title would have been "Humans not good at investing." There’s a very specific reason for this; It is something I am in the middle of writing up, and will address very soon in print.

Meanwhile, here’s an excerpt:

"A study by Hewitt Associates that analyzed the 2003 investment behavior and account activity of 2.5 million employees eligible for 401(k) plans exposes a trove of investment mistakes by average investors:

• Three out of 10 employees eligible for 401(k) plans don’t participate, Hewitt says. That means investors are passing up free money in the form of matching contributions from their employers.

• Despite horror stories about employees at scandal-scarred companies such as WorldCom and Enron having their 401(k) accounts wiped out because they had all their money riding on their own company’s stock, 27% of 401(k) investors still have more than half of their money in their employer’s shares.

• And proving that investors are hardly hands-on, only 17% made 401(k) transfers in 2003.

Another Hewitt study, done in fall 2004 with Harvard University and the Wharton School at the University of Pennsylvania, found that a "non-saving mentality" persists. The study focused largely on "low savers," those who do not stash enough in their 401(k)s to earn the company match. When "low savers" learned they were passing up $1,200 a year in matching contributions, one-third said they intended to raise their savings rate. Only 15% actually did."

This factor, more than any other reason, explains why the President’s Social Security Privitization idea has generated so little positive response amongst most Americans.


UPDATE  March 27, 2005 9:12 am

Put aside the Social Security issue for a moment. I find the argument that people are not hard wired to be investors is quite fascinating. Wall Street uses a variation of this to suggest "professional management;" indexers use it to argue against active management; discount brokers say if you can do as well as the mediocre pros, then why pay big commissions?

All of these positions miss the bigger picture: Why are Humans Beings so ill suited to investing?

I first came across one of my favorite explanations as to why we simply aren’t hardwired to undertake risk reward analysis in capital markets many years ago; It was from Michael Mauboussin , now Legg Mason Funds chief investment strategist, formerly chief U.S. investment strategist at Credit Suisse First Boston. In a cogent and persuasive manner, Mauboussin explains the reason why: "the mind is better suited for “hunting and gathering” than it is for understanding Bayesian analysis."

Simply put, you just ain’t built for it. Mauboussin breaks down the emotional and psychological impediments into 7 subtopics:   

· Desire to be part of the crowd.
· Overconfidence.
· Inability to assess probabilities rationally.
· We love a story, especially when it links cause to effect.
· Use of heuristics, or rules of thumb.
· Chance.
· Fitness landscapes and the role of the inductive process.

Each of these are explained in more detail, but the bottom line remains: Most people simply do not posses the counter-intuitive skillset, or the emotional detachment, or the discipline required for long term outperformance in the markets . . .


Been round here long . . . ?

Capital markets have not been around all that long (relatively speaking).


Most Americans no good at investing
Adam Shell
USA TODAY, Posted 3/23/2005 12:12 AM
Updated 3/23/2005 1:14 PM

What Have You Learned in the Past 2 Seconds?
Michael Mauboussin
March 12, 1997

Category: Apprenticed Investor, Investing, Psychology, Rules

Dot-Coms vs. Real Estate

Category: Finance, Markets, Psychology

Odds & Ends

Category: Film, Music, Psychology’s Internet Links of Interest:

Category: Finance, Investing, Markets, Psychology, Weblogs

The Psychology/Sentiment of Oil

Category: Commodities, Markets, Psychology

The kinda-eventually-sorta-mostly-almost Efficient Market Theory

“I guess we’re all behaviorists now” -Richard Thaler   One of the most widely believed theories on Wall Street is the Efficient Market Hypothesis (EMH). Adherents of this charmingly naive thesis believe that markets are an incredibly effective distributor of information. Because of this, say EMH theorists, it is impossible, therefore, to beat the market,…Read More

Category: Philosophy, Psychology, Really, really bad calls

3 Bubbles

I’ve been meaning to follow up on a terrific article from the WSJ last week, titled Why Analysts Aren’t Sure The Bubble Has Fully Burst. The “Three Bubbles” graphic accompanying the article is simply a gorgeous instrument of communication (its here Three Bubbles PDF). E.S. Browning does an admirable job soliciting a variety of viewpoints…Read More

Category: Finance, Psychology

The Skeptic’s Guide to Stock Tips

Category: Apprenticed Investor, Investing, Markets, Psychology, Rules, Trading

Popular or Best?

This was originally published at About This Particular Macintosh, January 1998. ~~ I recently had a computer purchase discussion with my sister—She and her husband would like to have a PC so that Jake and Jamie (my niece and nephew—ages 2 1/2 and 4 1/2) can learn computers and have some fun. Every time the…Read More

Category: Film, Media, Music, Psychology, Technology

BusinessWeek: The Death of Equities

Money & Banking August 13, 1979, 12:01AM EST The Death of Equities How inflation is destroying the stock market On July 23 institutions that manage pension fund money began operating under a new and far more liberal interpretation from the Labor Dept. of what is a prudent investment under the Employee Retirement Income Security Act…Read More

Category: Financial Press, Markets, Psychology, Think Tank