Instinct and Emotions in Investing

In Sunday’s linkfest, I pointed to an interview with MIT economics professor Andrew Lo. Today, I am privileged to be quoted with the good prof in an article on Investor Psychology:

"Andrew Lo, Professor at MIT, has published an interesting and widely
appreciated work called ‘adaptive market hypothesis’ where he argues that player
behaviour in the markets is influenced by the ability to adapt and evolve to
changing situations. Market behaviour could draw more from Darwin than from Adam
Smith.

Investors tend to use tried and tested rules of thumb in markets [heuristics] until they
understand the difference in the situation, and then they learn ways to work the
markets. What they do is more about survival instincts, and constant innovation
and evolution, than about cold-blooded mathematics and analytics.

In this game, therefore, the mindset of the player is pitted against the
social structure of the market, and the learning and evolution can never be
uniformly distributed. Also there is no conclusive evidence that one set of
players evolves faster than the others in the market ecosystem.

Others who have actually taken the logic of evolutionary learning to the labs
have found that large mammalian brains like ours are perhaps incapable of
winning in the markets, as our innate survival instincts are pitted against
skill sets needed to win. Barry Ritholtz presents interesting work that argues
that we may simply not be capable of investing rationally, given our genetic
make-up and our learning process.

What does this interesting body of work tell us? We are perhaps better off
remaining closer to our innate preferences and choices until we learn to adapt.
Making investment choices that are ill suited to our basic levels of cognition
and understanding, and more importantly, our ability to cope, can be risky."

Very cool, and very nice company to be included in with!

 

Source:
Instinct, the best investment gauge
Uma Shashikant
Rediff.com India Limited, Outlook Money | April 24, 2006
http://inhome.rediff.com/money/2006/apr/24invest.htm

Category: Financial Press, Investing, Psychology

Free Enterprise Action Fund ?

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A few words about Microsoft

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Media Appearance: Kudlow & Company (4/27/06)

Category: Media

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Its now official . . .

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Earnings and Subsequent Market Performance

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TSCM

Category: Earnings, Psychology, Technical Analysis, Trading

“Every Change of Rate”

“Every Change of Rate” is an utterly hysterical parody of the black & white Police video “Every Breath You Take,” as done by some Columbia Biz School students; Its an amusing take on the Ben Bernanke, the newly appointed Fed Chief. My favorite bit are the lyrics during the second verse: “First you move your…Read More

Category: Federal Reserve, Music

Existing Home Sales Data (California Real Estate: On Sale!)

Sales of existing homes surprised to the upside yesterday. But one data point does not make a trend. This is the first rise (sequential monthly change) after 5 straight months of falling Home Sales. And that’s before we examine the data.

Before you declare the end of the housing slow down, consider:

- Existing Home sales actually slipped vs. last year by -0.7%; The reported gain was over last month’s data;

- the Inventory of unsold homes soared 7 percent in March, hittting an all-time record; There are now 3.19 million existing homes for sale, or  5.5 months’ supply; That’s the largest inventory since July 1998

- Existing homes edged up 0.3% last month to a seasonally adjusted annual rate of
6.92 million units; (we know that seasonally adjusted data is not always accurate)

- Year over year, the Northeast and Midwest gained, while the previously hot housing markets in the South and the West slipped;

- median home prices are still rising, albeit nmore slowly — up 7.4% year over year, to $218,000.

Here’s a data point that has me scratching my head:  Why are there different numbers for the year-over-year changes for seasonally and not seasonally adjusted?  Was this March somehow in a different season than last year’s March? I am perplexed.

Note that data for existing home sales comes from National Association of Realtors, a group that is certainly an interested party; Of course, as a homeowner, investor, and someone with a public bearish tilt for the second half, I’m hardly objective myself (hey, I try). But this oddity — down -0.5% for the not seasonally adjusted year over year versus down -0.7% for the seasonally adjusted year over year — is beyond my comprehension.

So much for the hard data on existing sales; Today, we get New Home Sales. Recall our prior admonishments that monthly New Home Sales Data are unreliable; look instead to a moving average.

Let’s move onto some anecdotal evidence.  A friend writes:

"Flop! Wow, KB running blue light specials in California. Not surprising,
Chico area was rated one of the most overvalued markets in the country. Houses
in the $200k space.  When was the last time you saw that in California? "

 
Oak Knoll Place Live Oak, CA

Oak Knoll Place Slideshow

Here’s the sales pitch:

"Oak Knoll Place in Live Oak is located in a beautiful
community near the majestic Sutter Buttes. With easy access to Highway 99, it is
ideally located for easy access to Sacramento, Lake Tahoe, Reno and a wide
variety of recreational opportunities. Yuba City and Marysville are
approximately 10 minutes south, Chico is approximately 35 miles north and the
Gray Lodge Wildlife area is approximately 10 minutes west. Live Oak has a
quaint, small-town atmosphere with many nearby recreational water activities,
including the Feather River, Yuba River and Sacramento River. Prices starting
from the High $200′s.
"

I don’t know Live Oak, but houses like that in California are hard to imgaine . . .

More after the jump.

Sources:
Existing-Home Sales Rise Again in March
NATIONAL ASSOCIATION OF REALTORS
WASHINGTON (April 25, 2006)
http://www.realtor.org/PublicAffairsWeb.nsf/Pages/MarchEHS06?OpenDocument

Existing Home Sales  data
NATIONAL ASSOCIATION OF REALTORS
http://www.realtor.org/Research.nsf/files/REL0603EHS.pdf/$FILE/REL0603EHS.pdf

>

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Category: Data Analysis, Federal Reserve, Fixed Income/Interest Rates, Real Estate