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The Psy-Fi Blog wrote a new blog post titled Forecasts? I Haven't Got A Clue ...
Small Worlds We predict things all the time, we can't help ourselves. And in the small world that constitutes our immediate bubble of experience those predictions may have some validity. But in the big world that we inhabit they often don't.  Which of those worlds do you think more accurately represents stockmarket investment? It's difficult for us to accept that our small world experience doesn't scale up to the big world, but it's often true. To all intents and purposes we're infants teetering on the edge of the volcano: to all intents and purposes we know absolutely nothing worth...
127 days ago
The Psy-Fi Blog wrote a new blog post titled Cursed By Momentum
Edgy Investors Although most investors have no edge on the market there's a proportion of them that persist in trading actively, the main effect of which is to enrich their brokers. There are various explanations of why this occurs, but it seems to come down to some combination of inherent overconfidence and a perverse refusal to take account of negative information.  This is particularly dangerous in calm periods such as those we’ve been experiencing in markets over the past few years.  In such times momentum strategies are particularly effective – and serve to supercharge the...
165 days ago
The Psy-Fi Blog wrote a new blog post titled Bias In Action
Myopic Urges The recent sharp correction in markets has clearly surprised a lot of investors. No doubt this is partly due to the standard myopia people seem to exhibit as soon as the last crash is out of sight, but it also seems to be connected to the fact that the seemingly inexorable rise in share prices and the continuing low interest rates on deposits has tempted new people into stocks. Faced, for the first time, with nasty losses they’re casting about for some kind of strategy to deal with the situation. In truth if you need to find a strategy after markets have started falling it’s too...
190 days ago
The Psy-Fi Blog wrote a new blog post titled Putting Pro-Innovation Bias on the Blockchain
Blockchain Bias Over the past couple of years I've spent a lot of time listening to people wittering on about "the blockchain". They've claimed it can solve a plethora of society's ills - everything from the elimination of poverty to the overthrow of fiat currencies and the nation state. Being charitable this is evidence of pro-innovation bias in all its perverse glory. Being cynical it's evidence of people trying to scam investment funds by capitalizing on the halo effect. The blockchain is a brilliant piece of innovation, which will one day - probably - lead to significant economic...
484 days ago
The Psy-Fi Blog wrote a new blog post titled A Catalog of Investing Errors
Love Lists We're attracted to lists like moths to flames and netheads to clickbait. The Big List of Behavioral Biases is by some way the most popular page on this website, but it actually provides very little insight into investing successfully. Behind this, though, lies a deeper truth. Lists are processed more easily by the brain, and they're perfectly optimized for the click and go environment that is the Internet. Here I explain why. In a list. Obviously. 1. The Paradox of Choice Too much information overwhelms us, we're unable to process it and have to take unsatisfactory shortcuts. The...
491 days ago
The Psy-Fi Blog wrote a new blog post titled Unbanked But Not Unwise
Tribal Finance Lisa Servon has written a clever, accessible and pin-point clear piece of ethnographic research. It looks at how an underserved and underappreciated tribe, without access to regular financial services, has developed ways and means of coping in their absence. It's also a damning indictment of the organizations that claim to offer them these services. The tribe, of course, is middle class America, and the organizations are the banks that fail to serve them. Many Prices Over here in the UK we've seen a surge in the use of non-traditional, short-term financial lenders - payday...
498 days ago
The Psy-Fi Blog wrote a new blog post titled Age Makes You Happier - And Poorer
Avoidance Strategies As the years pass I've noticed I'm increasingly unwilling to expose myself to sources of negative information or emotional stress. So news bulletins, soap operas and anything a film critic might regard as emotionally engaging are increasingly off-limits. Frankly I'd rather watch Guardians of the Galaxy than Moonlight, no matter how worthy the latter. Slightly to my surprise it turns out that this isn't just me being more than normally antisocial, but is a commonly observed age-related change in preferences. By choice older people will habitually avoid stuff that they find...
505 days ago
The Psy-Fi Blog wrote a new blog post titled The Future is Made in the Bedroom, Not the Boardroom
RIP Hans Rosling Hans Rosling was, if you’re a data geek like me, a hero. His life was spent not just combating fake facts and opinion based decision making but also in finding new and imaginative ways of visualising real data. And he was in demand by corporations across the world because his work showed them where to invest. So obviously Rosling wasn’t an economist: he was a population statistician who built his ideas on data, rather than models. And what his data suggests is that the future is made in the bedroom, not the boardroom. Pollyanna? Unlike many people in his profession Rosling...
512 days ago
The Psy-Fi Blog wrote a new blog post titled Idiots in Investing Echo Chambers
Investing in the Dead Some people like to wander round graveyards. I get the same sort of ghoulish pleasure out of frequenting investment discussion boards. They're full of Pollyannas, forever only able to see the good in the stocks they invest in. Sadly they're almost always wrong. But it's kind of fun watching them keeping the reanimated corpses of zombie stocks moving about through the power of sheer stupidity. The Glad Game Pollyanna was the eponymous child heroine of Eleanor Porter's 1913 novel whose main characteristic was a determination to find the good in any situation, no...
519 days ago
The Psy-Fi Blog wrote a new blog post titled Blindsided by Brexit Bias
Unbalanced The result of the UK’s referendum on the EU caught markets by surprise. They’d soared the previous day in the expectation of a Remain vote and were thrown into turmoil when it turned out a majority of the British were less concerned with economic stability and more with mass immigration. The polls leading up to the referendum were finely balanced; if they were to be believed then the result was far from certain right up to the end. Yet many people took the market surge at face value – that markets were pricing in known information –  and that a Remain vote was in the...
778 days ago
The Psy-Fi Blog wrote a new blog post titled Bad Investor Behavior Can Be Very Expensive
Brief interview with yours truly by Robin Powell from The Evidence Based Investor: Also take a look at SmartInvestorTV for a bunch of other interesting resources.
873 days ago
The Psy-Fi Blog wrote a new blog post titled Meme Reversion
500 and Counting I’m now about 500 posts and a million words into the back-to-front world of financial psychology and you might think I'd have learned something useful by now. Well, it turns out there are only a couple of things you need to bear in mind: that mean reversion is the only certain thing about markets and that (almost) no one is interested. The reason that no one is interested is that everyone is convinced that they can identify the narrative, the story, the meme that will find the next wonder stock that defies the law of mean reversion. And you might, but the chances are you...
879 days ago
The Psy-Fi Blog wrote a new blog post titled Behavioral Bias 101: #3 Curse of Knowledge
Know What? We're often told that knowledge is power. However, in reality, knowledge may be unexploitable leading to the paradoxical situation that high quality goods get overpriced and low quality ones underpriced. Insiders, it turns out, are often burdened by the curse of knowing too much. Part 3 of 101 Ways To Lose MoneyCurse The curse of knowledge is related to hindsight bias, the problem being that if we have expert knowledge about something - the real value of a security for instance - we can't put ourselves in the position of uninformed punters. I experienced this personally during the...
885 days ago
The Psy-Fi Blog wrote a new blog post titled Building An IKEA Portfolio
Cartoon Capers If you get someone to build an IKEA sideboard – you know, one of those flat-pack conundrums that involves trying to work out what a cartoon character is doing with a hammer, a drill and forty three assorted metal dowels – they immediately place a higher value on it than anyone else would, even if it goes on to develop an alarming 45 degree tilt.  This is the IKEA effect. It’s associated, sort of, with a more general behavior that’s been known about for years, the endowment effect, in which possession of an item immediately causes us to value it more highly. Just...
888 days ago
The Psy-Fi Blog wrote a new blog post titled Less Is More
Error, Human Much market analysis operates on the assumption that more data is better – more data leads to more accurate results. More data may require more complex processing, leading to greater and greater requirements for computing power but, in principle, the idea is that more is better. Out in the real world, however, we don’t have the luxury of this kind of analysis. This leads to errors which sometimes we call biases. But surprisingly it also, often, leads to better results. It may just be that the reason we make so many mistakes is because we’re trying to process too much information,...
894 days ago
The Psy-Fi Blog wrote a new blog post titled Behavioral Bias 101: #2 Wishful Thinking
Permanently High Famously the economist Irving Fisher predicted that stocks had reached a "permanently high plateau", just before the Wall Street Crash. He was talking his own book, having loaded up heavily in stocks. Fisher was engaged in wishful thinking, a cognitive bias that's rife among investors, a notoriously optimistic bunch when it comes to expecting the downright improbable. Wishes and Wants Wishful thinking is the idea that whatever we want to be true affects what we believe to be true. Classically Ola Svenson (1) showed that most people think they're better drivers than everyone...
901 days ago
The Psy-Fi Blog wrote a new blog post titled The Chart Illusion
Timing Dragons Although, logically, I’ve always felt that the idea of investing by charts should be something on the map between “Dragons” and “Free Lunches” I’ve never been so sure of this as to be outright skeptical. And I know a few smart people who insist that they are at least helpful in timing investing decisions. Of course, the idea of “timing” anything in investment is fairly ludicrous anyway, but some recent research suggests the whole charting concept does actually help in prediction. Unfortunately what it predicts is a bunch of irrational self-fulfilling behaviour. Logic Logically...
903 days ago
The Psy-Fi Blog wrote a new blog post titled Behavioral Bias 101: #1 Illusory Pattern Recognition
The Man In The Moon Pareidolia’s that odd moment where you perceive a familiar pattern where none actually exists: it’s the man-in-the-moon, the elephant in the clouds, a religious figure in a pastry. Pareidoilia is a specific form of pattern recognition; the human brain is hard-wired to see faces in things, presumably to ensure that babies attend more to other people rather than random bits of plastic.  More generally, though, pattern recognition is critical to human functioning, but has a nasty tendency to go wrong. Snakes and Crashes The reason our pattern matching systems go...
908 days ago
The Psy-Fi Blog wrote a new blog post titled 7 Investing Lessons from Behavioral Psychology
Click ... bait You could start by not wasting your time clicking on stupid clickbait articles, I suppose. But since you’re here you might as well learn something. Investing should be mainly about hard work, slogging through accounts and trying to figure out where or why a company has a defendable competitive advantage. But that’s not much help if you have the self control of an octogenarian with prostate trouble.  Investing is 90% hard work and 10% mental discipline – but don’t even bother if you haven’t got the 10%. 1. Learn Self-Control or Buy Trackers The research of Walter...
911 days ago
The Psy-Fi Blog wrote a new blog post titled Scamming Journalists with Counterfactuals
Skim and Pump Every so often there’s a story in the press about contactless payment cards being skimmed and money being extracted from them. Basically someone goes around tapping hapless commuters on the ass with a contactless card reader. Which given the state of the UK’s stupid prosecution service probably puts them more at risk of a charge of sexual assault than being arrested for theft. This story is a recurring meme, and exemplifies what’s wrong with the state of financial journalism today. And on the way we get to look at real-world conspiracy theories and a bit of behavioral economics....
914 days ago