investorpsychology-aspectsofinvestorpsychologyforfinancialadvisors-130515012756-phpapp02

8/13/2019 investorpsychology-aspectsofinvestorpsychologyforfinancialadvisors-130515012756-phpapp02

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Rohan Dinesh Ghalla | [email protected] | +919819390450


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What do you want from todays session?

What Women Want (2000) *ing MelGibson and Helen Hunt

What do Investors Want? (1993 ongoing)

What do Investors REA LLY Want (2012)Rohan Dinesh G halla | [email protected] | +919819390450


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Utilitarian Benefit Returns and what money can finally buy

Expressive Benefit My tastes, status, values

Emotional Benefit Feel safe, excited, hope, dream

Rohan Dinesh G halla | [email protected] | +919819390450


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IQ of 200 means intelligent or rational?IQ = Logic = Rationality?

Why then EQ? and now SQ?Do we use the rational framework?

Update beliefs for new information Bayes Make normatively acceptable choices

rational choices? Thinking fast and slow Perfect Self Interest Perfec t Information



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The Tree of Biases

Cognitive

Belief Perseverance (6)

Cognitive Dissonance

Conservatism

Confirmation

Representativeness

Illusion of Control

Hindsight

Information Proc essing(7)

Anchoring and Adjustment

Mental Ac counting

Framing

Availability

Self Attribution Bias

Outcome Bias

Recency Bias

Emotional

(7)

Loss Aversion

Overconfidence

Self C ontrol

Status Quo

Endowment

Regret Aversion

Affinity



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Bias Type: CognitiveSubtype: Belief Perseverance

Basic building block of off beliefperseverance biasesWhen newly acquired information conflictswith preexisting understandings people

often experience mental discomfortPurchase the iPhone 5 only to see thelaunch of the Galaxy S4 go to great painsto justify initial purchase



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Basic building block of off beliefperseverance biasesWhen newly acquired information conflictswith preexisting understandings people

often experience mental discomfortPurchase the iPhone 5 only to see thelaunch of the Galaxy S4 go to great painsto justify initial purchase



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Mental process in which people c ling totheir prior views or forecasts at theexpense of acknowledging new

informationDifficulty in processing new information,reacting slowly to new information



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Type of selec tive perception thatemphasizes ideas the confirm our beliefswhile devaluing whatever contradicts

our beliefs



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When confronted with a newphenomenon that is inconsistent withany preconstructed classifications,

people subject it to those c lassificationsanyway, relying on a rough, best fitapproximation



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Tendency to believe that we can controlor atleast influence the outcomesLas Vegas Gambling

Comfort with risky involvement / privatefunding if done directly



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Once an event has elapsed, peopletend to perceive that the event waspredictable even if it wasnt

Actual outcomes are more readilygrasped by peoples minds than theinfinite array of outcomes that couldhave but didnt materialize



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Bias Type: CognitiveSubtype: Information Processing

Tendency to code, categorize andevaluate economic outcomes bygrouping assets into non-fungible mental

accounts$30 and $9 gamble exampleGoals based investing



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When required to estimate the valuewith unknown magnitude, people beginby envisioning some initial defaultnumber which becomes an anchor

which they adjust up or down to reflectsubsequent information and analysisPurchase price anchoringEarnings estimates and revisions



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Respond to situations differently basedon how something is presentedNarrow Framing and Broad Framing

Wealth and ProfitsAbsolute versus relative performance



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Rule of thumb or mental shortcut thatcauses people to estimate the probabilityof an outcome based on how prevalent orfamiliar that outcome appears in lifeAir travel insuranceProperty prices always go upHome country and investment bias



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He a d s I w in, ta ils its c ha nc e ! Tendency to ascribe success to innateaspects of the individual such as talent

and foresight and blame failures onoutside influences and luck



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Decision based on outcome of pastevents and actual outcomes rather thanprocess for achieving the outcome

Understanding of what is importantSkill vs Luck



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More prominently recall recent eventsand observations than those thatoccurred in the distant past

Its d iffe re n t t h is tim e



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Bias Type: EmotionalPro sp e c t the o ry

Stronger impulse to avoid losses than toacquire gains



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Bias Type: EmotionalUnwarranted faith in ones intuitive

reasoning, judgments and cognitiveabilitiesEmotionally charged behaviour such as

rash driving, excessive risk taking



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Bias Type: EmotionalLack of discipline and self control

Fail to act in pursuit of long termoverarching goals bec ause of a lack ofdiscipline

Inability to start saving youngImportant vs Urgent distinc tion



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Bias Type: EmotionalChoice based on whatever option

ratifies or extends the existing conditionIf a portfolio is built, very difficult tochange it dramatically

Selling stocks once they have beenbought



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Bias Type: EmotionalValue an asset more when it belongs to

you rather than when it is not in thepersons possessionMinimum selling price for something ismore than the minimum purchase pricefor the same thingInherited assets vs purchased assets



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Bias Type: EmotionalAvoid taking decisive actions because

of the fear that the course selected willprove less than optimalAvoid the emotional pain of regretassociated with poor decision making

Staying out of market after a lossHolding losing positions too longHerd behaviour



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Bias Type: EmotionalChoice made based on how one

believes that a certain product orservice will reflect their values to othersExpressive benefits of a product than onwhat it actually does



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A bat and a ball together cost $1.10. Thebat costs $1.00 more than the ball. How

much does the ball cost?Are you an above average driver?If it takes 5 machines 5 minutes to make5 widgets, how long would it take 100machines to make 100 widgets?



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A health survey was conducted in asample of adult males in Bombay, of all

ages and occupations. Please give yourbest estimates of the following values: What percentage of the men surveyed have

had one or more heart attacks? What percentage of the men surveyed are

both over 55 and have had one or moreheart attacks?



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Imagine these are four playing cards laidout in front of you. Each one has a letter

on one side and a number on the other.If a card has an E, it should have a 4.Which cards do you need to turn over inorder to see if I am telling the truth?



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Suppose an unbiased coin is flippedthree times, and each time the coin

lands on heads. If you had to bet $1000on the next toss, what side wouldchoose? Heads, tails or no preference?



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Imagine that the Bombay is preparing forthe outbreak of an unusual disease,

which is expected to kill 600 people. Twoalternative programs to combat thedisease have been proposed. Assumethe exact sc ientific estimates of theconsequences of the programs are asfollows:



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If program A is adopted 200 people willbe saved.

If program B is adopted there is a 1/3probability that 600 people will besaved, and a 2/3 probability that no onewill be saved.Which program do you choose?



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Linda is 31 years old, single, outspoken,and very bright. She majored in

Philosophy. As a student, she was deeplyconcerned with issues of discriminationand social justice, and also participatedin anti-nuclear demonstrations



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Which statement is more likely? Linda is a bank teller

Linda is a bank teller and is active in thefeminist movement

Would you want to be Lindas friend?



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You are now going to play a game againstthe others sitting in this room. The game issimply this. Pick a number between 0 and100. The winner of the game will be theperson who guesses the number closest totwo thirds of the average number picked.

Your guess is?



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If program C is adopted 400 people willdie.

If program D is adopted there is a 1/3probability that nobody will die, and a2/3 probability that 600 people will die.Which program do you choose?



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In addition to what you already own,you have been give Rs. 1000. Now

choose between A A 50% chance of winning Rs. 1000 more B Winning Rs. 500 for SURE. 100%



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In addition to what you already own,you have been give Rs. 2000. Now

choose between C A 50% chance of LOSING Rs. 1000 D LOSING Rs. 500 for SURE. 100%



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Where in the spectrum are you?



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A bat and a ball together cost $1.10. Thebat costs $1.00 more than the ball. How

much does the ball cost?Are you an above average driver?If it takes 5 machines 5 minutes to make5 widgets, how long would it take 100machines to make 100 widgets?



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A health survey was conducted in asample of adult males in Bombay, of all

ages and occupations. Please give yourbest estimates of the following values: What percentage of the men surveyed have

had one or more heart attacks? What percentage of the men surveyed are

both over 55 and have had one or moreheart attacks?



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Imagine these are four playing cards laidout in front of you. Each one has a letter

on one side and a number on the other.If a card has an E, it should have a 4.Which cards do you need to turn over inorder to see if I am telling the truth?



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Suppose an unbiased coin is flippedthree times, and each time the coin

lands on heads. If you had to bet $1000on the next toss, what side wouldchoose? Heads, tails or no preference?



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Imagine that the Bombay is preparing forthe outbreak of an unusual disease,

which is expected to kill 600 people. Twoalternative programs to combat thedisease have been proposed. Assumethe exact sc ientific estimates of the

consequences of the programs are asfollows:



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If program A is adopted 200 people willbe saved.

If program B is adopted there is a 1/3probability that 600 people will besaved, and a 2/3 probability that no onewill be saved.Which program do you choose?



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If program C is adopted 400 people willdie.

If program D is adopted there is a 1/3probability that nobody will die, and a2/3 probability that 600 people will die.Which program do you choose?



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Linda is 31 years old, single, outspoken,and very bright. She majored inPhilosophy. As a student, she was deeplyconcerned with issues of discriminationand social justice, and also participatedin anti-nuclear demonstrations



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Which statement is more likely? Linda is a bank teller

Linda is a bank teller and is active in thefeminist movement

Would you want to be Lindas friend?



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You are now going to play a game againstthe others sitting in this room. The game issimply this. Pick a number between 0 and100. The winner of the game will be theperson who guesses the number closest totwo thirds of the average number picked.

Your guess is?



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In addition to what you already own,you have been give Rs. 1000. Nowchoose between

A 50% chance of winning Rs. 1000 more B Winning Rs. 500 for SURE. 100%



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In addition to what you already own,you have been give Rs. 2000. Nowchoose between

C A 50% chance of LOSING Rs. 1000 D LOSING Rs. 500 for SURE. 100%



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Work on a ADAPT or MODERATE model



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Encourage c lients to adopt a broadview of their wealth, prospects andobjectives.Encourage clients to make long-termcommitments to polic iesEncourage clients not to monitor resultstoo frequentlyDiscuss the possibility of future regret withyour clients



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Ask yourself if a course of action is out ofcharacter for your c lient

Verify that the c lient has a realistic viewof the odds, when a normally cautiousinvestor is attracted to a risky ventureEncourage the c lient to adopt differentattitudes to risk for small and for largedecisions



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Attempt to structure the c lients portfolioto the shape that the client likes best(such as insuring a decent return with asmall chance of large gain)Make clients aware of the uncertaintyinvolved in investment decisions

Identify the aversion of your c lients to thedifferent aspects of risk, and incorporatetheir risk aversions when struc turing aninvestment program.



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Behaviorally Yours

Rohan Dinesh Ghalla

[email protected]

+91 98193 90450

Credits: Michael Pompian and J ames Montier across their variouspublications
mailto:[email protected]:[email protected]

Date post:	04-Jun-2018
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