Tag Archives: behavioral bias

Is It Worth Betting on the ‘September Swoon’?

People have an understandable interest in patterns in stock market returns.  As we head into September, we can expect the inevitable articles about the so-called ‘September swoon.’  If you look at the period since 1926, the average return in September has been negative.  A 2011 paper in the Journal of Applied Finance concluded that the historical occurrence of negative returns for the stock market in September is so strong and consistent that it cannot easily be explained away.  There are a range of other so-called ‘calendar effects’ in which a specific time of the year, month, or week has historically delivered returns that are markedly different from the average across all periods.  There are no conclusive explanations for these effects and, in a rational world, these types of anomalies should not persist—but they do.  If they expect stock prices to decline in September, savvy speculators should start to sell in August in anticipation of this drop and this selling should dilute the eventual drop in September.  Over time, this type of effect should, in theory, disappear to investor anticipatory buying or selling.  Nonetheless, these effects remain prominent in historical stock prices. Continue reading

Top Ten Ways to Deal with Behavioral Biases

Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.

Pretty much since the day I wrote it, my Investors’ 10 Most Common Behavioral Biases has been the most popular post on this blog.  It still gets a surprising number of hits all these months later.  Due to the pioneering work of Daniel Kahneman and others, nearly everyone in the financial world acknowledges the reality of cognitive and behavioral biases and their impact on people, the markets and life in general. It’s a very popular subject. Continue reading

Game Theory, Behavioral Finance, and Investing: Part 5 of 5

In the first four parts of this article, I have discussed a number of well-known behavioral biases that cause investors to make decisions that are, to put it kindly, less than optimal.  In this final installment, I summarize how best to avoid these costly traps.

As these blog posts have been published over the past couple of weeks, the issues are much in evidence.  Apple (AAPL), long the darling of the market, has lost favor and Groupon (GRPN) seems to be following a relentless downward spiral.  Surely many investors in Groupon must be asking themselves how they could possibly have seen the company as a good bet.  Apple stock, which was trading at $700 in mid-September, is currently at $544, a decline of 22% in two months.  The news that has come out on Apple does not seem sufficient to justify such a broad shift in the market’s consensus as to the long-term value of Apple as a company.  And, of course, we have the poster child of behavioral bias: Facebook (FB).  How is it possible that the market’s consensus view of the share value of such a widely held company could be almost 50% below its first day closing price of $38?  As Warren Buffett is quoted as saying, in the short-term the market is a voting machine and in the long-term the market is a weighing machine.  When voting overwhelms weighing, investor psychology is dominating.

Continue reading

Game Theory, Behavioral Finance, and Investing: Part 4 of 5

In earlier installments of this article, I have discussed some behavioral biases that tend to influence people to make bad investing decisions.  In this post, I explore several more of these biases.  The focus of this piece is on how we perceive ourselves and our ability to make independent decisions.  One of the key ideas within rational markets is that people gather public information and make informed decisions.  Without rational market participants, it is unlikely that markets themselves will converge to appropriate prices for traded assets (stocks, bonds, real estate, etc.).  Continue reading

Gaming the Numb3rs

Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.

Tom Stoppard’s Rosencrantz and Guildenstern are Dead  presents Shakespeare’s Hamlet from the bewildered point of view of two of the Bard’s bit players, the comically indistinguishable nobodies who become headliners in Stoppard’s play.  The play opens before our heroes have even joined the action in Shakespeare’s epic. They have been “sent for” and are marking time by flipping coins and getting heads each time (the opening clip from the movie version is shown above).  Guildenstern keeps tossing coins and Rosencrantz keeps pocketing them. Significantly, Guildenstern is less concerned with his losses than in puzzling out what the defiance of the odds says about chance and fate. “A weaker man might be moved to re-examine his faith, if in nothing else at least in the law of probability.” Continue reading

Gaming The System

Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.

When I was a kid I had a paper route.  One of my customers was a barber who made book on the side.  Shocking, I know.  The giveaway was the group of guys always hanging around but not getting their hair cut and the three telephones on the wall that rang a lot.  Even as a kid I could tell that something was up. Continue reading