BEHAVIORAL FINANCE: USING IT TO MAKE YOUR TECHNICAL ANALYSIS MORE PRODUCTIVE HOW TO LEARN MORE IF YOU WISH Don Cassidy www.R-I-I.org
Don Cassidy Founder and President Retirement Investing Institute www. R-I-I. org ( fmr. Senior Analyst, Lipper, 1990-2006 )
“95% of this game is 50% -Yogi Berra mental.”
SUCCESS (PROFIT) REQUIRES • Good Tools… • In the Hands of a Skilled User
Behavioral Finance Integrates… • Human Realities: • Rational Theory: • Anthropology • Economics BF • Psychology • Finance • Sociology • Accounting • Security Analysis
THINK OF MARKETS IN… • Crowd-Intensity Terms • Short-Term Supply/Demand Terms • Psychological, not ONLY in Fundamental Terms
ANTHRO 101 • Avoid Risk • Follow a Leader • Don’t Think Independently – All these are COUNTER-productive in financial mkts SOCIOLOGY 102 • Group Pressures/Influences • “Social Proof”
PSYCH 202 Stimulus / Response Vividness Reinforcement Strong Loss Aversion
WE NEED TO • Be aware of what’s wired into us • Battle against it to be market-successful • Observe others/crowd for mass errors – Move in opposite direction from crowd.
PERCEPTION PROBLEMS • The Need to Be Perfect • Great Remains Great Forever • Investment is a “Relationship” • Company = Stock • What WE Think Matters (ego)
WHERE CAN WE FIND HELP?
6 SIGNS TO WATCH • Humor • Advertising • Headlines OFF the Business Page • Mutual Funds’ Net Flows • How Friends / Colleagues Are Talking • What’s On Bookstore Shelves
Flows in $ Billions A GREAT Contrary Timing Indicator (www .ICI .org) -60 -40 -20 20 40 60 0 Jun-98 Sep-98 Month's Flows, $ Billion Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 Current Flows and Recent Performance 6-mo % chg: SP 500 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 -40 -30 -20 -10 0 10 20 30 40 6-mon % chg: S&P500
NOT CONTROLLING YOUR EMOTIONS
Quick Tour: 1999-2003 VERY
New Yorker Cartoon Count Bullish Percent (and Total Number) 1995: 100% (1) 1996: 63% (8) 1997: 50% (14) 1998: 46% (13) 1999: 70% (33)
New Yorker (continued) 2000: 25% (16) 2001: 4% (25) 2002: 0% (25) 2003: 0% (7) 2004: nmf (n=0 !)
THERE IS NO EXACT FORMULA For how many cartoons, TV-sitcom references, or newspaper headlines is “enough.” Be watchful. When you start saying, ‘wow, I’ve seen a fair amount of those lately’ THAT IS A SIGNAL A MAJOR TURN IS AT HAND. TAKE CONTRARIAN ACTION.
FAST FORWARD TO 2007 - 2009
New Yorker , First Week March-09
THREE BIG B-F APPLICATIONS • Volume Crescendos and Spikes • The Psychology of Support, Resistance, and Breakouts • The Psychology of Gaps
VOLUME SPIKE
VOLUME Crescendo
Support & Resistance
Body Scanners After Xmas Plane Try: UPSIDE Gap
DOWNSIDE Gaps
KEY CONCEPT TO OBSERVE Maximum Emotional Response of Crowd (others) Impacting Prices TEMPORARILY
SOME ‘TECHNICAL TERMS’ Overconfidence Myopic Loss Aversion House-Money Effect Anchoring Ego / Pride Cognitive Dissonance
MORE BEHAVIORAL- FINANCE INSIGHTS Endowment Effect Disloyalty Avoidance Decision Stress Avoidance Reinforcement Comfort Seeking / Closure Avoidance Perfectionism Vividness of Evidence / Social Proof
How NOT To Act Wisely
ACT counter -INTUITIVELY IF YOU CAN When your emotions are running high, “Don’t Just DO Something, Stand There!”
GOOD SOURCES re B.F. • Jason Zweig: Your Money & Your Brain • Hersh Shefrin: Beyond Greed and Fear • Michael Mauboussin: More than You Know • Robert Menschel: Markets, Mobs & Mayhem • John Nofsinger: Psychology of Investing also : Investment Madness • Names: de Bondt, Thaler, Schiller, Odean
APPLY YOUR BEST WISDOM. INVESTING IS NEVER A SCIENCE! Don Cassidy Retirement Investing Institute www. R-I-I. org
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