BEHAVIORAL FINANCE: USING IT TO MAKE YOUR TECHNICAL ANALYSIS MORE - - PowerPoint PPT Presentation

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% mental.”

• Yogi Berra

SUCCESS (PROFIT) REQUIRES

• Good Tools…
• In the Hands of

a Skilled User

Behavioral Finance Integrates…

• Rational Theory:
• Economics BF
• Finance
• Accounting
• Security Analysis
• Human Realities:
• Anthropology
• Psychology
• Sociology

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

Current Flows and Recent Performance

• 60
• 40
• 20

20 40 60 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 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 Flows in $ Billions

• 40
• 30
• 20
• 10

10 20 30 40 6-mon % chg: S&P500 Month's Flows, $ Billion 6-mo % chg: SP 500

A GREAT Contrary Timing Indicator (www .ICI .org)

NOT CONTROLLING YOUR EMOTIONS

VERY Quick Tour: 1999-2003

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