Reblog: How to keep cool when the market is not


Steve Wendel, head of behavioural sciences at Morningstar, chatted with markets editor Jeremy Glaser to come up with some ideas on how to keep your cool when the market isn’t. The entire interaction can be seen here. Below are the takeaways.

Understand that volatility, downward or upward, is just data.

Avoid looking at your portfolio on a daily basis, specially when there is tremendous volatility. There’s lots of research on how frequently checking your portfolio, especially during market downturns, can warp one’s behaviour and get you into trouble.

Remember that our minds play tricks on us.

If the market drops, that’s past. That’s gone. There’s nothing we can do about it. It’s really as we think forward to what will happen that our minds take that data and apply a story.

If you don’t know what that story is, it’s probably the bias of recency bias–thinking that what just happened is about to happen. But when we think about that rationally, we of course know that’s not the case.

One of the things that we can do is to round out that story: This just happened; this is what I believe is about to happen; what’s the rightful thing to do? For most professional, thoughtful investors, they know it means you look for bargains. Same exact data. Very different outcome.

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Reblog: How Investor Behaviour Gets in the Way of Success


Most textbooks portray humans as self-interested people making rational economic decisions, but people often are far from rational in making investment decisions.

Behavioral economics provides insight into why humans make sub-optimal decisions, studying the impact of psychological, cognitive and emotional factors on economic and investment decisions. Two winners of the Nobel Prize in economics, Richard Thaler and Daniel Kahneman, have been recognized for their pioneering work in behavioral economics.

In awarding the Nobel to Thaler in 2017, the Royal Swedish Academy of Sciences stated, “His contributions have built a bridge between the economic and psychological analyses of individual decision-making.” Thaler’s work was instrumental in pension reform, illustrating how subtle changes in framing can lead to dramatically different consumer choices. Thaler’s research contributed to policy changes including automatic enrollment of employees in 401(k) plans and the use of target date funds as the default option for new 401(k) enrollees instead of money market funds.

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Reblog: The Laws of Unintended Consequences


Lately, I’ve been interested in innocent evil, the evil that results from perfectly innocent choices people make. Moral philosophers generally fall into one of two camps, intentionalist, and consequentialist. Intentionalists argue that you have to judge moral behaviour based on intentions because we can’t predict the consequences of our actions. Consequentialists argue that you have to judge moral behaviour based on consequences because they’re what matters.

Innocent evil is, therefore, moral philosophy’s hardest problem. People with the moral intentions yielding immoral consequences.

A friend asks, isn’t innocent evil just another name for unintended consequences? That got me thinking that the innocent evil that interests me is typically the result of people not paying attention to the potential for unintended consequences, which got me thinking about compiling a list of laws of unintended consequences.

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