Cognitive Biases

Water Cooler
#1

good summary

http://www.businessinsider.com/cognitive-biases-that-affect-decisions-2015-8

#2

These are stems of the five biases:

  • information-processing shortcuts (heuristics)

  • mental noise

  • the brain’s limited information processing capacity

  • emotional and moral motivations

  • social influence If you can understand and react to these five, you’re golden. I have undergone lengthy cognitive modification therapy so know when certain ones get strong and how to react.

#3

^oh snap hook us up with more knowledge

#4

Cognitive biases are super important in investing, these come up over and over again, and not just with retail investors.

We just saw this in August; the developed world’s reaction to Chinese events which they did not understand – a small shift in the RMB exchange rate, a fall in the stock market, and a misunderstood economic slowdown. Biases included just about everything on the list – bandwagon effect, anchoring bias, availability heuristic, blind spot bias, choice-supportive bias, clustering illusion, confirmation bias.

Lots of money to be made on this stuff, because it means mispricing.

#5

^i got this book but have not read it yet, pretty good reviews

http://www.amazon.com/Behavioral-Portfolio-Management-Thomas-Howard/dp/0857193570

#6

The most irritating chapter of the L1 curriculum is the one on market efficiency, where they basically say active managment is a waste of time (really??? what am I doing then!)

yeaaaaaaa! cognitive bias. yea, market inefficiency!

#7

I am looking forward to the L3 bit on behavioral finance. In general the EMH as well as technical trading strategies are somewhat effective at times, but the market is made up of so many different investors with different risk profiles and time horizons that there is no single answer. It is a combination of all of them. I tend to do my personal trading on a fundamental/behavioral basis. Beginning of August i started getting into basic materials as have made a killing. I really concur with igor, i would like ACE to train us in some of his jedi mind tricks