Psychology of Investing

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Psychology of Investing Behavioral Finance

• CMTA ANNUAL CONFERENCE
• Don Collins
• Wedbush Securities
• 4-17-13
• Securities offered through Wedbush Morgan
  Securities member NASD/SIPC. The content of
  this presentation is for information purposes
  only. The concepts discussed and opinions
  expressed are not necessarily endorsed by Wedbush
  Morgan Securities . The strategies presented are
  not meant to be construed as guarantees against
  market loss and may not be suitable for all
  investors. The success of these strategies is
  dependent on market circumstances and results do
  vary. Past performance of securities and
  strategies is not a guarantee of future results.

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Bubbles
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Inside the bubble
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Bubble burst
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Bubbles?

• Conforming with the crowd
• Solomon Asch Experiment
• Lollapalooza effect
• Tulipmania 1634-1638
• Mississippi Bubble 1719-1720
• South Sea Bubble 1720
• U.S. Stock Market 1924-1929
• Japanese Bubble economy 1984-1989

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Classic Economic Theory
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Psychology of investing

• Economic and financial theory
• Classical Economics
• Act with rational, self interested, firm grasp of
  self-control
• Consider all available options
• Behavioral Economics
• Albert Phung
• Kahneman and Tversky
• Richard Thaler
• Robert Shiller
• Peter Bernstein
• "I can calculate the motions of heavenly
  bodies... But not the madness of people!"Isaac
  Newton (1642 - 1727)

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Impulsive, irrational behavior
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Psychology of investing

• Behavioral Finance and economics
• Not as logical,
• Disciplined,
• We care about others
• Two Minds
• Intuitive Mind
• Reflective Mind

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Psychology of investing
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Psychology of investing

• Avoid Emotional Processes and Decisions
• Attempt to pursue the Rational and Logical side
  of investing
• Warren Buffet Quote

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Over confidence
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Intuitive mistakes

• Overconfidence
• Perception
• Smarter
• More capable
• Reality
• Rapid traders
• Illusion of control

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Selective memory
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Selective Memory
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Behavioral Finance

• Selective Memory
• More self confidence
• Preservation of self image
• Cognitive Dissonance
• Rationalization
• Representativeness

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Self handicapping
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Behavioral Finance

• Self-Handicapping
• Opposite of overconfidence
• Loss Aversion
• Focus on the bad apple
• Regret
• Bad decision
• Bad outcome
• Pain or Pleasure?
• Gain
• Loss

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Loss aversion
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Sunk cost
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Behavioral Finance

• Sunk Cost
• Gift or purchase
• Focus on merit or cost
• Anchoring
• What happened yesterday influences tomorrow?
• Use what we know to make decisions about
  something unrelated

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Behavioral Finance

• Confirmation Bias
• Extrapolate personal beliefs
• Hindsight bias
• Commitment Trap
• Mental Accounting
• House money versus our money
• Money is money

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Herding
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Behavioral Finance

• Herding
• Information origin
• Gold
• Momentum
• Framing effect
• Big decisions versus small decision
• Penny on the ground
• Percentages versus actual value

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Random event Sand pile
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Behavioral Finance

• Misunderstanding Randomness
• Risk
• Calculated
• Impulsive
• Gain or Loss
• Good or bad decision
• Vividness Bias
• Immediate past into distant future

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Courage?
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Additional Investing Trait Mistakes

• Illusion of courage
• Current risk versus Future risk
• Paralysis
• Overwhelmed
• Mistake paranoia
• Endowment effect
• Property right effect on perceived value

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What should we focus on?

• Traits
• Humbleness
• Patience
• Partner, committee (small)
• Written checklist
• Look for contrary opinions
• Avoid historical perceptions, information
• Learn from mistakes, dont obsess
• Study randomness, dont be fooled by it
• Regression to the mean
• Ulysses Strategy

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Thank you

• For more information regarding this presentation,
  please contact
• Donald W. Collins
• 866-579-2871
• Don.collins_at_wedbush.com
• Securities offered through Wedbush
  Securities member NASD/SIPC. The content of
  this presentation is for information purposes
  only. The concepts discussed and opinions
  expressed are not necessarily endorsed by Wedbush
  Securities . The strategies presented are not
  meant to be construed as guarantees against
  market loss and may not be suitable for all
  investors. The success of these strategies is
  dependent on market circumstances and results do
  vary. Past performance of securities and
  strategies is not a guarantee of future results.