Poisonous behaviour: Fund managers are subject to this
So said Dr K
eith Anderson yesterday at the STA’s monthly meeting in London. An interesting talk based on lectures given to third year students in finance at York University – and it showed. Perfect timing, good clear slides, lots of titles for further reading, and plenty of time for questions. Interesting to note that he and his students run a small fund to test their ideas.
A brief but sweeping introduction to Behavioural Finance, which only really got going in the 1990’s, reminded us about how new the subject is, how small probabilities are thought to be more likely than they really are, just as minuscule ones work in the opposite direction – like the eternal hope of winning the lottery.
Overconfidence is another bad trait, especially in men (would you believe it?) so that they have a tendency towards short term trading. Dr Anderson believes that when investing in shares one should ideally start with a five year horizon. Generally, he says, too many of us are poor statisticians, ignore sample size, and find it difficult to update beliefs with new data.
Turning to expert predictions he mentioned the wonderful book by Fred Schwed Junior (yes, he was a US citizen) ‘Where are all the customers’ yachts?’ Published in 1937 if you haven’t done so yet do read it because it is delightful, still full of valuable recommendations for today. Starting with the fact that stock pickers are no better than tracking an index but charging large fees and telling compelling tales. Confidently forecasting corporate earnings for the next five years…because two thirds of funds are invested using active rather than passive management.
Above all, he was scathing of analysts’ errors (Note to self: as yet he has not done any testing with technical analysts’ predictions, just stockbrokers) which include over optimism, extreme views, herding, and groupthink. They have similar social and educational backgrounds, tend to live in similar areas, frequent the same watering holes, work long hours, and not surprisingly produce the same sort of presentations to investors. In other words, same old….
Click on the link below to see some of the optical illusions we talked about.
http://www.telegraph.co.uk/news/newstopics/howaboutthat/3520448/Optical-Illusions-the-top-20.html?image=11
Books recommended were:
Bad Thoughts by Whyte 2003
Irrationality by Sutherland 2007
Contrarian Investment by Dreman 2012
Thinking Fast and Slow Kahneman 2012
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