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50 Psychological Experiments for Investors



50 Psychological Experiments for Investors

Mickäel Mangot

ISBN: 978-1-118-58034-9 November 2012 200 Pages

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Great book! Mickäel has done a great job of explaining the insights from over 50 groundbreaking psychological experiments. You will learn how to avoid many of the psychological mistakes made by most investors. He teaches you to watch out for overconfidence and the momentum bias to avoid large losses. He helps you to understand how your social relationships can change your asset allocation risk profile. Forearmed is forewarned. If you apply Mickäel’s insights, you will improve your investment performance.

Paul Stefansson
Executive Director, UBS AG

Why are investors sometimes their own worst enemies? As this eminently readable book shows, all sorts of biases affect investors’ judgments, ranging from sheer ignorance and emotions to overconfidence or aversions, from selected short-term memory to undue generalizations. Building on the expanding literature in behavioral economics, the experiments reported here shed a useful, often funny, light on the implicit rules investors use to form their judgment and decisions. This book will definitely help you make wiser investment decisions!

Christian Koenig
Director, Asian Center, ESSEC Business School

Mickäel Mangot provides a fantastic tool that individuals as well as financial advisors can immediately apply to their portfolios. This book’s success lies in its superbly easy-to-use format: Mangot demystifies the technical terminology of behavioral finance by linking everyday behavior to the world of investing. So while the human examples are enjoyable and interesting (you’ll chuckle when you recognize these traits in yourself), he deftly explains how these very human biases lie at the root of 57 simple but very damaging investment mistakes. Most importantly, each conclusion provides a concise, sensible summary to help you correct—and improve—your investment decisions.

Philippa Huckle
CEO, The Philippa Huckle Group

This is an insightful book that forces one to question one’s own financial behavior. 50 Psychological Experiments for Investors covers different topics such as savings, equity investment and property investment. The portrait of the investor presented here is harsh but can be highly profitable for anyone who recognizes that he or she is vulnerable to misjudgments and misguided emotions. A must-read for any self-questioning investor.

Jacques-Henri David
Vice Chairman Global Banking, Deutsche Bank


Chapter 1
A love of anecdotes

How we choose information on fallacious criteria
1. Why do you think you have to invest in the stock market when prices have skyrocketed?
Momentum bias

2. Why do you buy stocks when the market has gone up and bonds when it has gone down?
Momentum management

3. Why are you sure that everyone agrees with your view that the market is going to go up?
False consensus

4. Why does Google's success make you want to invest in high-tech?
The availability heuristic

5. Why has your stock portfolio only gained 5% this year when you are sure it has earned twice as much?
The confirmation bias

6. Why is it that on moving to the boonies you rent an overly expensive apartment?
Points of reference

Chapter 2
Hopeless at math!
How silly mathematical errors enter our financial decisions
7. Why do you play black at roulette when red has just come up four times in a row?
The gambler's fallacy

8. Why do you trust the mutual fund that had the best performance last year?
Belief in the "hot hand"

9. Why do young savers become rich seniors?
The under-estimation of compound interest

10. Why does inflation encourage selling the house and renting instead?
The money illusion

Chapter 3
All the eggs in a broken basket
How our view of risk leads us to poorly diversify investments
11. Why do you refuse to put foreign stocks in your portfolio?
Forgetting correlations

12. Why do young people buy Levi stock and older folk buy Hermès?
The bias of familiarity

13. Why is 90% of your portfolio in French stocks?
National bias

14. Why have you bought stock in that high-flying company in your area?
Local bias

15. Why do you own stocks in the company where you work?
Employer bias

16. Why does the industrial waste collection sector not attract investors?
Emotional reasoning

Chapter 4
For me, it's different!
How optimism and overconfidence encourage taking excessive risk    
17. Why do you look more closely at the potential for growth than at the potential for loss in an investment?
Bias of optimism

18. Why do you think that you know precisely when the stock market will crash?

19. Why, after a set-back, do you always consider mutual fund managers to be hapless?
Hindsight bias

20. Why do you place more orders when the market is soaring?
The self-attribution bias

21. Why do you take more risk after raking in unexpected gains?
The "house money" effect

22. Why do you place so many orders on the Exchange each year?
Excessive trading

23. Why do you earn less on the market when you place orders on the Internet?
Illusion of control on the Internet

Chapter 5
An obsession:
Never regret anything

How the loss and regret aversions inhibit our behaviour
24. Why do you try to sell your house at an unrealistic price when real estate goes down?
Loss aversion

25. Why do you keep your losing securities longer than those that are earning?
The deposition effect

26. Why do you sell all your losing stocks on the same day?
Hedonic editing

27. Why do you re-invest in your losing stocks?
The committed expenditure effect

28. Why do you never buy back securities on which you have lost money?
The "snake bite" effect

29. Why do you not like to sell stocks which have just gone down?
Regret aversion

30. Why do you change nothing in the portfolio that your grandmother has left you?
Status quo bias

31. Why do you keep stocks that you would not buy in your portfolio?
The endowment effect

Chapter 6
When Mars and Venus decide to invest
How men and women consider risk and confidence differently in their financial decisions
32. Why does Mars invest more than Venus?
 Gender differences and attitude toward risk

33. Why does Mars prefer stocks and Venus bonds?
Gender differences and investment choices

34. Why does Mars change his portfolio more often than Venus?
Gender differences and confidence

35. Why do Venus and Mars draw closer with time?
Gender differences and experience in financial markets

Chapter 7
Investing by the Sun
How climate and the calendar influence our investing mood
36. Why do the markets go up when it is nice out?
The Sun effect

37. Why do you have to look up before buying stocks?
The lunar effect

38. Why do markets decline on Monday?

39. Why do you too buy stocks just before Christmas?
The holiday effect

Chapter 8
Inborn or acquired?
How our financial behaviour depends on education and personal characteristics.
40. Why are those that do their Christmas shopping at the last minute poorer than others?
Individual preferences and investing behaviour

41. Why would it be a good thing if your children were trained in the handling of their piggy banks?
Financial education at school

42. Why would you gain if you took financial training in your company?
Financial education of adults

Chapter 9
Not sillier than your neighbour
How social relationships affect our financial decisions
43. Why does going to church encourage the buying of shares?
Social interactions

44. Why does your colleague become your top financial advisor in matters of saving for retirement?
Social norms

45. Why do investment clubs favour consensual investments?

46. Why do investment clubs take more risks than individual investors?
Polarization toward risk

Chapter 10
Packaging counts too
How the presentation of financial products changes our choices
47. Why does the distribution in your portfolio depend on the funds offered to you?
Naïve diversification

48. Why do you never choose the safest or the most risky mutual funds?
Aversion to extremes

49. Why does your financial advisor offer you only a portion of his assortment of investments?
The difficulty of choosing

50. Why does automatic enrolment increase participation of employees in retirement savings plans?
Omission bias

51. Why is it necessary to ask an exorbitant price when you sell your home?

52. Why does checking the performance of your investments everyday encourage the buying of bonds?
Myopic loss aversion

Bonus Chapter
Real estate: more than an investment
How purchasing real estate affects life beyond financial performance
53. Do home owners change residence more often than renters?
Property and mobility

54. Are property owners employed at a higher rate than renters?
Home ownership and employment

55. Do owners live more happily than renters?
Ownership and psychological well-being

56. Are owners in better shape than renters?
Ownership and physical health

57. Are children of owners more successful than those of renters?
Homeownership and the behaviour of children