3. Investor Psychology

3. Investor Psychology - InvestmentManagementWorkshop:

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Investment Management Workshop: Investor Psychology / Behavioral  Finance Euromoney Training  August, 2009 Instructor: John M. Longo, PhD, CFA
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Exercise Complete the questionnaire that you will  be handed. It is designed to measure your investment  behavioral biases. What investment biases do you suffer  from?
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Behavioral Finance is HOT! The 2002 Nobel Prize in Economics was  awarded to Daniel Kahneman and  Vernon Smith for their work in  Behavioral Finance. Behavioral Finance may better explain  the existence and popping of investment  bubbles. Ex:  JDSU during the Internet Bubble
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Why Bother With This Topic? Investment managers suffer from  behavioral biases that may impact their  investment results . Your  clients suffer from behavioral  biases  that may affect their investment  choices. And yes …  you (and I) suffer from  behavioral biases  that may impact the  results of the portfolios we recommend.
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Q: Why Is Their So Much Trading In The  Market? Two investors can look at the same  company and come to different  conclusions.    Both investors may believe they are acting  rationally, but only one is correct.   Humans are not computers.  They may  make mistakes that you may potentially  profit from .
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3 General Areas of Human Mistakes 1) Biases of Judgment. 2) Errors of Preference. 3) Living with the Consequences     of Decisions.   (examples to follow)
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Biases of Judgment Overconfidence Optimism Hindsight Overreaction to Chance Events
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Overconfidence Example Q:   What is your best estimate of the value of  the FTSE or S&P 500 3 months from  today?  Next, pick a value which you are 99% sure  that it will be less than (ceiling estimate).   Next, pick a value which you are 99% sure  that it will be greater than (floor estimate).  
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Overconfidence Example (Cont’d) The three estimates combined are called  a point estimate and a (98%) confidence  interval. Psychologists have conducted many of  these types of investments and guess  what…???
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3. Investor Psychology - InvestmentManagementWorkshop:

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