Investorpsychology Aspectsofinvestorpsychologyforfinancialadvisors 130515012756 Phpapp02

Rohan Dinesh Ghalla | rohan@leapgrowth.
com | +919819390450
What do you want from todays session?

What Women Want (2000) *ing Mel
Gibson and Helen Hunt

What do Investors Want? (1993
ongoing)

What do Investors REALLY Want (2012)

Rohan Dinesh Ghalla | rohan@leapgrowth.com | +919819390450
Utilitarian Benefit
Returns and what money can finally buy

Expressive Benefit
My tastes, status, values

Emotional Benefit
Feel safe, excited, hope, dream

IQ of 200 means intelligent or rational?
IQ = Logic = Rationality?
Why then EQ? and now SQ?
Do we use the rational framework?
Update beliefs for new information Bayes
Make normatively acceptable choices
rational choices? Thinking fast and slow
Perfect Self Interest
Perfect Information


The Tree of Biases
Cognitive
Belief Perseverance (6)
Cognitive Dissonance
Conservatism
Confirmation
Representativeness
Illusion of Control
Hindsight
Information Processing
(7)
Anchoring and Adjustment
Mental Accounting
Framing
Availability
Self Attribution Bias
Outcome Bias
Recency Bias
Emotional
(7)
Loss Aversion
Overconfidence
Self Control
Status Quo
Endowment
Regret Aversion
Affinity
Bias Type: Cognitive
Subtype: Belief Perseverance
Basic building block of off belief
perseverance biases
When newly acquired information conflicts
with preexisting understandings people
often experience mental discomfort
Purchase the iPhone 5 only to see the
launch of the Galaxy S4 go to great pains
to justify initial purchase
Basic building block of off belief
perseverance biases
When newly acquired information conflicts
with preexisting understandings people
often experience mental discomfort
Purchase the iPhone 5 only to see the
launch of the Galaxy S4 go to great pains
to justify initial purchase
Mental process in which people cling to
their prior views or forecasts at the
expense of acknowledging new
information
Difficulty in processing new information,
reacting slowly to new information
Type of selective perception that
emphasizes ideas the confirm our beliefs
while devaluing whatever contradicts
our beliefs
When confronted with a new
phenomenon that is inconsistent with
any preconstructed classifications,
people subject it to those classifications
anyway, relying on a rough, best fit
approximation
Tendency to believe that we can control
or atleast influence the outcomes
Las Vegas Gambling
Comfort with risky involvement / private
funding if done directly
Once an event has elapsed, people
tend to perceive that the event was
predictable even if it wasnt
Actual outcomes are more readily
grasped by peoples minds than the
infinite array of outcomes that could
have but didnt materialize
Subtype: Information Processing
Tendency to code, categorize and
evaluate economic outcomes by
grouping assets into non-fungible mental
accounts
$30 and $9 gamble example
Goals based investing
When required to estimate the value
with unknown magnitude, people begin
by envisioning some initial default
number which becomes an anchor
which they adjust up or down to reflect
subsequent information and analysis
Purchase price anchoring
Earnings estimates and revisions
Respond to situations differently based
on how something is presented
Narrow Framing and Broad Framing
Wealth and Profits
Absolute versus relative performance
Rule of thumb or mental shortcut that
causes people to estimate the probability
of an outcome based on how prevalent or
familiar that outcome appears in life
Air travel insurance
Property prices always go up
Home country and investment bias
Heads I win, tails its chance!
Tendency to ascribe success to innate
aspects of the individual such as talent
and foresight and blame failures on
outside influences and luck
Decision based on outcome of past
events and actual outcomes rather than
process for achieving the outcome
Understanding of what is important
Skill vs Luck
More prominently recall recent events
and observations than those that
occurred in the distant past
Its different this time

Bias Type: Emotional
Prospect theory
Stronger impulse to avoid losses than to
acquire gains

Unwarranted faith in ones intuitive
reasoning, judgments and cognitive
abilities
Emotionally charged behaviour such as
rash driving, excessive risk taking

Lack of discipline and self control
Fail to act in pursuit of long term
overarching goals because of a lack of
discipline
Inability to start saving young
Important vs Urgent distinction
Choice based on whatever option
ratifies or extends the existing condition
If a portfolio is built, very difficult to
change it dramatically
Selling stocks once they have been
bought
Value an asset more when it belongs to
you rather than when it is not in the
persons possession
Minimum selling price for something is
more than the minimum purchase price
for the same thing
Inherited assets vs purchased assets
Avoid taking decisive actions because
of the fear that the course selected will
prove less than optimal
Avoid the emotional pain of regret
associated with poor decision making
Staying out of market after a loss
Holding losing positions too long
Herd behaviour
Choice made based on how one
believes that a certain product or
service will reflect their values to others
Expressive benefits of a product than on
what it actually does

A bat and a ball together cost $1.10. The
bat costs $1.00 more than the ball. How
much does the ball cost?
Are you an above average driver?
If it takes 5 machines 5 minutes to make
5 widgets, how long would it take 100
machines to make 100 widgets?

A health survey was conducted in a
sample of adult males in Bombay, of all
ages and occupations. Please give your
best estimates of the following values:
What percentage of the men surveyed have
had one or more heart attacks?
What percentage of the men surveyed are
both over 55 and have had one or more
heart attacks?
Imagine these are four playing cards laid
out in front of you. Each one has a letter
on one side and a number on the other.
If a card has an E, it should have a 4.
Which cards do you need to turn over in
order to see if I am telling the truth?

Suppose an unbiased coin is flipped
three times, and each time the coin
lands on heads. If you had to bet $1000
on the next toss, what side would
choose? Heads, tails or no preference?
Imagine that the Bombay is preparing for
the outbreak of an unusual disease,
which is expected to kill 600 people. Two
alternative programs to combat the
disease have been proposed. Assume
the exact scientific estimates of the
consequences of the programs are as
follows:
If program A is adopted 200 people will
be saved.
If program B is adopted there is a 1/3
probability that 600 people will be
saved, and a 2/3 probability that no one
will be saved.
Which program do you choose?
Linda is 31 years old, single, outspoken,
and very bright. She majored in
Philosophy. As a student, she was deeply
concerned with issues of discrimination
and social justice, and also participated
in anti-nuclear demonstrations
Which statement is more likely?
Linda is a bank teller
Linda is a bank teller and is active in the
feminist movement
Would you want to be Lindas friend?
You are now going to play a game against
the others sitting in this room. The game is
simply this. Pick a number between 0 and
100. The winner of the game will be the
person who guesses the number closest to
two thirds of the average number picked.
Your guess is?
If program C is adopted 400 people will
die.
If program D is adopted there is a 1/3
probability that nobody will die, and a
2/3 probability that 600 people will die.
In addition to what you already own,
you have been give Rs. 1000. Now
choose between
A A 50% chance of winning Rs. 1000 more
B Winning Rs. 500 for SURE. 100%
choose between
C A 50% chance of LOSING Rs. 1000
D LOSING Rs. 500 for SURE. 100%
Where in the spectrum are you?

A bat and a ball together cost $1.10. The
bat costs $1.00 more than the ball. How
much does the ball cost?
Are you an above average driver?
If it takes 5 machines 5 minutes to make
5 widgets, how long would it take 100
machines to make 100 widgets?

A health survey was conducted in a
sample of adult males in Bombay, of all
ages and occupations. Please give your
best estimates of the following values:
What percentage of the men surveyed have
had one or more heart attacks?
What percentage of the men surveyed are
both over 55 and have had one or more
heart attacks?
Imagine these are four playing cards laid
out in front of you. Each one has a letter
on one side and a number on the other.
If a card has an E, it should have a 4.
Which cards do you need to turn over in
order to see if I am telling the truth?

Suppose an unbiased coin is flipped
three times, and each time the coin
lands on heads. If you had to bet $1000
on the next toss, what side would
choose? Heads, tails or no preference?
Imagine that the Bombay is preparing for
the outbreak of an unusual disease,
which is expected to kill 600 people. Two
alternative programs to combat the
disease have been proposed. Assume
the exact scientific estimates of the
consequences of the programs are as
follows:
If program A is adopted 200 people will
be saved.
If program B is adopted there is a 1/3
probability that 600 people will be
saved, and a 2/3 probability that no one
will be saved.
If program C is adopted 400 people will
die.
If program D is adopted there is a 1/3
probability that nobody will die, and a
2/3 probability that 600 people will die.
Linda is 31 years old, single, outspoken,
and very bright. She majored in
Philosophy. As a student, she was deeply
concerned with issues of discrimination
and social justice, and also participated
in anti-nuclear demonstrations
Which statement is more likely?
Linda is a bank teller
Linda is a bank teller and is active in the
feminist movement
Would you want to be Lindas friend?
You are now going to play a game against
the others sitting in this room. The game is
simply this. Pick a number between 0 and
100. The winner of the game will be the
person who guesses the number closest to
two thirds of the average number picked.
Your guess is?
choose between
A 50% chance of winning Rs. 1000 more
B Winning Rs. 500 for SURE. 100%
choose between
C A 50% chance of LOSING Rs. 1000
D LOSING Rs. 500 for SURE. 100%
Work on a ADAPT or MODERATE model
Encourage clients to adopt a broad
view of their wealth, prospects and
objectives.
Encourage clients to make long-term
commitments to policies
Encourage clients not to monitor results
too frequently
Discuss the possibility of future regret with
your clients
Ask yourself if a course of action is out of
character for your client
Verify that the client has a realistic view
of the odds, when a normally cautious
investor is attracted to a risky venture
Encourage the client to adopt different
attitudes to risk for small and for large
decisions

Attempt to structure the clients portfolio
to the shape that the client likes best
(such as insuring a decent return with a
small chance of large gain)
Make clients aware of the uncertainty
involved in investment decisions
Identify the aversion of your clients to the
different aspects of risk, and incorporate
their risk aversions when structuring an
investment program.
Behaviorally Yours

Rohan Dinesh Ghalla

rohan@leapgrowth.com

+91 98193 90450

Credits: Michael Pompian and J ames Montier across their various
publications

Investorpsychology Aspectsofinvestorpsychologyforfinancialadvisors 130515012756 Phpapp02

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