I thought this little snippet belonged in the Its Friday section because surely being rewarded with a multi million dollar bonus for overseeing a financial planning division that committed wholesale fraud is taking the piss……isn’t it? This actually tells you all you need to know about the culture of Australian banks.
There is something in the rationale of people choosing hedge funds as a vehicle that I am not getting. The sales pitch must be amazingly slick or people are still captive to the false narrative that hedge funds are enrichment vehicles for someone other than the manager. Investors poured $70.9 billion into hedge funds in… Read more…
More than likely. The interesting thing about this piece is that whilst it is largely directed as the Chinese community and their approach to numerology and its perceived importance in decision making the same sort of irrationality applies universally. You need only pick up a copy of our local trading magazine Your Trading Edge to… Read more…
I thought this little snippet belonged in the Its Friday section because surely being rewarded with a multi million dollar bonus for overseeing a financial planning division that committed wholesale fraud is taking the piss……isn’t it?
This actually tells you all you need to know about the culture of Australian banks.
There is something in the rationale of people choosing hedge funds as a vehicle that I am not getting. The sales pitch must be amazingly slick or people are still captive to the false narrative that hedge funds are enrichment vehicles for someone other than the manager.
Investors poured $70.9 billion into hedge funds in the first seven months of 2014, despite average returns of only 2.82% year to date.
New data from Eurekahedge shows European hedge funds took in $33.4 billion as of July 2014, up from $29.4 billion last year at this time.
North American hedge funds now manage more than $1.4 trillion, having added $62.6 billion as of July 2014.
Long/short equity, fixed-income and multi-strategy funds remained the three most popular strategies in terms of investor allocations, attracting $55.5 billion, $15.6 billion and $10.1 billion, respectively, over the monitored period.
The evidence is overwhelming that if you want simple equity exposure then you are much better off buying an ETF – your performance will be staggeringly better than the hedge fund you choose and you wont be reamed by fees.
The interesting thing about this piece is that whilst it is largely directed as the Chinese community and their approach to numerology and its perceived importance in decision making the same sort of irrationality applies universally. You need only pick up a copy of our local trading magazine Your Trading Edge to see that it abounds with irrationality such as Gann, Fibonnaci, and astrology.
Within decision making you have a triad of components, the cognitive capacity of the person making the decision, the quality of the information being received and the time to make the decision. Decision making is therefore bounded since none of these features can be infinite. However, I think there is a flaw in this matrix in that it doesn’t include irrationality which in humans can be unbounded. Simply look around you and you will soon be convinced of the veracity of this. Irrationality is the default state for humans, this is why we had to invent both logic and the scientific method to enable us to actually begin to understand the universe we live in.
Superstition, which is defined as a belief that is not based on reason, has been a part of the human condition since humans began. But does superstition adversely affect human welfare? We answer this question in the context of trading in the Taiwan Futures Exchange, where we exploit the Chinese superstition that the number “8” is lucky and the number “4” is unlucky.
Defining a “superstition index” of a trader as the proportion of limit order submissions at prices ending at “8” minus the proportion of limit order submissions at prices ending at “4,” we find that individual investors are superstitious but institutional investors are not. Further, amongst individual investors, there is a negative correlation between trading profits and the superstition index. We find that these losses arise from bad trades at nearly all price points for a superstitious trader, not just at “8” and “4,” suggesting that superstition may be a symptom of a general cognitive disability in making financial decisions.
What prompted this little piece was I was reviewing someones trading plan and one of the reasons they listed as wanting to trade was fun and my immediate thought was they are not long for this world. The problem with the notion of fun is that represents an emotional investment in the trading process. this begs the question of whether trading will still be fun in the middle of a drawdown. My guess is that the answer would be a resounding NO.Trading is a profession of routine and part of that routine is adherence to a trading plan. Routine by its very nature is boring – traders are in effect part of a production line. This production line is boring but profitable. However, this boredom aspects does bring about a problem of compliance – in part it is boredom but it is also simply a function of being human. We are really bad at sticking at things, our interests change, our minds wander and we are generally fairly weak willed when it comes to persistence. Just think New Years resolution and you get a sense of what I am talking about.
These somewhat depressing statistics about our ability to stick with something make somewhat sobering reading because we are talking about something more than habit formation. To me habit formation is in many ways a routine for making your bed and whilst it can be helpful in establishing a basis for doing some mundane tasks. Activities that are truly important require discipline or a level that most are incapable of. My definition of discipline is doing something you really do not want to do on a regular basis. Whilst, Sisyphus was condemned to rolling an enormous boulder up a hill only to watch it roll back down and to have to repeat this action forever. As traders we are in many ways condemned to the same fate of endless repetition and it takes more than a notion of fun to keep going.
One of the things I find most intriguing about going to conferences is watching other speakers simply because their approach to the universe is so different to my own. Most go with the aim of confusing the attendees sufficiently that they believe the notion that said guru is indispensable and they must buy whatever they are offering them in order to navigate the investing world. Generally ( read almost always) there is no evidence to support any of the contentions that are being raised, just a load of homilies and half truths. The thing I found most interesting is the love affair that some presenters have with stocks. There is a staggering amount of anthropomorphising about stocks – such and such is a good stock because or I love this stock because. It reminds me of people who claim that their dog is a comedian because it rubs its arse on the carpet and then licks its balls in front of strangers. Your dog is just being a dog. The same is true of stocks and in fact I am surprised that some of the fundamentally oriented presenters didn’t start dry humping the lectern whenever they mentioned their favourite stock.
Part of the issue I have with this is the notion of the narrative fallacy – people are trapped by their own story. In my mind this raises a question I have never been able to get an answer to. How do you convince the market of your narrative? If we assume that the market is a voting machine what happens if the market does not agree with your belief structure about a given stock. Your affection for it will not in any way alter the trajectory of price. This in turn raises the awkward question of what is your plan B? As an example, consider this piece by Morningstar that dropped into my junk mail folder. It is a rather lengthy piece on ANZ’s growth strategy – whatever that might mean. The piece itself is a carefully contracted narrative but it doesn’t tell me what to do and when to do it. It gives me a story that I can feel confident repeating to myself or to others as a justification for whatever price action follows my decision. This is the crux of this sort of piece – it is simply a justification mechanism that appeals to my emotions as opposed to making a mechanical case for trading. A compelling justification can insulate me from both the need to take action and the emotional consequences of my action. I can simply either cling to the story or blame the story. Either way responsibility for my actions is abrogated to the narrative.
After seeing this piece I decided to have a look at ANZ to see what if anything I could glean just by looking at the actual data of price – what was the market telling me about its perception of the company. The first thing to do was to look at it in light of the other four banks and as can be seen from the chart below ANZ has not really been the stand out performer over the past 90 months. That honour goes to CBA with NAB bringing up the rear.
This tells me that the market doesn’t necessarily agree with the narrative being put forward by Morningstar. The interesting thing to note is that fundamental analysts all draw their information from the same sources, either Thompson/Reuters or Bloomberg. Therefore they all know the same things and the market knows the things they know and then it decides on the veracity of their belief. Which again raises the uncomfortable question of how to you convince the market that your story is the right story. To adopt such a position is in some ways the height of arrogance since you believe that your view is the correct one in the face of what the market says. As an example at the 2012 version of the same conference someone asked one of the presenters what they thought of WES. He proudly stated that he wouldn’t buy the stock because his valuation method valued the stock at $4.00 – at the time it was trading at around $30. A year later it was $43. The narrative is a powerful and compelling piece of our psychology – it is also a completely useless piece of the trading puzzle.
Here is an interesting thought for those who like to tinker with their trading systems after a loss.
If a pro basketball team’s opponent hits a better-than-expected proportion of its free throws — 80% versus 70% — the coach is half a percentage point more likely to change his starting lineup for the subsequent game, even though the opposing team’s free-throw average was beyond his control, says a group of researchers led by Lars Lefgren of Brigham Young University. Coaches frequently make strategic changes in response to irrelevant factors, especially after a loss, no matter how narrow or meaningless. This behavior is due to the outcome bias, which leads people to view random negative outcomes as the result of poor choices.