07 August 2024

At The Money: Humans Are Not Built For Investing

1Frameworks

4Insights

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Rules-Based Investment Decision System

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 1

Myth Buster09:05

The Most Entertaining Trades Can Be the Most Expensive

Crosby describes markets as a bizarro world where exciting ways to pursue returns can be especially damaging to wealth. He cites evidence that only one in 360 day traders showed skill and says the average IPO lagged the S&P 500 by 21 percent over its first three years.

Enjoyment is not evidence of investing skill
Short-term trading can be intoxicating despite poor odds
Anecdotes about giant IPO winners obscure average performance
Exciting strategies can put the investor in the gambler's position

“some of the most exciting, most fun ways to try and make money in the markets are the most deleterious to our wealth.”
Daniel Crosby · 09:18

“they found that one in three hundred and sixty day traders show evidence of skill.”
Daniel Crosby · 09:32

#day trading#ipos#investor behavior#market returns

Hot Take· 1

Hot Take10:39

Fame Can Make a Forecaster Worse

Crosby says Philip Tetlock's research found that experts were poor political and financial forecasters, with the more famous experts tending to perform worse. A dramatic black-swan call can create fame, after which the forecaster keeps repeating the same thesis even as ordinary history makes it wrong.

Expert status does not ensure forecasting accuracy
A rare successful call can create a public reputation
Famous prognosticators have incentives to repeat their signature prediction
Average conditions eventually punish persistent extreme forecasts

“even the experts are terrible at this, and in fact, the more famous and expert, the worst they tended to be”
Daniel Crosby · 10:51

“history on average is pretty average, and then you're wrong.”
Daniel Crosby · 11:10

#forecasting#philip tetlock#experts#black swans

Explainer· 2

Explainer06:11

Investor Overconfidence Has Three Distinct Forms

Crosby divides overconfidence into believing we are better than average, luckier than average, and more capable of forecasting the future than we really are. Together, these beliefs create what he calls a toxic cocktail for decision making in markets.

Investors overrate their stock-picking ability
People claim optimistic possibilities while discounting personal dangers
Investors overestimate their ability to foresee the future
The three biases reinforce poor market decisions

“The first is we think we're better than average right, smarter, better, faster, stronger, better at picking stocks”
Daniel Crosby · 06:45

“So these three forms of overconfidence are a pretty toxic cocktail of bad decision making.”
Daniel Crosby · 07:39

#overconfidence#behavioral bias#forecasting#investor psychology

Explainer11:17

Why Confident Financial Predictions Feel So Comforting

The brain consumes a disproportionate share of daily energy, and Crosby says people naturally seek cognitive relief. When people in an fMRI watched financial-news predictions, the brain region associated with critical thinking and decision making went to sleep, helping explain the enduring demand for certainty.

The brain uses 20 to 25 percent of daily calories despite little body weight
Predictions can reduce active critical thinking
Certainty provides psychological relief even when forecasts are poor
There will remain a market for confident prognostication

“the part of their brain associated with critical thinking and decision making actually goes to sleep”
Daniel Crosby · 11:36

“as bad as we are at forecasting, there will always be a market for some sort of certainty.”
Daniel Crosby · 11:54

#financial media#certainty#cognition#forecasting