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Psychology of Investing – Behavioral Finance CMTA ANNUAL CONFERENCE Don Collins Wedbush Securities 4-17-13 Securities offered through Wedbush Morgan Securities.

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Presentation on theme: "Psychology of Investing – Behavioral Finance CMTA ANNUAL CONFERENCE Don Collins Wedbush Securities 4-17-13 Securities offered through Wedbush Morgan Securities."— Presentation transcript:

1 Psychology of Investing – Behavioral Finance CMTA ANNUAL CONFERENCE Don Collins Wedbush Securities Securities offered through Wedbush Morgan Securities member NASD/SIPC. The content of this presentation is for information purposes only. The concepts discussed and opinions expressed are not necessarily endorsed by Wedbush Morgan Securities. The strategies presented are not meant to be construed as guarantees against market loss and may not be suitable for all investors. The success of these strategies is dependent on market circumstances and results do vary. Past performance of securities and strategies is not a guarantee of future results. Securities offered through Wedbush Morgan Securities member NASD/SIPC. The content of this presentation is for information purposes only. The concepts discussed and opinions expressed are not necessarily endorsed by Wedbush Morgan Securities. The strategies presented are not meant to be construed as guarantees against market loss and may not be suitable for all investors. The success of these strategies is dependent on market circumstances and results do vary. Past performance of securities and strategies is not a guarantee of future results.

2 Wedbush Securities - Don Collins

3 Bubbles

4 Inside the bubble

5 Wedbush Securities - Don Collins Bubble burst

6 Wedbush Securities - Don Collins Bubbles? Conforming with the crowd Conforming with the crowd Solomon Asch ExperimentSolomon Asch Experiment Lollapalooza effect Lollapalooza effect Tulipmania Tulipmania Mississippi Bubble Mississippi Bubble South Sea Bubble 1720 South Sea Bubble 1720 U.S. Stock Market U.S. Stock Market Japanese Bubble economy Japanese Bubble economy

7 Wedbush Securities - Don Collins Classic Economic Theory

8 Wedbush Securities - Don Collins Psychology of investing Economic and financial theory Economic and financial theory Classical EconomicsClassical Economics Act with rational, self interested, firm grasp of self-control Act with rational, self interested, firm grasp of self-control Consider all available options Consider all available options Behavioral Economics Behavioral Economics Albert PhungAlbert Phung Kahneman and TverskyKahneman and Tversky Richard ThalerRichard Thaler Robert ShillerRobert Shiller Peter Bernstein Peter Bernstein "I can calculate the motions of heavenly bodies... But not the madness of people!" Isaac Newton ( ) "I can calculate the motions of heavenly bodies... But not the madness of people!" Isaac Newton ( )

9 Wedbush Securities - Don Collins Impulsive, irrational behavior

10 Wedbush Securities - Don Collins Psychology of investing Behavioral Finance and economics Behavioral Finance and economics Not as logical,Not as logical, Disciplined,Disciplined, We care about othersWe care about others Two MindsTwo Minds Intuitive Mind Intuitive Mind Reflective Mind Reflective Mind

11 Wedbush Securities - Don Collins Psychology of investing

12 Wedbush Securities - Don Collins Psychology of investing Avoid Emotional Processes and Decisions Avoid Emotional Processes and Decisions Attempt to pursue the Rational and Logical side of investing Attempt to pursue the Rational and Logical side of investing Warren Buffet Quote Warren Buffet Quote

13 Wedbush Securities - Don Collins Over confidence

14 Wedbush Securities - Don Collins

15

16 Intuitive mistakes Overconfidence Overconfidence PerceptionPerception Smarter Smarter More capable More capable RealityReality Rapid traders Rapid traders Illusion of control Illusion of control

17 Wedbush Securities - Don Collins Selective memory

18 Wedbush Securities - Don Collins Selective Memory

19 Wedbush Securities - Don Collins Behavioral Finance Selective Memory Selective Memory More self confidenceMore self confidence Preservation of self imagePreservation of self image Cognitive DissonanceCognitive Dissonance RationalizationRationalization RepresentativenessRepresentativeness

20 Wedbush Securities - Don Collins Self handicapping

21 Wedbush Securities - Don Collins Behavioral Finance Self-Handicapping Self-Handicapping Opposite of overconfidenceOpposite of overconfidence Loss Aversion Loss Aversion Focus on the bad appleFocus on the bad apple RegretRegret Bad decision Bad decision Bad outcome Bad outcome Pain or Pleasure? Pain or Pleasure? GainGain LossLoss

22 Wedbush Securities - Don Collins Loss aversion

23 Wedbush Securities - Don Collins Sunk cost

24 Wedbush Securities - Don Collins Behavioral Finance Sunk Cost Sunk Cost Gift or purchaseGift or purchase Focus on merit or costFocus on merit or cost Anchoring Anchoring What happened yesterday influences tomorrow?What happened yesterday influences tomorrow? Use what we know to make decisions about something unrelatedUse what we know to make decisions about something unrelated

25 Wedbush Securities - Don Collins Behavioral Finance Confirmation Bias Confirmation Bias Extrapolate personal beliefsExtrapolate personal beliefs Hindsight biasHindsight bias Commitment TrapCommitment Trap Mental Accounting Mental Accounting House money versus our moneyHouse money versus our money Money is moneyMoney is money

26 Wedbush Securities - Don Collins Herding

27 Behavioral Finance Herding Herding Information originInformation origin GoldGold MomentumMomentum Framing effect Framing effect Big decisions versus small decisionBig decisions versus small decision Penny on the groundPenny on the ground Percentages versus actual valuePercentages versus actual value

28 Wedbush Securities - Don Collins Random event – Sand pile

29 Wedbush Securities - Don Collins Behavioral Finance Misunderstanding Randomness Misunderstanding Randomness RiskRisk Calculated Calculated Impulsive Impulsive Gain or LossGain or Loss Good or bad decisionGood or bad decision Vividness Bias Vividness Bias Immediate past into distant futureImmediate past into distant future

30 Wedbush Securities - Don Collins

31 Courage?

32 Additional Investing Trait Mistakes Illusion of courage Illusion of courage Current risk versus Future riskCurrent risk versus Future risk Paralysis Paralysis OverwhelmedOverwhelmed Mistake paranoiaMistake paranoia Endowment effect Endowment effect Property right effect on perceived valueProperty right effect on perceived value

33 Wedbush Securities - Don Collins

34 What should we focus on? Traits Traits HumblenessHumbleness PatiencePatience Partner, committee (small)Partner, committee (small) Written checklistWritten checklist Look for contrary opinionsLook for contrary opinions Avoid historical perceptions, informationAvoid historical perceptions, information Learn from mistakes, don’t obsessLearn from mistakes, don’t obsess Study randomness, don’t be fooled by itStudy randomness, don’t be fooled by it Regression to the meanRegression to the mean Ulysses StrategyUlysses Strategy

35 Wedbush Securities - Don Collins Thank you For more information regarding this presentation, please contact: Donald W. Collins Securities offered through Wedbush Securities member NASD/SIPC. The content of this presentation is for information purposes only. The concepts discussed and opinions expressed are not necessarily endorsed by Wedbush Securities. The strategies presented are not meant to be construed as guarantees against market loss and may not be suitable for all investors. The success of these strategies is dependent on market circumstances and results do vary. Past performance of securities and strategies is not a guarantee of future results. Securities offered through Wedbush Securities member NASD/SIPC. The content of this presentation is for information purposes only. The concepts discussed and opinions expressed are not necessarily endorsed by Wedbush Securities. The strategies presented are not meant to be construed as guarantees against market loss and may not be suitable for all investors. The success of these strategies is dependent on market circumstances and results do vary. Past performance of securities and strategies is not a guarantee of future results.


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