1. + Your Silent Trading Partner Your Silent Trading Partner IBD & MIT IBD & MIT March 25, 2009 March 25, 2009 Mark Passacantando Mark Passacantando No part of this written or oral presentation should be implied to be a recommendation or construed to be a sale of a security and there are no explicit representations. This information is purely educational in nature.

2. The Big 3 Questions !!! 1)Are there key factors that stack the deck against us (investor/traders)? 1)Are we aware of them? 2)Is there anything we can do to swing some of that probability back in our favor?

3. The Big 3 Yes, 90% of new traders fail in the first year! Research: due to the fact that we are irrational in execution; miscalculate probability, risk, reward, randomness Most people are not; maybe some remote awareness; dots are not connected; greed; fear; ignorance; we are too smart Absolutely! Read on…

4. VBB – Visceral, Brain, Bias Visceral – things hit us without us knowing about it - influence? Brain – Chemicals are so powerful; they rule – influence? Bias – We come to the table with Rules already built-in – Investors are never neutral! -influence?

5. Visceral Game Rules Quiet, relax, heighten senses It straight, hands out, feet flat Press left hand/foot for STOP; negative Press right for GO; positive

6. Thevote.abc.com Thevote.abc.com

7. Pinknews.com/uk

8. Vulcansmercy.com

9. Sanityisland.us.com

10. NFLlogos.com

11. Sidelinehelmets.com

13. What Did You Feel? Any patterns? Observations? Impact on state of mind? Impact on investment decisions?

14. Control Center – It Is Working Right Now! More than 100,000 chemical reactions go on in your brain every second! The brain is also a radio transmitter, which sends out measurable electrical wave signals. The brain continues to send out these signals many hours after death! Among the brain's many jobs is to be your own chemist. The brain produces more than 50 identified active drugs. Some of these are associated with memory, others with intelligence, still others are sedatives. Source: Altered-States.net

15. HAPPY BRAIN CHEMICALS Endorphin = Brain's painkiller, and it is 3 times more potent than morphine. Scientific research over the last several decades has led to the revolutionary discovery of opiate-like chemicals in the body that associate with opiate specific receptors in the brain and spinal cord, including Serotonin, a hormone manufactured by your brain. Serotonin = a neurotransmitter, involved in the transmission of nerve impulses. Besides being involved in the process of addiction, low Serotonin levels are believed to be the reason for many cases of mild to moderate depression which can lead to symptoms like anxiety, apathy, fear, feelings of worthlessness, insomnia and fatigue.

16. Happy (cont) Dopamine, which makes people more talkative and excitable. It affects brain processes that control movement, emotional response, and ability to experience pleasure and pain.

17. Happy (cont) Exercise has been shown to produce another chemical known as endorphins, which help with depression, anxiety, sleep, and sexual activity. So, besides eating certain foods, relaxation, exercise, and are things that we do that can also affect the level and activity of these chemicals.

18. Happy to slooooooow down Relaxation produces the chemical norepinephrine; tied to depression in some studies.

19. Stress Cortisol Stress impairs memory and judgment Stressors are never static; they mount Past stress (e.g.PTSD) affect current ability to handle stress Stress – neuron firing slows; less flexible connections not made as readily

20. Cocaine and Investments I am About to Make Money! MRI brain scans are remarkably the same! Frontal cortex – same neural network controls; pleasure networks – control buying Google at $350/share, orgasm and cocaine

21. MRI Brain Scans Source: Happy Health Long Life.com Reading vs. Google Search!

22. Brain & Addiction – Post Stroke, patients found it easy to quit smoking; damage to left side of the brain (insula) The Dana Foundation, photo: Antonie Bechara

23. The Brain Matters The FMRI scan on the right detects a brain processing a false statement; the less colorful brain on the left corresponds to someone in the middle of a truthful statement. The Neurocritic; blogspot; 9/1/2007; ABC

24. Anterior Cortex – Analytical vs. Emotional Response – Gamble or Dont Gamble; All Showed an Emotional Bias; Emotions Rule! University College- London; USA Today 8/07/06

25. Our Home Grown Bias Childhood Values Beliefs Mores Experiences Contact with Others

26. Wisdom Of Crowds James Surowiecki New England Patriots vs. New York Giants Success rate IBD at MIT influence - positive

27. IBD – Strength, but Possible Achilles? Wisdom of Crowds does not Equal the wisdom of one in the crowd Halo Effect – person has one good quality, other characteristics are judged as better than they really are Psychology of group – persons conform to attitudes/beliefs of the group; toward midpoint; regression to the mean Tendency for groupthink – our skills are superior; a given approach IBD, Chapman, Elliot, etc. Individual can suppress own thoughts to conform to the group Choose individuals to speak whos views conform; others?

28. Bias #1 – Hate Loss! Have $1,000; choose either: A) Sure gain of $500 or, B) 50% chance to gain $1,000 and a 50% to gain nothing. Audience, you choose… ------------------------------------------------- Nobel prize winner Daniel Kahneman 2002; Tversky and Kahneman study

29. Cont Have $2,000; choose either: A)Sure loss of $500 or, B)50% chance to lose $1,000 and a 50% chance to lose nothing. Audience, you choose…

30. Result Two problems are identical in terms of probable net cash! Option A = certain $1,500 Option B = 50/50 chance to get either $1,000 or $2,000

31. Why? People are risk averse; strong bias to avoid loss regardless of risk Argument framed in how much you GAIN vs. how much you LOSE If sure gain, OK, Ill take risk Possible loss, No thanks; we quickly lose sight of net outcomes and actual probabilities

32. Bias #2 – Recent Information We usually place more emphasis on recent events (and therefore overreact to this information) Examples: Look at in and out trading a lot; recent news, look at co/stock frequently* Later, look back–it was a blip; Elliot Snap-back? Fence? EMA Thaler, Tversky Kahneman - most feedback traders recd lowest returns, lowest money * Mood changes 1x/day; 6x/day; 390/day; 100,000 year!

33. Bias #3 - Availability We tend to overemphasize information that is in front of us and/or easily attainable! We then make decisions based on it. U.S. vs. International Investing?

34. Bias #4 – Over-confidence We tend to be overconfident in: Our abilities (I avoided tech crash!) Our (believed) understanding of something (co., industry, market) Our ability to bounce back True of mutual fund managers; DALBAR/Morningstar + media (CNBC) Usually exists with recent gains. e.g. Dougs Lead: Members Predictions e.g. Freds IMHO

35. Bias #5 - Anchoring We have a bogie or benchmark or event in mind; that is what we peg all other observations to; Tied to our past job? Beliefs? Last Years Returns Deutche CEO example; Dow 14,000+; clients

36. Bias #6 – Confirmation Source: fun.front.lv/i/illussion We are always scanning the environment for information that supports or confirms our own beliefs. When we see it, does that make it true? WFMI, SBUX, TIF, APOL, FNM, RGR, SWHC

37. Bias #7 – Outcome Judge things based on our hoped for outcome or desired result as opposed to current conditions or what you see! Head/Tails Coin Toss (H-T-T-H-T-H or H-H- H-T-T-T)…which is more likely? It will come around! It must! I did the research! I will wait until it does.

38. Regret Aversion Regret Aversion Admit I am wrong! Never! Mistake. Hold. Not a mistake. Winner! Congrats! Hold, hold, hold (regret selling, watch it go higher) Motto: use pre-determined rules, use discipline; let go of ego, emotion

39. Help The Brain Exercise – help executive functions Diet – stay sharp; prevent defense Stimulants – increase short term memory/reaction time Music – activate reward centers; reduce activity in amygdala Meditation – cells fire in synchrony

40. Self-Test Checklist Bias??? YesNoMaybe 1Loss Aversion 2Recent Information 3Availability 4Over-Confidence 5Anchoring 6Confirmation 7Outcome

41. Tips Heighten awareness of these facts; YOU! Understand your biases Dont over-trade Self-analysis tools Hire a coach Emotional discipline – have it? Stress – must be controlled Consistency – strive for it; measure Risk Management – always Humility – Great traders have it; I have no control over the markets

42. Marks Tips to Mark Understand each Yes/Maybe Bias Manage emotion Use tech tools(stops, programs, etc.) Invest v. swing trade v. day trade

43. Final Tip! *&%#((*_&*&(%$ Dont look at beautiful women anchors in business channels when you are making investment decisions. means… Never make financial decisions when you are sexually stimulated!! Source: High Risk Investments and Sex; Stock Market Guide; April 6, 2008 Northwestern University; Stanford University joint study