mit feb 2016
TRANSCRIPT
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MIT SLOAN
Investment Conference 2016
Presentation by
Barry Ritholtz,
Chairman & CIO
Ritholtz Wealth Management
Crashes, Terrorists,
and Sharks Oh, My!
Why investors fear
the wrong things,
and what to do about it
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Todays Discussion:
What we fear and why
How distress hurts investment performance
Recognizing and preventing this
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1. Herding, Groupthink
2. Optimism Bias
3. Confirmation Bias
4. Expert Opinions
5. Recency Effect
6. Endowment Effect
7. Hindsight Bias
8. Risk Aversion
Behavioral Economics
Neuro-Finance
How Your Brain Interferes with Your Investing
Risk Aversion
1. Anticipation vs. Rewards
2. Selective Perception/Retention
3. Words vs Images
4. Pattern Recognition
5. Data vs Narrative
6. Cognitive Dissonance
7. Species of Dopamine Addicts
1. Misunderstanding risk
2. Why you fear
3. Black Swans
4. What will kill you5. Your biggest financial fears
6. What hurts performance
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A brief introduction toUnderstanding Risk
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Defining Investment Risk
The probability that actual returns
on an investment will be lower than
the expected returns.
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You Are Going to Die . . . Heres How.
Shark: A perfectly evolved killing machine, immortalized in Spielbergs 1975 film, Jaws.
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6-10 peopleper year are
killed by sharks worldwide
Other large predators:
Lions (100)
Elephants (100)Hippos (500)
Crocodiles (1,000)
Dogs (25,000)
Snakes (50,000)
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Source: Ritholtz.com
Death by Selfie1. An American woman fell to
her death while taking a selfie
with her boyfriend on a cliff in
South Africa.2. Two Russian men were killed
while taking a selfie with a hand
grenade.
3. Three Indian students were
killed by an oncoming train
while taking selfies on train
tracks.
4. A Romanian teenager was
electrocuted when she was
taking a selfie on top of a train
and touched a high-voltage
wire.5. A Russian teen was also
electrocuted after touching live
wires while taking a selfie near
railway tracks.
6. A Russian woman shot
herself in the head while trying
to take a selfie with a gun.
7. A woman in Moscow City
died falling from a bridge,
where she was trying to take a
selfie.
8. A teenager in Houston,
Texas, fatally shot himself while
taking a selfie with a gun.
9. A Japanese tourist died
falling down the stairs while
taking a selfie at the Taj Mahal.
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Source: Gates Foundation, CDC
The Deadliest Animal in the World
Mosquitoes are the deadliest creature
on earth; (Human are only second)
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Source: Ritholtz.com
Sentiment Cycle
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Source: DALBAR
Investor Performance (10 Years)
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Risk of Terrorism
Source: CDC, Mueller & Stewart, Terror, Security, and Money.
2010: U.S.
noncombatant
fatalities from
terrorism
worldwide = 25
2011: Terror
deaths = 8
Annual deaths
due to struck
by lightning =
29 .
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Source: LA Times
What killed Americans in 1900 vs. 2010
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Your Actual Risk
You are 35,079 times more likely to die of heart disease
33,842 times more likely to die of cancer
than a terror attack.Source: CDC
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What are YOU afraid of?
Market Crashes
HyperInflation
Collapse of the
Dollar
Looking foolish
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1987 Crash in Imminent!Marc Faber: 2014 crash will be worse than 1987sCNBC, April 10, 2014
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Faber on Hyperinflation: Not A Matter Of If But When Business Insider, 9/23/2010
'The Bear Market Is Starting' Marc Faber CNBC, August 3, 2011
Faber: The Dollar's Value In The Future Will Be Zero Business Insider, 4/18/ 2011
Marc Faber: We Could Experience A 1987-Style Crash This Year Business Insider,
5/10/2012
Marc Faber: Look out! A 1987-style crash is coming. CNBC, August 8, 2013
2014 crash will be worse than 1987's: Marc Faber CNBC, April 10, 2014
Dr. Doom calls bubble, adding to gloomy calls CNBC, Nov 2, 2015
My prediction? Sometime in 2016, Faber will predict a 1987-like crash . . .
Catastrophizing Markets
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S&P500 Declines of 20% (or more)
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Investor Performance (20 Years)
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Global Central Banks Are Running Out of Ammo
(CNN/Money February 9, 2016)
Rate-Hikers At the Fed Are Running Out of Ammo
(CNBC May 13, 2015)
Fed Has No Ammo Left (USA Today March 2014)
Federal Reserve: What Happens When The Fed ReallyDoes Run Out of Ammo? (Time February 27, 2013)
Fed Running Out of Ammo (Politico July 31, 2012)
Fed Out of Ammo For Economy (WaPo 8/26/ 2011)
Fed Running Low on Ammo (WSJ August 26, 2010)
Fed Running Low on Ammo (Reuters August 18, 2009)
Catastrophizing Central Bankers
Economist, Feb 20th 2016
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Risk Aversion: Pleasure versus Pain
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Risk . . .
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