s1-introduction to bf and books
TRANSCRIPT
-
8/7/2019 S1-Introduction to BF and Books
1/63
1
BEHAVIORAL FINANCE
Session 1
-
8/7/2019 S1-Introduction to BF and Books
2/63
2
The most difficult subjects can b
explained to the most slow witte
man if he has not formed an idea
them already; but the simplest
thing cannot be made clear to th
most intelligent man if he is firml
persuaded that he knows alreadwhat is laid before him
Leo Tolstoy, 1897
Thought for the day
-
8/7/2019 S1-Introduction to BF and Books
3/63
3
It is not so much what you hav
to learn if you accept weirdtheories, its what you have to
unlearn
Isaac Asimov
-
8/7/2019 S1-Introduction to BF and Books
4/63
4
The illiterate of the 21st century
will not be those who cannotread and write, but those who
cannot learn, unlearn and
relearn
Alvin Toffler
-
8/7/2019 S1-Introduction to BF and Books
5/63
5
Consider the history of high
jump. First the scissors style
technique was used (much
like hurdling)
Winning depended on being
the best at that technique
-
8/7/2019 S1-Introduction to BF and Books
6/63
-
8/7/2019 S1-Introduction to BF and Books
7/63
7
The western roll was the
style for 25 years untilsomeone changed the
rules again introducing
the straddle, (or
eastern roll).
High jumpers launched
and landed on oppositefeet and faced the bar
-
8/7/2019 S1-Introduction to BF and Books
8/63
8
In the 1968 Olympics,
former gymnast DickFosbury broke the
Olympic record by
three inches, creating
a third, discontinuous
change.
The Fosbury flop involved a straight approach,
jumping with both feet and twisting the body 180
degrees, like a gymnast, looking away from the bar
-
8/7/2019 S1-Introduction to BF and Books
9/63
9
Dick Fosbury
-
8/7/2019 S1-Introduction to BF and Books
10/63
10
These nonlinear shifts exemplify innovative
thinking. Each transformed the high-jump
industry.
In each case, the inventive high jumpers were not
just managing the present, they were creating the
future.
-
8/7/2019 S1-Introduction to BF and Books
11/63
11
-
8/7/2019 S1-Introduction to BF and Books
12/63
12
The objective of this class is to
change the way you think and
make decisions
-
8/7/2019 S1-Introduction to BF and Books
13/63
13
You have all spent five
trimesters as one class, and
have had a chance to know
your classmates quite well
-
8/7/2019 S1-Introduction to BF and Books
14/63
14
Think for a moment that I gave
you the right to buy 10% of oneof your classmates for the rest
of his or her lifetime
-
8/7/2019 S1-Introduction to BF and Books
15/63
15
You have to pick someone who
will do well on his or her ownmerit
(not the one with the rich dad !)
-
8/7/2019 S1-Introduction to BF and Books
16/63
16
If I gave you one hour to make
your choiceWho would you choose?
-
8/7/2019 S1-Introduction to BF and Books
17/63
17
Would you pick the one with the
highest IQ
Or
The one with the best grades ?
Or
The most energetic one ? The one
who displays the highest initiative ?
-
8/7/2019 S1-Introduction to BF and Books
18/63
18
Now, who would you choose ifyou were to go 10% short on
-
8/7/2019 S1-Introduction to BF and Books
19/63
19
IQ, grades ?
Or
Dishonest, irritating ?
-
8/7/2019 S1-Introduction to BF and Books
20/63
20
If you make a list ofqualities that
you like and dont like, what do
you notice ?
-
8/7/2019 S1-Introduction to BF and Books
21/63
21
We can get rid of the qualities thatwe dont like and improve on the
ones that we like
Easier to get rid when you are
younger
-
8/7/2019 S1-Introduction to BF and Books
22/63
22
Most behavior is habitual
-
8/7/2019 S1-Introduction to BF and Books
23/63
23
The chains ofhabit are too light to
be felt until they are too heavy to be
broken.
-
8/7/2019 S1-Introduction to BF and Books
24/63
24
Investing is not a game where the guy wit
the 160 IQ beats the guy with the 130
IQOnce you have ordinary intelligence,what you need is the temperament to
control the urges that get other people int
trouble in investing.Warren Buffett
-
8/7/2019 S1-Introduction to BF and Books
25/63
25
-
8/7/2019 S1-Introduction to BF and Books
26/63
26
The brain can bedeveloped just the same
way as the muscles can
be developed, if one will
take the pains to train
the mind to think
Thomas Alva Edison
-
8/7/2019 S1-Introduction to BF and Books
27/63
27
-
8/7/2019 S1-Introduction to BF and Books
28/63
28
So, what is
behavioral finance ?
-
8/7/2019 S1-Introduction to BF and Books
29/63
29
Behavioral Finance emphasizes amulti-disciplinary approach
-
8/7/2019 S1-Introduction to BF and Books
30/63
30
-
8/7/2019 S1-Introduction to BF and Books
31/63
31
-
8/7/2019 S1-Introduction to BF and Books
32/63
32
-
8/7/2019 S1-Introduction to BF and Books
33/63
33
-
8/7/2019 S1-Introduction to BF and Books
34/63
34
-
8/7/2019 S1-Introduction to BF and Books
35/63
-
8/7/2019 S1-Introduction to BF and Books
36/63
36
Multi disciplinary approach
Many an academic is like the trufflehound, an animal so trained and bred for
one narrow purpose that it is no good at
anything else Charlie Munger
-
8/7/2019 S1-Introduction to BF and Books
37/63
37
You will be a better investor,
executive, parent, friend
person if you approach
problems from a
multidisciplinary approach
Michael J Mauboussin
-
8/7/2019 S1-Introduction to BF and Books
38/63
38
"The principal enemies
of the equity investor
are expenses andemotions."
Warren Buffett
-
8/7/2019 S1-Introduction to BF and Books
39/63
39
1
Ah, the price isgoing up, lets
watch the market
3
Good thing Ididnt wait!
2
The trend is holding- Ill buy at the next
consolidation
6
OK, lets wait for it to recover-otherwise this will have to be a
really looooong-term investment
7
Enough! Im selling out!And staying out
8
Good thing I soldeverything!
4
Ill use this correctionincrease my position . . .
5
Ouch. As soon as itgoes back up, Imselling out!
9
Its going totank again anyway
12Drat! Ill buy in again. Its
cheaper than last timeanyhow
10
What the hell???
11
This is it! I knew thiswas going to happen
all along!
-
8/7/2019 S1-Introduction to BF and Books
40/63
40
Behavioral economics uses many of the sametools and frameworks as standard economics
Assumes individuals have well-defined objectives,
that objectives and actions are connected, and
actions affect well-being
Relies on mathematical models
Subjects theories to careful empirical testing
-
8/7/2019 S1-Introduction to BF and Books
41/63
41
Important difference is use of experiments using
human subjects
Behavioral economists tend to use experimental
data to test their theories rather than drawing
data from the real world
-
8/7/2019 S1-Introduction to BF and Books
42/63
42
Advantages of Experiments
Easier to determine whether peoples choices areconsistent with standard economic theory by rulingout alternative explanations
Often easier to establish causality
Researchers can double-check their assumptions and
conclusions by testing and debriefing subjects
Often possible to obtain information that isntavailable in the real world
-
8/7/2019 S1-Introduction to BF and Books
43/63
43
Disadvantages of Experiments
Decisions made in the lab differ from decisions madein the real world
Introduce influences on decision-making that arehard to measure or control
Strong evidence that subjects often try to conform to whatthey think are the experimenters expectations
Most subjects are students, thus not representative
of the general population Also inexperienced at making economic decisions
Scale of any given experiment is limited by theavailable resources
-
8/7/2019 S1-Introduction to BF and Books
44/63
44
Evaluating Behavioral Evidence
Critical questions about behavioral research thatappears inconsistent with standard economictheory:
Is the evidence convincing? Was the experimentwell-designed?
Is the observed behavioral pattern robust?
What are the possible explanations? Can we
reconcile this with standard theory?
If theory appears to fail in a significant situation,how should we modify the theory?
-
8/7/2019 S1-Introduction to BF and Books
45/63
45
The phrase behavioral economics appears
to be a pleonasm. What non-behavioral
economics can we contrast with it? Theanswer to this is found in the specific
assumptions about human behavior that
are made in neoclassical economictheoryHerb Simon
-
8/7/2019 S1-Introduction to BF and Books
46/63
46
There are three fundamental assumptions in
neoclassical economics:
1) People are rational.
2) Individuals and firms maximize utility orprofit.
3) Individuals behave independently and
with full information.
-
8/7/2019 S1-Introduction to BF and Books
47/63
47
Assumption of Behavioral Economics
Bounded rationality (including bounded attention)
Bounded willpower
Bounded Self interest
Bounded markets
-
8/7/2019 S1-Introduction to BF and Books
48/63
48
Books
-
8/7/2019 S1-Introduction to BF and Books
49/63
-
8/7/2019 S1-Introduction to BF and Books
50/63
5050
Richard Thaler
-
8/7/2019 S1-Introduction to BF and Books
51/63
5151
James Montier
-
8/7/2019 S1-Introduction to BF and Books
52/63
5252
Daniel Kahneman
-
8/7/2019 S1-Introduction to BF and Books
53/63
5353
Robert Cialdini
-
8/7/2019 S1-Introduction to BF and Books
54/63
5454
Michael J Mauboussin
-
8/7/2019 S1-Introduction to BF and Books
55/63
5555
George Soros
-
8/7/2019 S1-Introduction to BF and Books
56/63
5656
Peter Ubel
-
8/7/2019 S1-Introduction to BF and Books
57/63
5757
Charles Munger
-
8/7/2019 S1-Introduction to BF and Books
58/63
5858
James Surowiecki
-
8/7/2019 S1-Introduction to BF and Books
59/63
-
8/7/2019 S1-Introduction to BF and Books
60/63
6060
Robert Shiller
-
8/7/2019 S1-Introduction to BF and Books
61/63
6161
Dan Ariely
-
8/7/2019 S1-Introduction to BF and Books
62/63
62
Leonard Mlodinow
-
8/7/2019 S1-Introduction to BF and Books
63/63
63
Quiz Question
What was unique / special about the
Nobel Prize of Economics awarded in the
year 2002