Tag Archiv: loss aversion

Are You Really in Control of Your Decision-Making?

29. November 2013

It is typically when stocks markets are at record highs that investment strategists on financial television are asked the question: “Can investors still get in?” Of course, those who have accepted the invitation to appear are often those who are already long; those who missed the move, or who are short, tend to have busier calendars when the TV networks call. So these sound-bites are not necessarily objective, or even representative of the average strategist’s opinion.

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A Message That Can Save You Money

4. November 2013

I’ve gotten into something of a pickle with this latest trading position. Just a few weeks ago is seemed that all the operational and economic stars were aligned to send this stock into the stratosphere, but things did not work out like they were supposed to. It is not a complete disaster, but there were numerous little ‘misses’ on the way. So, although the broader equity market is reaching a 52-week high, my stock is closer to its 52-week low, and I am losing money.

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The Next Insider Trader

30. September 2013

On the same day I read the investment bank JPMorgan & Co. was in discussions with regulators to bring an end to criminal and civil charges by paying an $11 billion penalty, I also discovered the US Federal Reserve had begun investigating claims that some traders were privy to the information ahead of the official release time and had exploited it the milliseconds before it went public.

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Jealous Society

10. May 2013
Neid 2

One can hardly blame governments around the world for going after tax evaders. Across Europe, finance ministers are battling to reduce budget deficits while at the same time trying to find resources for stimulus measures, and anti-capitalist upstarts are snapping at the electoral heels of the established parties. Sometimes the word ‘fairness’ slips into the discussion, but political leaders can hardly pretend that morality is the motivation for the siege on tax-havens. If that was the case, they would have acted long ago.

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How Investors’ Beliefs Rule Their Investment Decisions

25. March 2013

It makes intuitive sense that the way people feel about something should dictate the way they behave—that our preferences and convictions are faithfully reflected in the choices we actually make. Although this seems a reasonable assumption, recent research in psychology and behavioral finance suggests otherwise.

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A Weighty Problem

25. February 2013

A generous waistline is my sin in life; diets are my suffering. It doesn’t seem to matter which diet I try, the kilos I fight so hard to lose always seem to creep back again. It makes no difference whether I try milkshake meals, WeightWatchers, or Atkins. The only difference is how much or how quickly the weight disappears at the outset. In every case, though, the missing kilos always wind up back where they seem to belong: on my waistline.

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The Repairman Always Rings Twice

18. February 2013

Wretched dishwasher: it stopped running just minutes before the end of the program, leaving the plates in a damp, cold mist. It is always a grim moment when one realises that a call to the repairman is unavoidable. While Siemens’ 24-hour hotline is a nice feature in cases like these, I couldn’t help but wonder what good it was when all it could offer was a repair appointment one week later.

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No Grexit from London Luxury Property Market

11. February 2013

International investors are fleeing former financial safe-havens in huge numbers this year. Compare this to 2012, when fears of a Greek departure from the eurozone prompted its well-heeled nationals shift their wealth into more economically-sound destinations within the zone, like, Germany, Austria and Finland or, better still, into non-eurozone countries like Switzerland and the UK.

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‘Nudgers’ are Tarred With the Same Brush

31. October 2012

C-minus. This was the grade awarded by journalist Martin Grieve for the accomplishments of the ‘nudging’ techniques implemented over the last few years by the US and UK governments. Nudging is the policy approach that seeks to encourage people to behave in ways that enhance their health, wealth and wellbeing by tinkering with the way choices are presented to them.

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Active Fund Managers are shown the Red Card

10. September 2012
rote Karte

The fund management industry gasped this spring when Scottish Widows Investment Partnership (SWIP) gutted its £58bn equity division in Edinburgh, sacking most of the managers and analysts, and switching to an essentially passive management structure. Although many observers bemoaned the decision, they could not fault the decision-making. SWIP had conceded shortcomings in its abilities, recognised new developments in the needs of its clients, and so acted consequently. Compare this behaviour to that of another large fund management firm, having encountered probably much the same challenges. It decided instead to so bizarrely incentivise its underperforming active management team that a passive management outcome was all that could possibly result.

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Coperti Aversion

25. July 2012
Coperti S  M Rosenwirth - Fotolia com Gedeck

We managed it for a second time: almost two weeks on holiday with our three kids in Venice. It was our second an urban vacation, but this time with gorgeous summer weather. In stark comparison to the veritably chilly weather back home, Venice treated us to temperatures north of 30°C. And there was no sign of economic crisis; the sole exception being the prevalence of cash receipts. For every scoop of ice cream, the cash register cranked out a receipt. Whether the effort was really worth it, given that the vast majority of tourists simply left it on the counter without looking, is another question. I didn’t dwell on the subject too long though as I was determined not to squander even a minute of my precious vacation thinking about debt, deficits or austerity.

As our vacation residence was in Cannareggio, a neighbourhood somewhat off the usual tourist track, we just had to try one of the charming local bistros that one can find tucked away in the corner of a tiny public square or adjacent to a picturesque waterway. The food was great, the wine reasonably priced, and the children, for once, well-behaved. Everything was great, until the bill came.

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More Skin in the Game

18. July 2012
Basketball hände

A personal investment in a fund increases the fund managers’ psychological commitment to the investment decision. Commitment is not be confused with conviction. Unlike the latter, the former is rarely a good thing. Commitment can be thought of as the psychological glue that binds decision-makers to their decisions. When you hear someone described as being ‘married to their position’, what is being discussed is commitment.

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A Pill For Investment Success

16. July 2012


If a drug existed that promised to help you achieve higher investment returns, would you take it?

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A Well-Spun Bailout

11. June 2012
Black swan

The Spanish government’s decision to seek EU help for its stricken banks should not have come as a surprise to anyone. The only eye-opener that there might have been was the amount of the proposed rescue sum: €100bn. This figure easily overtook  earlier estimations which seemed to be in the order of €40bn to €80bn. Officials announced the higher figure without fanfare, but with the vaguely expressed desire to cover all imaginable risks. The decision to round the amount upwards is praiseworthy, given the history of the crisis. One still has to hope though that no black swans will be flying over the Bay of Biscay in the near future.

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Vying for a Tax-Free Passport

22. May 2012
US Reisepass

The latest prominent personality to renounce his US citizenship is the Facebook co-founder Eduardo Saverin. Apparently, Saverin gave up the US passport to avoid a hefty capital gains tax bill that he would have incurred post-IPO.  However, Saverin is not a typical high net-worth individual who is renouncing his passport. The US Internal Revenue Service data showed that around 1,780 US expatriates gave up their nationality at US embassies last year, up from 235 in 2008.

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Commuting & Wellbeing

30. April 2012

In a country that prides itself on its green initiatives, it sounds almost odd that German personal tax law allows deductions for the costs associated with driving to work. This means the greater the distance between home and the workplace, i.e., the more a motorist chokes the roads and the air, the more he can deduct from his tax bill.

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Reference Point Roulette

13. April 2012

I can easily understand why someone would buy a lottery ticket in the slim hope of getting rich in a single coup. Even though the expected return from this investment is negative, so no economically- rational person should do it, millions of people take the plunge every week. The reason is because the very low probability of hitting the jackpot is likely to be perceived as greater than it really is. In addition, the thing one buys with a lottery ticket, above all else, is the right to dream.

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Greek Debt-Swap Kaleidoscope

23. March 2012

It is amazing what can become of a bond engagement if one happens to choose the wrong issuer. Yes, I was one of those unfortunate souls who decided to take a bet on short-dated Greek bonds in the middle of the eurozone bailout negotiations. In retrospect, it was not my best idea, but the engagement was small and entirely with my own money. Who dares, wins, I mused.  

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Negotiating from a Losing Position

19. December 2011
Value function

Some consider the eurozone debt crisis to be the result of a fundamental design flaw. They may be right. But then, when in political history has any project been done completely right from the outset. Political and financial frameworks have always had to be modified or adjusted as a function of new events or opinions. What marks out this particular crisis is that the decision-makers seem unable to make a single meaningful step further. Two years and 15 summits into the crisis and we are still engaged in fire-fighting.

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The Rogue Within

18. November 2011

“Most of the people in this room have it in them to become a rogue trader.” This is how I challenged a large group of institutional investors at one of my recent behavioural finance seminars. The suggestion raised numerous titters, but there was not a single word of opposition. They understood that loss-aversion is a powerful human motive and, in addition, that the passage of time dulls a person’s perception of the enormity of the damage.

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Low Yields Make Pensions Even Less Attractive

11. November 2011

In a recent post my fellow blogger described how a ‘nudging’ technique helped to encourage people to save for their retirements. The trick worked by leveraging off people’s dislike for giving up things that that they already have. Even if all that is done is to swap one thing for another of equal value, people still do not like it because a loss is perceived twice as keenly as the gain.

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Stop-Loss Trees

19. October 2011

Hiking is my latest pastime. On any of the last few weekends you would probably have found me striding hill and dale, or walking through forests. Contrary to my expectations, I actually find it great fun. But I am awful at sticking to my schedule; I can’t even keep to the planned route. I invariably find it more interesting to circle an impressive rock formation, to follow a stream, or simply to clamber onto higher ground to admire the view.

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DAX-Sentiment: News importance depends on where investors bought

15. September 2011

There have been repeated attempts by optimistic investors to pick a bottom for the DAX.  All have ended in tears. In one case, however, these tears have not yet dried.

Survey by Deutsche Boerse, commented by Cognitrend


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Limiting Losses, Non-stop

9. August 2011

While writing my last blog over stop-losses I could not have imagined how quickly the theme would become relevant. In the meantime, any DAX investor with discipline and a 10-percent risk-limit would have already exited the market.

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A Graduate-Premium Without a Degree

20. July 2011

In her opening speech at the university’s graduation ceremony, the Lady Chancellor did not waste the opportunity to attack the UK government’s policy on university fees. She slated the coalition for wanting to turn British universities into institutions reserved for ‘the privileged and for those not afraid of taking on £50,000 in debt.’

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Holiday Pitfall

8. July 2011

At last, I’m in the final stages of my vacation planning, a thankless task, even though I’m no rookie when it comes to African tourism. There have been endless discussions with travel agents, innumerable internet searches, and dozens of glossy travel brochures have had their page corners folded down.

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The Behavioural Parable of the Prodigal Son

27. June 2011

I was recently reminded of the Parable of the Prodigal Son, from the Gospel of Luke. That’s the one where the younger of two boys asks his father for his portion of the inheritance and then goes on to squander it in wild adventures abroad. Later, penniless and repentant, the profligate begs his father to take him back in as a hired-hand.

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The Psychology of a Share Giveaway

24. June 2011

Nick Clegg, the leader of UK government’s junior coalition party, wants to give voters free shares in the partially state-owned bank, RBS (83 percent) and Lloyds (41 percent). The populism of the plan is obvious, and Clegg certainly needs to score some points with a public that has grown increasingly sceptical of the Liberal-Democrat leader in particular and with coalition politics in general. However, Clegg defends his stance with appeals to psychology: during a visit to Brazil, he argued that it was important for Britons to ‘feel’ that they hadn’t been overlooked.

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Time Bandits

3. June 2011

At last, German legislation is finally addressing a plague that costs everyone a lot time and money: the fee-based telephone queue. I never understood why one is subjected to a fiddly question-answer menu only to again explain the reason for the call when once connected with a service representative.

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Stop-Loss Aversion II

27. May 2011

We make investments because we believe they will bring profits, not losses. Just thinking about the prospect of a loss is already pretty unpleasant. This is because human beings have an intense aversion to losses, and this is why decisions made after losses have been incurred are so prone to bias. To start with, investors tend to believe, with a little time and patience, that the loss can be made good.

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