In the decision sciences, a clear distinction is made between risk and uncertainty. You take a risk when you know in advance all the potential outcomes of your choice, and their respective probabilities. This risk description covers things like coin tosses, lotteries and spins of a slot machine. In such circumstances, only cold logic, statistical thinking, and possibly a pocket calculator, should influence your decision about whether to run the risk or not. As soon as some of the outcomes, and/or some of the probabilities, are not known, we enter the realm of uncertainty. In this less ordered domain, reason and statistics become less useful because there is nothing to calculate. Instead, argue decision scientists, one should rely more on one’s intuition, gut feelings and rules-of-thumb. Examples of such judgements include living to be one hundred years old, falling in love, or being killed by a terrorist. Any decision to bet on them – or insure against them – involves dealing with uncertainty… Read more on TCAM’s website
At least one asset is guaranteed to enrich your portfolio this year: your investing experience. Stick at it long enough and you will encounter practically everything from start-ups to meltdowns, flashes in the pan to flash crashes, slim pickings to fat fingers. You will also discover the financial impact of earthquakes and tsunamis, of both the political and geological varieties. The wisdom of the years, one might argue, ought to make you a better investor. [Read more on TCAM’s website]
First you would think about whether its memory holds any sensitive data, and wonder what the stranger might do with it. Once you’re satisfied there are no ill intentions, you would decide whether you believe the stranger has the ability to repair smartphones. Given the success of the entire transaction depends on the latter, it seems counter-intuitive that this judgment be made only as a second step, yet this precisely what we all do. Read more on TCAM’s website
Hardly a week goes by without some sorry tale of a lost reputation. If it isn’t a politician accused of ruthless betrayal, or a bank’s name sullied by the fraudulent activities of its traders, it is the country itself that suffers the ignominy of being stripped of its triple-A sovereign debt rating. Reputations are clearly things that people, firms and nations can have, and lose. But what are they? Where do they come from? What are they worth? And what does one do to repair a tarnished one?…
Most people would spend less time to ponder a decision to buy a lottery ticket than they would to buy a share in a lottery company even though, pound-for-pound, the latter is certainly the better investment.
Read more of Herman Brodie’s latest article on TCAM’s website
Julia Roberts is a superb actress. All too often, though, she headlines in movies whose themes I find uniquely unappealing. This means, when I do see her films, I have been dragged reluctantly to the cinema by my insistent other. This simple observation partially explains my lack of appreciation for Ms Roberts’ choice of scripts: how could I confess to having liked a movie when I had protested my disdain 90 minutes earlier? Nonetheless, I am willing to confess here that one of her films did contain a scene I appreciated very much. This was the one in which a lady leaves some US city and embarks on a voyage of emotional, romantic and cinematographic self-discovery in Italy, Bali and India. The highlight for me was near the start of the film when she packed all of her belongings into self-storage before her grand departure. Continue reading
I’ve gotten into something of a pickle with this latest trading position. Just a few weeks ago it 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. Continue reading
I confess to having been deeply sceptical when I read an appeal last week by a boss of a fund management firm (Schnider,Walter & Kollegen) to make it an obligation for fund managers to invest personally in the funds they manage. For Mr Walter, the notion that having some ‘skin in the game’ makes for better investment decision-making is so self-evident it barely needs defending. Nevertheless, the article cites a Morningstar study from 2010 that revealed above-average performances among funds where the manager held a personal stake. Continue reading
If a drug existed that promised to help you achieve higher investment returns, would you take it? This question was recently raised in an online behavioural finance forum.
For simplicity, I limit my response to the single behavioural trait that is the most robust, widespread and probably responsible for the biggest disasters in investing history: loss aversion. Continue reading
September 1987 was an inauspicious moment to begin a career in the financial markets, but that was the first time I found myself in the centre of the dealing operations of one of the world’s largest commodity operators. I had recently emerged blinking from an ivory tower and found this new environment fascinating, exhilarating, totally incomprehensible. After scarcely four weeks on the job global stock markets crashed. Continue reading