Tuesday, April 29, 2008

MarketPsych Says Let's Make A Deal!: What Would It Take To Buy You Off?

I'm going to assume that if you've visited our MarketPsych blog, that you are, in fact, an investor.

But what kind of an investor are you?

Do you invest for to get a financial return or to get an emotional return?

(Okay. That's a trick question. We invest our money for both reasons.)

But getting back to you for a momemt, what is your style? Which kind of return is most important to you?

Here's one way to get an insight; ask yourself this question:

Imagine that we at MarketPsych can magically guarantee you an average annual return on your investments, but in exchange you will forfeit your right to ever invest your own money again. In another words, for agreeing to keep your paws off your investments we will (again, magically) guarantee you ____ % per year.

Let's Make A Deal: How high does that percent need to be in order for you to agree to the bargain?

(MarketPsych Legal Counsel Disclaimer: The above is meant to be a playful exercise in the hypothetical. In no way is MarketPsych actually offering this deal. In fact, despite Richard's launching of MarketPsy Capital, which we are confident will be a big success, it is always irresponsible and unethical to guarantee market returns. Moreover, MarketPsych does not engage in wizardry, magic, alchemy or any other occult arts. Although Frank does own "lucky socks".)

Now, we know that the average return for "The Market" over time has been close to 10%. (Note: There is still some disagreement on this. How do you define "The Market" -Dow Jones Industrials? S&P 500? Russell 5000?)

But we know over time, major indexes have yield on average close to 10% For the sake of argument, let's call it 9%.

So if 9% is the average, what would it take to buy you off and have you completely delegate all investing to someone else (a financial advisor, for example).

Some investors will immediately say - "I'll agree to the bargain for 9% per year. After all, it's a reasonable return, a "fair" return."

Some investors will say - "Heck, I'll sign up 7%! If the return is guaranteed, I'll never need to worry again. It's worth a "below average" return for the peace of mind."

Some investors will say - "I need more. I like investing money. I enjoy it. And I think I can do better. I need 10%... 15%... 25%! to make it worth my while."

A rare minority will simply never go for it, at any price.

So ask yourself that question. No matter what your answer is; it will be revealing.

It calls to mind a true story of an avid poker player who also happened to be a day-trader. Let's call him, Mr. B.

Mr. B was losing at poker. He'd bluff too much. He'd play ill-advised hands. He'd refuse to fold. Fact is, he sucked.

He became sick of losing, so he hired a professional to teach him how to play winning poker. And lo and behold, it worked. After a few lessons, Mr. B began to see better results. He found himself making a little money, and slowly began to build a bank roll.

And after 2 months, Mr. B quit playing.


"Too boring," he said.

So was Mr. B playing the game for financial reasons (like he thought), or was he playing for something else, to satisfy emotional needs?

And what exactly were these emotional returns that he valued above financial returns?

Knowing the answer to the above question in red is a great first step to knowing where your investing values, strengths and vulnerabilities lie. All other things being equal, such knowledge makes you a better investor.

We also offer you another deal, to come to one of our Professional Seminars (there's nothing else like them out there - don't be fooled by imitations!) whether one designed for everyday investors, or for investing professionals.


Monday, April 21, 2008

Testosterone and Sexy Ladies

While this isn't yet a porn site (so long as the profit motive doesn't overcome our desire to educate investors), we should report on two independent studies that are showing a correlation between Testosterone, sexy photos and financial risk taking.

I'm not talking about "financial porn."

I know it sounds strange, but a hormone level (Testosterone) correlates with higher trading returns (see this study). Taking external testosterone won't boost returns, but having a higher baseline level in the morning, independent of other events, may increase the aggressiveness of risk-taking and lead to higher returns. However, while the effect was significant, the sample size was fairly small (17) and homogenous (intra-day traders).

Seeing an unrelated sexy photo increases financial risk taking (See Brian Knutson's study here), which is where the above image comes from. Knutson's study indicates that external, irrelevant photos that activate our old friend, the Nucleus Accumbens, appear to have a lingering and substantial impact on subsequent risk taking. This may explain why casinos put ther female staff in revealing clothes and car companies and others use lightly clad women to sell their completely unrelated products. The dopamine surge accompanying the sight of a sexy photo increases financial risk taking going forward. There are other stimuli that also cause dopamine release in the Nucleus Accumbens, and these can plausibly be assumed to increase financial risk taking as well. As I have mentioned in the past, the genius of Knutson's studies is that the researchers are able to PREDICT financial risk-taking behavior. This allows them to study behavioral modification techniques in future experiments. That cannot be said of virtually all other neurofinance studies, including the Testosterone study cited above. In fact, the authors' media comments about the Testosterone effect are highly speculative (can you give a trader testosterone or cortisol to alter their financial risk taking? - now that would be a predictive study), and Testosterone is likely working through the Dopamine circuits anyway.

Happy Investing!