Behavioural Finance

Many of the reflexes that we innately have were very helpful when we were faced with predators in the stone age like saber-toothed tigers. But it turns out that evolution hasn’t prepared us well for facing the market economy.

It looks like once again, investing in commodities is in the news. Let me relate my encounters with commodity traders.

This discussion begins in 1906, at the Plymouth County Fair in England. Sir Francis Galton walks by a contest, where participants are asked to guess the weight of an ox. There are over 800 guesses; some from butchers and farmers, and many more from men and women with no expertise to inform their guesses.

The holy grail of investing is finding assets that are imperfectly correlated with each other. Adding assets that behave differently together in a portfolio improves the expected outcome.

Investing in index funds is obvious once you subscribe to the idea, but getting there is not always easy. The majority of Canadians still invest their money in actively managed mutual funds. From what I have seen, the acceptance of index investing typically follows four stages.

A piece titled The Psychology of Money written by Morgan Housel made its rounds on the internet in June. It was an excellent collection of 20 flaws, biases, and bad behaviors that the author has observed when people deal with money. I did not fully agree with flaw number 10.

Being bombarded with data, headlines, and predictions presented as being impactful to your financial well-being can evoke strong emotional responses from even the most experienced investors.

About 25 years ago, I received an email from a prospective graduate student. He informed me that he had an undergraduate degree in Computer Science, an MBA, and was currently working in the financial sector. He wanted me to be his supervisor and write a thesis on Computational Finance.

When you take your car in for a tune-up or yourself in for a check-up, you expect your mechanic and healthcare provider to know more than you do about their respective areas of expertise.

In 1931, Alfred Korzybski, an engineer, philosopher, and mathematician, presented a paper to the American Association for the Advancement of Science. In the paper, he introduced the idea that the map is not the territory. In other words, a model of a thing is not the thing itself.