tag:blogger.com,1999:blog-5465015914589377788.post1913316397287179920..comments2020-04-03T09:08:31.084-04:00Comments on Michael James on Money: Misbehaving: The Making of Behavioral EconomicsMichael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger31125tag:blogger.com,1999:blog-5465015914589377788.post-29577723948115310062016-06-24T14:29:08.535-04:002016-06-24T14:29:08.535-04:00@SST: Before the vote results or after? In my ca...@SST: Before the vote results or after? In my case, I did nothing. But I am now bemoaning the fact that I have no appreciable amount of cash lying around to buy some beaten up ETFs. I don't keep "dry powder" available for market selloffs because I find the opportunity cost too high, but it would have been nice if I just happened to pick today to invest some cash that had been building up.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-520109650694470672016-06-24T13:37:17.427-04:002016-06-24T13:37:17.427-04:00I wonder how everyone's brehavioural breconomi...I wonder how everyone's brehavioural breconomics misbehaved amid the Brexit chaos? <br /><br />Full disclosure: I sold precious metals and bought public equities. SSTnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-596795435165976412016-06-22T18:43:38.269-04:002016-06-22T18:43:38.269-04:00@Mark: I liked this book but I liked Thinking Fas...@Mark: I liked this book but I liked Thinking Fast and Slow more. They are quite different even though they cover some similar material.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-38946730656486135712016-06-22T18:40:54.622-04:002016-06-22T18:40:54.622-04:00@Anonymous: No problem. I find these issues simi...@Anonymous: No problem. I find these issues similar to the visual puzzles where you can measure two lines and know that they are the same length, but you can't prevent your visual system from being "sure" that one line is longer. My gut might tell me not to take a certain coin flip bet even though I know from the math that I should take it.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-15898596129728521022016-06-22T18:40:26.242-04:002016-06-22T18:40:26.242-04:00Sounds like an interesting book. How does it comp...Sounds like an interesting book. How does it compare to Thinking Fast and Slow? Although not about economics you might want to check out Steven Pinker's book How The Mind Works. Very detailed and interesting.<br />My Own Advisorhttp://www.myownadvisor.canoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-40128551348810934422016-06-22T18:21:00.258-04:002016-06-22T18:21:00.258-04:00Yeah, okay, I see what you're getting at. Tha...Yeah, okay, I see what you're getting at. Thanks for taking the time. :)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-62898112638008521222016-06-22T10:24:37.649-04:002016-06-22T10:24:37.649-04:00Yup, thanks.
As this thread has demonstrated, b...Yup, thanks. <br /><br />As this thread has demonstrated, behavioural economics is a tough hurdle. SSTnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-51174774989674116852016-06-22T10:02:08.347-04:002016-06-22T10:02:08.347-04:00@SST: Both are correct. The flips are independen...@SST: Both are correct. The flips are independent. The equally-likely possibilities are ++, +-, -+, --. This is 25% -$200, 50% +$100, and 25% +$400. Each individual flip remains +$200 or -$100 with 50/50 odds. Not sure if this answers your question.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-70767124365890617232016-06-22T09:57:11.262-04:002016-06-22T09:57:11.262-04:00"One flip, and you have a 50% chance of being..."One flip, and you have a 50% chance of being up $200 or down $100. Two flips, and you have a 25% chance of being down $200, and 75% chance of being up either $100 or $400..."<br /><br />Is this correct? <br /><br />I'm no mathematician, but isn't there some kind of probability of independent events rule (i.e. it will always be 50/50 "to win $200 or lose $100" not matter how many flips)? <br /><br />No need to explain in detail, just yes or no. :)SSTnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-79814367219821568102016-06-22T09:17:03.859-04:002016-06-22T09:17:03.859-04:00@Anonymous: Your reasoning is a good example of p...@Anonymous: Your reasoning is a good example of prospect theory, which is a model for how people make these types of decisions. Unfortunately, this is a model of our irrationality. <br /><br />I'm not sure I can think of another way to explain all this. It is definitely true that the more flips you take, the better off you are. However, the process is very close to linear. 100 flips are a good idea because each flip is a good idea. The proof that each flip must be a good idea comes from the fact that if you were given the option to stop after 99 flips, would you take it? After all, the result of the 99 flips is in the past. You're facing the 50% possibility of losing $100. If you take into account previous results to decide whether to take the last flip, this is irrational. If you make a rational decision to take the last flip, this means you should have been willing to take just one flip from the beginning.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-56060222186190913902016-06-22T08:59:46.185-04:002016-06-22T08:59:46.185-04:00Ok, I'll accept your point about the analogy.
...Ok, I'll accept your point about the analogy.<br /><br />But, I'm not ignoring how much I win or lose. Since your expected return is positive, you really only care about how much you can lose and how likely you are to lose (unless you could be making more money doing something else, but let's assume that we're flipping coins quickly enough). However, the more flips there are, the better off you are. One flip, and you have a 50% chance of being up $200 or down $100. Two flips, and you have a 25% chance of being down $200, and 75% chance of being up either $100 or $400 (either is a win, so I don't really care which it is). So you could lose twice as much as before, but the probability of that happening is half as much. Three flips, and you could lose $300, but there is only a 12.5% chance of that happening, and an 87.5% chance of breaking even or better. Your maximum loss is increasing linearly, but the probability of that happening is decreasing at a much faster rate. Meanwhile, your expected return is also increasing linearly. At 100 flips, yes, you could at worst lose (or win) $10k, but the probability of losing (or winning) that much is 7.9e-31... AND the probability of losing ANY money at all is 0.044%. Meanwhile your expected return has also grown to $5000. Increase the number of flips to 1000, and the probability of losing ANY money at all is down to 1.07e-26, and your expected return is $50k.<br /><br />So the more flips, the more likely you are to come out ahead (and therefore less likely to lose anything), and the more you flip, the higher your expected return. So the more flips you offer me, I think it becomes more and more rational to accept.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-79188866012135541402016-06-21T23:50:49.866-04:002016-06-21T23:50:49.866-04:00@Anonymous: Focusing solely on whether or not you&...@Anonymous: Focusing solely on whether or not you've lost money and ignoring how much money you've won or lost is an irrational behavioural quirk that many humans share.<br /><br />The attempted analogy to diversification of stocks does not apply, I'm afraid. If I'm investing $500,000 in 5000 stocks, that's $100 per stock. It makes sense to say that if I'm willing to put the $500,000 into 5000 stocks, I should be willing to put $100 into one stock. But it does not follow that I should be willing to put the whole $500,000 into one stock.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-77356027739890008272016-06-21T23:04:24.252-04:002016-06-21T23:04:24.252-04:00To use an analogy that's closer to what you no...To use an analogy that's closer to what you normally talk about in your blog to illustrate: following your logic, if you're happy putting all your retirement savings in a portfolio of 5000 stocks, you should be perfectly happy putting all your savings in 1 stock.<br /><br />No?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-48477988703826457592016-06-21T23:00:15.794-04:002016-06-21T23:00:15.794-04:00Yeah, I'm not sure I'm convinced. If you ...Yeah, I'm not sure I'm convinced. If you line up a hundred people to play each game, roughly half of the single-flip folks will have lost money. Of the hundred people playing the 100-flip game, how many would you expect to have lost money? Not half of them... maybe even none of them.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-73555356475158666892016-06-21T13:14:42.892-04:002016-06-21T13:14:42.892-04:00@Anonymous: There is certainly a limit to how long...@Anonymous: There is certainly a limit to how long you can bluff if you're paying a substantial dividend. The trouble is that once the bluff gets found out, the company is bankrupt. I think that dividend or no, you're facing similar risks. If Nortel had paid a bigger dividend, they would have imploded sooner, but investors who reinvested their dividends would have lost it all either way.<br /><br />Investors worried about conspiracies sometimes focus on a company's cash flow. It's harder for creative accountants to play games with cash flow than with reported revenue and earnings.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-12569678977063625822016-06-21T13:02:17.272-04:002016-06-21T13:02:17.272-04:00A friend once told me he preferred dividend payers...A friend once told me he preferred dividend payers because they were less likely to be cooking the books.<br /><br />ie, with an 80% dividend payout, it's hard to be bluffing. With no dividends... who knows what the true story is.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-69401438451445134682016-06-21T12:10:57.454-04:002016-06-21T12:10:57.454-04:00Ok, I get it now!Ok, I get it now!Le Barbunoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-5619603320892934222016-06-21T11:56:58.629-04:002016-06-21T11:56:58.629-04:00@Le Barbu: You don't get to choose the versio...@Le Barbu: You don't get to choose the version of the game; I do. Suppose I offer one flip to someone and he says no. But he didn't know I planned to then offer any number of flips up to 100. Now he says he'll take 100 flips. If the 100 flips are a good idea, then he should have taken the offer of only one flip.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-75159734184944848282016-06-21T11:52:34.382-04:002016-06-21T11:52:34.382-04:00I probably do not understand the rules of this gam...I probably do not understand the rules of this game. If you give me the option to flip once, my outcomes are 200$ or -100$. If I flip 100x I will likely end up with anything between 3,500$-6,500$ wich is a lot better than 200$. Le Barbunoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-74888514130568392202016-06-21T10:53:04.443-04:002016-06-21T10:53:04.443-04:00@Le Barbu: That would be a different game. Let...@Le Barbu: That would be a different game. Let's say I can't decide whether I'll let you flip once or flip any number of times up to 100. Many people would reject the offer of just one flip, but would choose 100 flips in the second case. This is irrational, but feels right to many of us.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-79268438398621738502016-06-21T10:47:20.265-04:002016-06-21T10:47:20.265-04:00The way I understood the offer to flip 100 times, ...The way I understood the offer to flip 100 times, choosing to stop after 99 was NOT an option. To be a looser at this game, you got to loose 67x over 100 attemps wich is very unlikely to happen if it's a fair flip. But really, the 100th flip is not rational, neither the 99th and so on.Le Barbunoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-34811877874492680352016-06-21T09:38:58.344-04:002016-06-21T09:38:58.344-04:00@Anonymous: If you're unwilling to take this ...@Anonymous: If you're unwilling to take this bet once, then why would you do it the 100th time after the first 99? And if you're not willing to do it the 100th time, then the 99th is out as well. Proceeding like this, you're not willing to do it at all.<br /><br />There are various behavioural quirks at play that make us willing to take the bet 100 times, but not once. We hate to have a chance of losing money even when we could win twice as much. And once we've won some money (with high probability in the first 99 trials), we're more relaxed about playing with "house money." These things are irrational, but they're part of how we think.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-83271381447807160362016-06-21T09:33:43.239-04:002016-06-21T09:33:43.239-04:00@John: I enjoyed both books. Unfortunately, I did...@John: I enjoyed both books. Unfortunately, I didn't do full reviews back than and just picked out one part to write about:<br /><br />http://www.michaeljamesonmoney.com/2008/09/be-first-to-order-in-restaurant.html<br /><br />http://www.michaeljamesonmoney.com/2008/10/two-bad-stock-market-days-in-row.htmlMichael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-11691921900783426562016-06-21T09:33:42.942-04:002016-06-21T09:33:42.942-04:00So why is the "win $200-lose $100" 100 t...So why is the "win $200-lose $100" 100 times vs 1 time irrational? This seems like the kind of thing that I might agree to do... :(Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-58326294574974662722016-06-21T09:17:07.965-04:002016-06-21T09:17:07.965-04:00I really enjoyed this book as well. You might enj...I really enjoyed this book as well. You might enjoy "Predictably Irrational" (and anything else by Dan Ariely) and "Your Money and Your Brain" by Jason Zweig if you liked this.John Ryanhttp://www.moneytimeblog.comnoreply@blogger.com