5 когнитивных ошибок, killing your profitability

George Dvorsky (George Dvorsky) once wrote: “The human brain is capable of performing 10 ^ 16 processes per second, making it a much more powerful tool, than any computer currently in existence. But that doesn't mean, that our brain has no serious limitations. A humble calculator can do calculations a thousand times better, than we, and our memory is often not very useful - yet, мы подвержены когнитивным ошибкам (cognitive biases), these annoying glitches of our thinking, which force you to make dubious decisions and come to erroneous conclusions".

Cognitive errors are the bane of portfolio managers, because they reduce our ability to remain emotionally disconnected from money. As history shows, when it comes to investing your own money, investors always do the "opposite", what should be done. They "buy at the maximum", as greed prevails over logic, and "sell at the minimum", because fear disrupts the decision-making process.

Here 5 the most insidious mistakes, which will prevent you from achieving long-term investment goals.

1) Предвзятость подтверждения (confirmation bias).

People tend to seek information, which matches their current beliefs. If it is considered, what stock market will grow, then they, usually, looking for only that news and only that information, which confirm this position. This confirmation bias error is a major driver of the psychological investment cycle of private investors., представленного ниже.

Net capital flows versus S&P 500

Green columns – three-month average net capital flows
Black line - index S&P 500
Growth – the change in the condition of people from depression to euphoria
The fall – changing people's condition from anxiety to despair

The issue of “confirmation bias” also poses a problem for the media.. Since the media needs paid advertisers to generate their income, then viewers and readers are paramount to gaining such customers. When financial markets rise, refuting the point of view of financial bears, investors are looking for sources to confirm their current opinions. People want reassurance, what do they think right. We are human beings, and we hate, when they say, that we are wrong, so we tend to look for sources, who say, that we are right.

2) Erroneous conclusion of a gambler (gamblers’ fallacy).

The gambler's wrong conclusion is one of the biggest problems, people face when investing. Because people are ruled by emotions, then we tend to attach great weight to previous events, Believing, that in the future the results will be about the same.

This mistake is explicitly described at the end of every part of the financial literature.. "Past performance is not a guarantee of future performance". but, despite, that this statement is everywhere in the financial universe, people ignore the warning over and over again and focus on the latest return, expecting similar results in the future.

This is one of the key problems, which affects the long-term profitability of the investor. The pursuit of profitability has a high propensity for permanent failure., failures constantly force investors to jump from one strategy to another at the end of the cycle. This is shown below in the periodic table of returns. A succession of successes, usually, last on average only 2-3 of the year, before you finish.

Callan's periodic table of return on investment
Annual returns on key indices in order of performance (1994-2013)

Для наглядности я выделил доходность индекса Russell 2000, but the main, what should you notice, this is what, what all, what is at the top of the list in some years tends to fall to the bottom of the list in subsequent years. Pursuit of profitability – one of the main reasons for the decrease in the long-term profitability of the investor.

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3) Disregard for probability (probability neglect)

When it comes to taking risks, there are two ways to assess the potential result. There are "possibilities" and "probabilities". As humans we are, usually, we tend to, what is possible, for example, win the lottery. The statistical probability of winning the lottery is very small. Actually, you are more likely to die on the way to the kiosk, where are you going to buy a lottery ticket, чем выиграть. Nevertheless, the "opportunity" to become fabulously rich makes the lottery an extremely successful "tax on poor people".

Nevertheless, as investors, we tend to disregard the likelihood – a statistical measure of risk, assumed in any investment. As individuals, our mistake is chasing stocks, which have already shown the largest price increase, because "maybe", that they can grow even higher. Although "most likely", most of the profit is already built into the current movement, and a correction is approaching.

Robert Rubin, former finance minister, once stated: “Over the years, I have been guided by four principles to make decisions.. Firstly, the only certainty is, что нет никакой определенности. Secondly, every decision, Consequently, is the result of weighing the probabilities. Thirdly, despite the uncertainty, we have to make a decision, and we must act. AND, finally, we must judge decisions not only by results, but also because, how they were accepted.

Most people reject uncertainty. Они полагают, what will they be lucky, and that the unpredictable can be reliably predicted. It brings the business to life by fortune-tellers, psychics and brokers, but this is a terrible way to deal with uncertainty. If there are no absolute conclusions, then all decisions are based on judgments about the likelihood of different outcomes, and also on the costs and benefits of each of them. Then, on that basis, a good decision can be made.".

Neglecting likelihood is another important component of being, why investors are constantly buying at the maximum and selling at the minimum.

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4) Herd behavior (herd bias)

People, usually, "Follow the crowd", sometimes unknowingly. Much of this behavior is related to the need for confirmation of decisions made., and with the need for recognition. Thought is, what if everyone does something, then, If i want, to be recognized, I have to do the same.

In life, conformity to the norm is socially acceptable and is expected in many cases.. However, in financial markets, herd behavior leads to market excesses during the rise and fall..

As Howard Marks once said (Howard Marks): "Resist - and thereby achieve success as the opposite (contrarian) investor is not easy at all. Events combine, making it difficult; including natural herd tendencies and the agony of, that you're out of step with the rest, as momentum invariably makes pro-cyclical actions look right for some time. This is why it is very important to remember, that go too far ahead of your time, это все равно, that to be wrong".

Given the uncertainty of the future, And, respectively, the difficulty of being sure of the correctness of your position – especially since the price is moving against you – it is difficult to be a lonely opposite investor..

Moving against the herd allows investors to generate most of the profits in the long run. Difficulty for most people, Unfortunately, is, to know, when to bet against panic flight.

5) Anchor effect (anchoring effect)

Error, also known as the relativity trap (relativity trap), lies in the tendency to compare the current situation with one's own limited experience. For example, i bet, what could you tell me, how much did you pay for your first home, and how much did you end up selling it for. However, can you tell, exactly how much did you pay for your first bar of soap, first hamburger or first pair of shoes? Probably, No.

Причина заключается в том, that buying a house is one of the main events in life. Therefore, we attach special importance to this event and remember it vividly.. And if the subsequent sale of the house cost more than buying it, then it was a positive event, and therefore we will consider, that the next home purchase will have the same result. We mentally "cling to" this event and make future decisions based on very limited data..

When it comes to investing, we often do the same. If we buy shares, and they rise in value, then we remember this event. In this way, we cling to these promotions, and not for you, who have lost their value. People, usually, avoid stocks, which fell in value, even if they were just bought and sold at the wrong moment by the mistake of the investor. Finally, it's not our fault, that investment lost money, it was just bad stock. So in fact?

This anchoring effect over time also contributes to the pursuit of profitability.. If you made money off ABC stocks, but lost money on DEF stocks, then you "cling" to ABC shares and keep buying them, while they grow. When stocks begin their inevitable reversal, investors still cling to past performance, until the agony of owning these shares exceeds the emotional threshold. Then they sell in panic, "clinging" to negative experiences and never buy ABC shares again.

Finally, we are all just people. Despite the best intentions, it is almost impossible for a person to get rid of emotional mistakes, which inevitably lead to poor investment decisions over time. This is why all great investors try to adhere strictly to investment discipline., which they follow, to reduce the impact of human emotions.

Take a break from the media and Wall Street comments for a minute., give an honest assessment of the financial markets. Is the current expansion of financial markets rational? What people are currently evaluating in the markets: "Possibilities" or "probabilities"?

Being human, we bring our hard earned savings to Wall Street casinos. Our job is, to place a bet, when the odds of winning are in our favor. At abnormally low interest rates, rising inflation, экономических данных, continuing to muddle, and ending support for the Federal Reserve, how strong is your hand, which you place your bets?

перевод http://www.long-short.ru/post/5-kognitivnyh-oshibok-ubivayuschih-vashu-dohodnost-746
author: Lance Roberts
A source: 5 Cognitive Biases That Are Killing Your Returns

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