Putting money in your mattress will not help if your house burns down; and there are ways of reducing the risks that come with the behavioural biases involved in investor decision-making. Thus writes Erica Wolf in a paper titled, Why the house always wins: A behavioural perspective on investor trading in the stock market(www.ssrn.com) .

The author opens with questions, such as “Why do so many people buy high and sell low?” “Why do some people buy stock, but never open their account statements?” and “Why do some people stay up all night in ‘after hours' trading obsessing over the same ticker symbol?”

Stating that the answers go beyond the base emotions of greed and fear, Wolf explores the motivations and rationales underlying the decisions of individual investors.

For instance, a section on the ‘House Money' effect speaks of the long-standing parallels between the stock market and the casino. The author notes that, contrary to the “random walk” theory — which purports that the price of a stock yesterday and today has no bearing on the price of the stock tomorrow some investors believe that a stock that has been successful is “due” to drop, whereas an unsuccessful one is “due” to rise.

Citing Nassim Nicholas Taleb, the author reminds that few investors understand probability and often attribute good results to themselves, when in fact, they were merely lucky.

The paper concludes with a sombre caution that attempts to outmanoeuvre the market almost always fail. Hence, the author advises investors to either accept the uncertainty of stock market risk or get out of the game. And to small, risk-averse investors, her counsel is for less investment in individual stocks, and more investment in mutual funds.

Educative material, that ranks high in the site, in terms of download counts.

The investor Keynes

“The avoidance of taxes is the only intellectual pursuit that carries any reward.” “Words ought to be a little wild for they are the assaults of thought on the unthinking.” “The market can stay irrational longer than you can stay solvent.” These are some of the quotes that show up in a page devoted to John Maynard Keynes at www.quotationspage.com . But the Keynes you would read in a recent paper by David Chambers and Elroy Dimson is, Keynes the stock market investor .

The authors aver that the most overlooked of Keynes's many accomplishments is that he was among the first institutional managers to allocate majority of his portfolio to the new alternative asset class of equities.

Interestingly, the almost complete record of Keynes's trading has remained dormant in the King's College Archives, and it provides the detail on security holdings and transactions, the paper states.

This information, the authors use for reconstructing Keynes's investment decision-making and they find that Keynes started out as a strategic macro-manager, and changed into a bottom-up stock picker in the early 1930s from which point his purchases of his long-term holdings began to outperform the market on a consistent basis.

In the authors' view, Keynes' willingness to take a variety of risks in the King's portfolio and to depart dramatically both from the market and institutional consensus exemplifies the opportunity available to long-term investors such as endowments to be unconventional in their portfolio choices. A caveat, though, is expressed through a reference to the work by Lerner, Schoar and Wang (2008) who had analysed the leading Ivy League endowments — that idiosyncratic investment approaches such as of Keynes are difficult for the vast majority of managers to replicate.

Instructive read.

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