Behavioural finance rant

MrMagoo · Post by **MrMagoo** » Tue May 29, 2012 9:46 pm

about the greenspan example :

For the Behavioral Finance explanation to be correct you have to assume he was acting in good faith.

What if the oldman knew what he was doing, but his actions were captured by a wall street / ivory tower academy lobby, set to maximize short-term bank profits ?

There's a thin line between misaligned incentives leading to rational actions with disastrous longer-term consequences and a truly cognitive/emotional error.

Strange · Post by **Strange** » Sat Jun 16, 2012 7:11 pm

Observing my boss over the course of this year, I am coming to conclusion that whatever negative things BF has to say about traders are definitely true.

granchio · Post by **granchio** » Sun Jun 17, 2012 1:16 pm

>Observing my boss over the course of this year, I am coming to conclusion that >whatever negative things BF has to say about traders are definitely true.

I observe myself, and come to the same conclusion

pj · Post by pj » Sun Jun 17, 2012 1:59 pm

Gentlemen,

So you think that "rational" homo economicus is the thing to emulate?

Strange · Post by **Strange** » Sun Jun 17, 2012 6:54 pm

My conclusions/observations are as follows:

(1) You take a bunch of monkeys, half of them randomly goes short, the other half goes long. At the end of the year, you pay and promote the winners. Keep repeating the process again on the "winners circle" until you are left with two-three monkeys that had a few repetitive wins (and know how to kiss ass). Each one of these monkeys will think that they are geniuses and can not do wrong.

(2) Because of the positive reinforcement, most sell-side senior traders have strong cognitive biases. Personally, i think overconfidence is an all-time worst, with anchoring and recency competing for the second spot.

(3) If you are a cynic, lack self esteem, are perpetually depressed and constantly doubt yourself, you are going to produce a much better P&L stream. You are also going to lean to trade more systematically, as this way of trading is more comfortable for self-doubters ("well, I suck, but at least I back-tested it to the best of my ability"). Usually, you will spend as much time analyzing why some trade has worked as if it did not - "was this luck or did I do something right for a change?".

(4) In a sell-side institution, the actual trading ability is not what gets you paid and promoted. The "supreme beings" that get MD titles and hot seats are not the guys that produce steady P&L streams or know how leverage the franchise, but rather people that take big swings for the fences.