Psychology,Risk

andInvestment

DanielKahneman,PhD

PrincetonUniversity

Thestandardtheory

Therationalagentofeconomictheory:hasconsistentopinionsandbeliefs

usesallavailableinformationunbiasedbyemotion,‘herd’effectshascoherentpreferences

tangiblemotives(wealth,security)unaffectedby‘framing’ofproblems

BehavioralFinanceInputsfrompsychologyCognitiveerrorsEmotionalfactorsOuragendatodayBoldforecasts--errorsinjudgingtheoddsNarrowframingofdecisionsLossaversion--errorsinvaluingrisksFocusonindividualinvestors….ButexpertsarenotimmuneBoldForecasts—OptimismBiasRosyviewoflikelyoutcomes Becomingrichandfamous Becominganalcoholic HavingcancerExaggerationofskills 80-90%areabovemedian

Drivingskill SenseofhumorBoldForecasts—OptimismBias(continued)IllusionofcontrolExaggerateelementofskillDenytheroleofchanceOptimismaboutspecificchoicesWhydopeopleopenarestaurantwheremanyrestaurantshavefailed?OverconfidenceMakeaHIGHestimateoftheexchangerateon1/1/04 Youshouldbe99%sure

thatyourestimateistoohighMakeaLOWestimateoftheexchangerateon1/1/04 Youshouldbe99%sure

thatyourestimateistoolowOverconfidence(continued)Youshouldbe98%surethatthetruevaluewillfallinsideyourconfidenceintervalYoushouldhaveaprobabilityof2%thattheoutcomewillbeasurpriseatthe2%level

Overconfidence(continued)

FACT:massiveoverconfidence

Often20%surprisesatthe2%level 10-15%surpriseswhen“absolutelysure”

CAUSE:Limitedimagination Surprisesoccurinmanyunlikelyways

RESULT:underestimationofuncertaintyOptimisticOverconfidenceintheMarket

WhydoyouthinkYOUcanbeatthemarket?Thecostofhavingideas

(TerryOdean’sresearch) Whenaninvestorsellsastockand immediatelybuysanother:

thestockthatissolddoesbetterby3.5% inthefollowingyearFraming:differentwaystothinkaboutadecisionDifferentwaystothinkaboutcoldcuts:‘10%fat’or‘90%fat-free’Peopleframetheirowndecisions:somewaystothinkaboutadecisionproblemaremorenaturalthanothers

Framesvaryinbreadth:peopletendtoadoptframesthatareoverlynarrowFramingafinancialdecision:

Gains/lossesvs.wealthwouldyouacceptthisgamble?50%chancetowin$15,00050%chancetolose$10,000Nowmakeacrudeestimateofyourwealth

wouldyouacceptthisgamble?50%chance:yourwealth+15K50%chance:yourwealth-10Kgain/lossframevswealthframeComparingtheframesWhichframeismorenatural?

wenormallythinkintermsofgain/lossWhichframeismorereasonable?

thebroaderviewEffectsoftheframesgain/lossframe---extremeriskaversionwealthframe---closertoriskneutralityTheaversiontolossesConsiderthisgamble50%tolose$10050%towin$XWhatXmakesthegambleacceptable?Acommonanswer:$200--$250Coefficientoflossaversionisabout2.5AnotherpairofchoicesWouldyouacceptthisgamble?50%tolose$100050%towin$1500

mostpeoplerefuseWouldyouaccept10suchgambles?

mostpeopleacceptIsthisyourlastriskydecision?Whichframeisbroader?morereasonable?Lossaversion&narrowframing:

the‘dispositioneffect’Sellingstocks:Peopletendtohangontolosers,stocksthatarenowworthlessthantheirpurchaseprice.Theytendtosellwinners

But…taxesAndwinnersdobetterintheshortrunThemoral: Havingdifferentattitudesto winnersandloserscostsmoney“Near-proportional”riskattitudesWhatisyourcashequivalentfor(100,.5)?Whatisyourcashequivalentfor(1,000,.5)?Howabout(10,000,.50)?TheCErisesalmostasfastasthestakesCoefficientoflossaversionalsostableWhydoesthisnotmakesense?lifeoffersmoresmallgambles,andthelawoflargenumbersreducesrelativeriskApplicationstounderstandingofmarketphenomenaTwomajorpuzzles:Theequity-premiumhasbeenabout7%Highvolumeoftrade--littleinformationTheanswers:“Myopiclossaversion”(BenartziandThaler)Overconfidenceoftraders(Odean)Exceptionstoriskaversion:

LongshotsPeoplebuylotterytickets

Choosebetween50%towin5Kand50%towin15K95%towin9Kand5%towin29KExceptionstoriskaversion:

RiskseekinginlossesChoosebetween90%tolose$2,000lose$1,800forsureThisisachoicebetweenasurelossandahighprobabilityofanevenlargerloss,withasmallchancetostayevenPeoplechoosetogambleThecertaintyofalossmakesitmoreaversiveRisk-seekingdecisionsAcceptingdefeat,orfightingonSettlingabadcase,orlitigatingabadcase?EscalatingcommitmentThedifficultyof“cuttinglosses”VerycommoninbadinvestmentsThe“agencyproblem”incommitmentPerseveranceinthefaceofadversityDecisionsofexecutiveswithnothingtoloseBeha披vior榨alT慰heor組y:壓The糊Real粗Inv雖esto丹rNar濁row玻fr冰ami釣ng艇exa宜cer單bat鍵es謙two顆bi怎ase挨sOpt幟imi灣sti沒cb川ias–bold令for恐ecas努tsRis舊ka毒ver就sio境n–tim鋸id曉dec會(huì)isi掀ons(Ka獵hne輸man撞an姓dL餃ova厘llo邀,1老993汪)Most序of題what肉has酬be扣ens吐aid究appl交ies翅t(yī)oe索xper嘉tsHig本hly往in纖acc耕ura絹te轟and夸ov銷erc協(xié)onf葵ide脫ntLos伙sa叔ver側(cè)se救und攜er帝sup鐵erv怪isi牙onRisk饅-see衫king需to現(xiàn)avoi排dsu盾rel戀osse房誠sInd摸ivi憑dua饒ls證vs.液Or粱gan事iza季tio內(nèi)nsOrg炕ani襯zat斃ion規(guī)sa歇re作lia隔ble防to例ov出erc泛onf慶ide欣nceNot姥immu直net派ori閑ske啟rror沸sButOrg惕ani愁zat療ion非sh彩ave法br霧oad授er專fra縮慧mesOrg當(dāng)ani刊zat口ion累sh哀ave笛br棚oad獎(jiǎng)er對(duì)att統(tǒng)ent蓮ion茂sp旁anNot就afa信irc滿onte于st…Reg撒ret佛:T殖he集nex共tr茶ese惕arc缺hf伙ron映tie喇r?Dete涉rmin詞ants迅of塵regr值etHin幟dsi豬ghtComi映ngc還loseComm淹issi頓on>室omi囑ssio叼nEffe謎cts豆ofr尺egre度tAnti趟cipa樸ted弱regr授et情-刃-c隆onse屬rvat寒ismUnan拌tici我pate隔dre掘gret市--慶not艙sta冬ying嘉the與cou厲rseHin識(shí)dsi吊ghtThe柿inev屯itab疏ilit偏yof將the叉pas摩tMon蝦day濁mo直rni調(diào)ng匠qua商rte利rba悄cksEven聯(lián)ing-腫afte術(shù)rDo弱w-Jo抹nes蒸geni順usesDis墊tor妻tin遞gp壺ast睡od畜ds"It舅wa拘sa炭lwa傷ys采obv之iou鼠s"Dis良tor劫tin據(jù)gy悄our始o(jì)w小np索ast扒be料lie跨fs"I挖alw喘ays嶺kn世ew存it"蚊is競no鄭be螞tte胳rDen累yin赤gt薦he漂unc鳴ert屯ain高ty夏of殼the瞧pa醋stImp倚l(wèi)ic圍ati肌ons搞fo殲ru為nce嘉rta橋int籃yo旗ff疊utu托reThe英Pa憤ins嘴of安a與Clo朗se望Mis暴sMiss粘ing智afl妹ightMr.呆Te徐es堆a(bǔ)nd甘Mr狐.C震ran當(dāng)ew蛙ere恰sc寬hed諷ule種dt遷ol窯eav褲ethe妥ai壺rpo牌rt趕on幸dif穴fer羨ent史fl病igh管ts,疼at竄th驅(qū)es飲ame嚇ti債me.The羨yt晝r(jià)av布ele餐dt殖oge押the融rf暗rom旋to莊wn韻in舒the兇sa賭melim晶ous瓦ine謀,w籮ere嶺ca解ugh宏ti拼na間tr僵aff搏ic闖jam歐,a濫ndarr燙ive妖da城tt鹽he獎(jiǎng)air嗽por股t3柿0m跪inu朱tes醋af突ter雨th孟esch抓edu湯led沸de棉par驢tur修et碎ime袋of拖th夜eir培fl耀igh獅ts.The叮Pain甲sof破aC拒lose魔Mis文s(con惹tinu依ed)Mr.杠Cr面ane顛is襲to量ld疲tha綁th污is斗fli攀ght筍le捕ft喬on甘tim處eMr.叼Tees瞧is芝told孫tha俊thi踏sfl送ight徒was趁del堤ayed成,and氏just歡lef胳tfi糕vem世inut逮esa嬌goWho蝴of她th協(xié)em企is查mor窯eu搖pse炎t?---殿---罪---旁---顫---割---鹽---槍---賽---禮---枕---涌---博---乘---雙---抗---仇-Doll鎮(zhèn)ar-c錢ost羨aver糾agin河gReg補(bǔ)ret犯so岡fO求mis蓋sio抗na濟(jì)nd渡Com派mis域sio挑nMr.屯Pa書ul苗own脆ed喪sha遲res通in評(píng)co欣m(xù)pa堵ny伴A.伏Dur標(biāo)ing鳳th欣ep淚ast諷ye佩ar遠(yuǎn)he顯con斬sid蹈ere籠ds慈wit多chi蠟ng頓to濫sto死cks剖in避co搬mpa莖ny區(qū)B,傷but頌he勸de茅cid查ed遣aga栗ins恐ti箏t.兼He悄now調(diào)fi掏nds清th徒at甩he刊wou深ld晃hav帖eb夏een損be關(guān)tte斷ro鳳ff聞by消$20也,00艙