Interesting Quotes: 29 Dec 2017

1. Loss aversion causes investors to shy away from stocks; therefore, stocks earned very large returns relative to risk free government securities.

2. When the stakes are smaller, people actually become more tolerant of risk, not less tolerant.

3. There are 2 main implications of investor overconfidence. The first is that investors take bad bets because they fail to realize that they are at an informational disadvantage. The second is that they trade more frequently than is prudent, which leads to excessive trading volume.

4. The departure of price from fundamental value does not automatically lead to risk-free profit opportunities. In fact, the "SMART MONEY" may avoid some trades, although they have identified mis-pricing. Why? Because of non-fundamental risk, meaning risk associated with unpredictable sentiment.

Interesting Quotes : 28 Dec 2017

1. Many investors will not sell anything at a loss. They don't want to give up the hope of making money on a particular investment, or perhaps they want to get even (equal to purchase value) before they get out. The "get-evenitis" disease has probably wrought more destruction on investment portfolios than anything else. Investors who accept losses can no longer prattle to their loved ones, " Honey, it is only a paper loss. Just wait. It will come back."

2. People are not uniform in their tolerance for risk. It depends on the situation. Many appear to tolerate risk more readily when they face the prospect of a loss than they do not.

3. Dividends are labeled as income, not capital. And investors tend to frame dividends as income, not capital. Again, this is frame dependence. Investors feel quite comfortable choosing a portfolio of stocks that feature high dividend payouts and spending those dividends.

4. Imagine someone who makes a decision that turned out badly and engages in self-recrimination for not having done the right thing. REGRET is the emotion experienced for not having made the right decision. REGRET is more than the pain of loss. It is the pain associated with feeling responsible for the loss.

5. REGRET minimization also leads some investors to use dividends, instead of selling stock, to finance consumer expenditures. Those who sell stock to finance a purchase, only to find that shortly thereafter the stock prices soars, are liable to feel considerable regret.

6. There are several emotional issues regarding loss and gain, the most fundamental of which is that people tend to feel losses much more acutely than they feel gains of comparable magnitude. This Phenomenon has come to be known as LOSS AVERSION. 

Interesting Quotes in Behavior Finance

1. People commit errors in the course of decision making; and these errors cause the prices of securities to be different from what they would have been in an error-free environment.

2. Investors overreact to both bad news and good news. Therefore, overreaction leads past losers to become under priced and past winners to become overpriced.

3. Disposition Effect: Investors are predisposed to holding losers too long and selling winners too early.

4. Long term earnings forecasts made by security analysts tend to be biased in the direction of recent success. Specifically, analysts overreact in that they are much more optimistic about recent winners than they are about recent losers. 

5. When people are overconfident, they set overly narrow confidence bands. They set their high guess too low and their low guess too high. 

6. Conservatism: Most of the security analysts react to earnings announcements: They do not revise their earnings estimates enough to reflect the new information. Consequently, positive earnings surprises tend to be followed by more positive earnings surprises, and negative surprises by more negative surprises.