Friday, September 28, 2007
Learning from Falkenstein
Its Succoth here, a ten days long Jewish holiday, when Jews live in succoth (temporary huts). Israel has the world most non-working public holidays. I just made a call related to one of my projects, and by courtesy I asked if it was inconvenient, and the answer was a gross - Yes, this is a very bad time. Discouraged, stopped working and am reading Mahalanobis old posts. He writes about Markowitz, but it is all in old old (fifty years old) text books. About indices, I have my free Microsoft website selector (mine? free for all), which allows me and my dog (should I have one) rank all the universe's shares by anything - momentum, profits/capitalization, accruals, alphabetic order, number of Hungarian Jews in the management, whatever. But something he published in 2005 is very interesting: Experiments show that individuals with a specific type of brain damage, which prevents them from feeling fear, outperform normal players when it comes to making some investment decisions. Crack and methamphetamine addicts as well as alcoholics similarly outperform. According to James Montier, a global equity strategist at Dresdner Kleinwort Wasserstein who has an interest in behavioural finance, the impared ability of these groups to feel fear can help them to make better investment decisions because it makes them more tolerant of short term losses. This makes them bigger risk takers in situations where risk taking is rewarded. "Assuming that risk is rewarded in financial markets, then the best investors are likely to be those who can keep their emotions in check", says Montier.Alcoholics in general outperform other people, I think, because their brain arteries are less calcified. The pic shows Bluto, the Faber Business School's star student ("Knowledge is Good"). Alcoholic ab ovum and probably brain-damaged, he became a Senator and a great financier.
Hotshots: It could also explain why the archetypal hotshot trader behaves so differently from most in polite society and why the 1980s was such a great period in the markets [huh?]. Montier also finds useful lessons for investors from animal behaviour. Pigeons and rats, for example, are better at predicting [certain] sequences than human beings because they don't attempt to find patterns where none exist. For example, when presented with a random sequence of red and green lights, in which one colour flashes 70% of the time, animals will always choose the dominant colour. Humans, by contrast, attempt to match the frequency to look for patterns even if none exist. "So the next time you think you spot a pattern, think twice," warns Montier.