BEHAVIORAL
INVESTING
DEMYSTIFYING THE PSYCHOLOGICAL
DRIVERS OF GLOBAL MARKETS
Digital October
Knowledge Exchange
Moscow
No...
WHAT FACTORS PREDICTABLY DRIVE
MARKET PRICES?
PRIMARILY ECONOMIC FUNDAMENTALS?
PRIMARILY PRICE PATTERNS?
PRIMARILY INVESTOR PSYCHOLOGY?
COMPLEX INTERACTION?
INFORMATION
BEHAVIOR

BRAIN
ABOUT
MARKETPSYCH
MARKETPSYCH HAS DEVELOPED
APPLIED BEHAVIORAL FINANCE TOOLS
SINCE 2001.
Research group includes experts i...
BEHAVIORAL
/FINANCE

Behavioral Economics

Market Sentiment

Individual investors
make predictable
decisions when
experien...
YOUR MARKET
BRAIN
EMOTIONAL
/PRIMING
EXPERIMENT (Winkielman et al, 2007)
 People shown fearful or angry faces took less risk
in an investme...
EMOTION
/OVERVIEW
 The brain’s structure may
explain some individual
economic behaviors.
 Frontal Cortex
 Executive fun...
EMOTION
/REWARD SYSTEM





Excited motivation
Confidence
Desire
Dopamine

Knutson and Kuhnen, 2005
EMOTION
/LOSS AVOIDANCE





Threat perception
Memories of loss
Serotonin
Fear
EMOTION
/LOSS AVOIDANCE
YOUR MARKET
PERSONALITY
BRAIN
/PERSONALITY
• Investor’s Personality Test free online since
2004 at tests.marketpsych.com.
• 4,000+ respondents (20...
WHICH PERSONALITY TRAITS ARE KEY TO
INVESTING SUCCESSFULLY?
Emotionality

Emotional Stability

Extraversion

Introversion
...
MANAGING YOUR
MARKET
REACTIONS
“If you want a positive outlook, you’re going to
have to turn your chair around, Walter.”
19
TOOL
/GO TO G-R-O-U-N-D
Step 1: Managing Emotion
Ground in the present
Reappraise the situation
Observe your thoughts
Unde...
GET GROUNDED:
BE PRESENT IN YOUR CURRENT EXPERIENCE
REAPPRAISE THE SITUATION:
HOW TRULY SIGNIFICANT IN TERMS OF TIME, URGENCY, AND IMPACT?
IS THIS AN EXPECTED PART OF YOUR JO...
OBSERVE YOUR THOUGHTS:
OBSERVING WITH CURIOSITY, WITHOUT JUDGMENT, LET GO OF SELF
JUDGMENTS AND CRITICISMS.
UNDERSTAND WHA...
NOODLE ON IT:
RE-ENGAGE ANALYTICAL THOUGHT
DO SOMETHING:
MOVE FROM REASON TO ACTION
UNGROUNDED

The Cardinal Sin:

Attempting STEP 2 (action) before
addressing STEP 1 (managing emotion).
STEP 1: MARKETPSYCH PEARLS

 You can’t reason yourself out of a
position you didn’t reason yourself into.
 All emotions ...
INFORMATION,
CROWD EMOTION,
AND PRICE
BEHAVIOR
THOMSON REUTERS
MARKETPSYCH
INDICES (TRMI)

A summary of MarketPsych text analytics.

• Complex statistical
language proce...
WHAT IS THE ANGRIEST MONTH FOR INVESTORS?
September
WHAT IS THE MOST OPTIMISTIC MONTH?

December
MARKETS
/PSYCHOLOGICAL CYCLES
MARKETS

Egypt country data derived from textual analysis of global social media.
INVESTORS
USING
SENTIMENT
1.
2.
3.
4.

Timing Turning Points
Relative Value Screens
Identify Price Drivers
Gauge The Conse...
TIMING TURNING POINTS
MOVING AVERAGES

“We look to buy from
pessimists and sell to
optimists.”
~ Benjamin Graham
RELATIVE VALUE
U.S. ETF’S
Sector and industry
sentiments such as Anger
and PriceForecast (inverse)
correlate with future w...
MARKETS
/COUNTRIES

Question: What sentiment and macroeconomic factors drive international
equity returns?

SENTIMENT
OPTI...
RELATIVE
VALUE
GLOBAL
EQUITIES
Country sentiments such as
Joy and Government
Instability inversely
correlate with future
c...
MARKETS
/EXTREMES
Question: How can we test
the robustness of a rotational
strategy?
SENSITIVITY ANALYSIS

Returns are rob...
GLOBAL INVESTING
/EQUITY CURVE
MONTHLY ROTATIONAL
MODEL

Long on Government
Instability, Low Joy, and Loose
Fiscal Policy ...
MARKETS
/IDEAS
Question: What is the forecast
of the final rotational one-year
model in November 2013?
ONE YEAR MODEL

Lon...
ECONOMIC
FORECASTING
PREDICTING
PMI
Econometric models fit to country
PMI values since 2008. Updated
daily using the lates...
SUMMARY
/YOUR INVESTING BRAIN
1.

2.
3.

4.
5.

Investors can’t reason themselves out of an
investment they didn’t reason ...
SUMMARY
Check out our sentiment
tools, sign up for our free
newsletter, and take a
free Investor Personality
Test at:
www....
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Ричард Петерсон для Knowledge Stream

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Сегодня он успешно совмещает карьеру ученого, преподавателя, финансового консультанта и управляет инвестициями друзей и знакомых на фондовой бирже, используя технологию мониторинга новых медиа, собирающую и анализирующую настроения тысяч мелких и крупных экономических агентов. 27 ноября он рассказал об этом в центре Digital October.

http://digitaloctober.ru/ru/events/knowledge_stream_finansovyy_geniy

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  • This is the system that gets us involved in taking risk, excessively, and helps us to feel good about it. When danger lurks, the warning signs that the prefrontal cortex sees often don’t mesh with this system, and so this deeper limbic system wins out. It tends to deactivate the loss avoidance system as it becomes more active.
  • Ричард Петерсон для Knowledge Stream

    1. 1. BEHAVIORAL INVESTING DEMYSTIFYING THE PSYCHOLOGICAL DRIVERS OF GLOBAL MARKETS Digital October Knowledge Exchange Moscow November 27, 2013 Richard L. Peterson MarketPsych, LLC
    2. 2. WHAT FACTORS PREDICTABLY DRIVE MARKET PRICES?
    3. 3. PRIMARILY ECONOMIC FUNDAMENTALS?
    4. 4. PRIMARILY PRICE PATTERNS?
    5. 5. PRIMARILY INVESTOR PSYCHOLOGY?
    6. 6. COMPLEX INTERACTION? INFORMATION BEHAVIOR BRAIN
    7. 7. ABOUT MARKETPSYCH MARKETPSYCH HAS DEVELOPED APPLIED BEHAVIORAL FINANCE TOOLS SINCE 2001. Research group includes experts in quant finance, natural language processing, affective neuroscience, psychometrics, cloud computing and behavioral economics. Published research in academic journals, textbooks, and two award-winning books. Frequent appearances in financial media including BBC, WSJ, FT and Bloomberg.
    8. 8. BEHAVIORAL /FINANCE Behavioral Economics Market Sentiment Individual investors make predictable decisions when experiencing Stress, Uncertainty, Optimism, Trust, Fear, and other states. Sentiment has long been anecdotally associated with asset price fluctuations driven by crowds. Thomson Reuters MarketPsych Indices “All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis.” ~ Jesse Livermore, How To Trade In Stocks, 1927 MarketPsych partnered with Thomson Reuters to produce the most comprehensive quantitative data source for testing the predictive power of market sentiment.
    9. 9. YOUR MARKET BRAIN
    10. 10. EMOTIONAL /PRIMING EXPERIMENT (Winkielman et al, 2007)  People shown fearful or angry faces took less risk in an investment task, earning less money.  Happy face increased risk-taking 30% versus negative expressions.  Afterwards subjects denied that the faces had affected their judgment.  How does emotional priming affect investors’ decision making?
    11. 11. EMOTION /OVERVIEW  The brain’s structure may explain some individual economic behaviors.  Frontal Cortex  Executive function  Judgment “X-ray” view through the brain  Subcortex: Limbic system  Emotions  Drives  Desires
    12. 12. EMOTION /REWARD SYSTEM     Excited motivation Confidence Desire Dopamine Knutson and Kuhnen, 2005
    13. 13. EMOTION /LOSS AVOIDANCE     Threat perception Memories of loss Serotonin Fear
    14. 14. EMOTION /LOSS AVOIDANCE
    15. 15. YOUR MARKET PERSONALITY
    16. 16. BRAIN /PERSONALITY • Investor’s Personality Test free online since 2004 at tests.marketpsych.com. • 4,000+ respondents (20,000+ over all tests) from 89 countries. • Measuring the “Big Five” personality traits. • Collect largest drawdown, returns, experience, and demographic information. • The common reported mistakes are the same worldwide.
    17. 17. WHICH PERSONALITY TRAITS ARE KEY TO INVESTING SUCCESSFULLY? Emotionality Emotional Stability Extraversion Introversion Openness Traditionalism Agreeableness Self-Interest Conscientiousness Spontaneity
    18. 18. MANAGING YOUR MARKET REACTIONS
    19. 19. “If you want a positive outlook, you’re going to have to turn your chair around, Walter.” 19
    20. 20. TOOL /GO TO G-R-O-U-N-D Step 1: Managing Emotion Ground in the present Reappraise the situation Observe your thoughts Understand the emotion -----------------------Step 2: Thought and Action Noodle on it: Analyze Do Something: Take Action
    21. 21. GET GROUNDED: BE PRESENT IN YOUR CURRENT EXPERIENCE
    22. 22. REAPPRAISE THE SITUATION: HOW TRULY SIGNIFICANT IN TERMS OF TIME, URGENCY, AND IMPACT? IS THIS AN EXPECTED PART OF YOUR JOB AS A RISK TAKER? (PROBABLY YES)
    23. 23. OBSERVE YOUR THOUGHTS: OBSERVING WITH CURIOSITY, WITHOUT JUDGMENT, LET GO OF SELF JUDGMENTS AND CRITICISMS. UNDERSTAND WHAT USUALLY HAPPENS WHEN YOU FEEL LIKE THIS.
    24. 24. NOODLE ON IT: RE-ENGAGE ANALYTICAL THOUGHT
    25. 25. DO SOMETHING: MOVE FROM REASON TO ACTION
    26. 26. UNGROUNDED The Cardinal Sin: Attempting STEP 2 (action) before addressing STEP 1 (managing emotion).
    27. 27. STEP 1: MARKETPSYCH PEARLS  You can’t reason yourself out of a position you didn’t reason yourself into.  All emotions linger until they are actively grounded (good) or discharged (bad).  To (re)build discipline, take baby steps: commit and deliver.
    28. 28. INFORMATION, CROWD EMOTION, AND PRICE BEHAVIOR
    29. 29. THOMSON REUTERS MARKETPSYCH INDICES (TRMI) A summary of MarketPsych text analytics. • Complex statistical language processing. • 3,000 topics and sentiments scored. A selection of TRMI sentiments and macroeconomic indexes. • 40,000 specific companies, currencies, commodities, and countries tracked. • 2 million articles daily • 1998 to the present. • Social media and news media data feeds. Covering 35 commodities, 120 countries, 4000 equities, and 30 currencies.
    30. 30. WHAT IS THE ANGRIEST MONTH FOR INVESTORS? September
    31. 31. WHAT IS THE MOST OPTIMISTIC MONTH? December
    32. 32. MARKETS /PSYCHOLOGICAL CYCLES
    33. 33. MARKETS Egypt country data derived from textual analysis of global social media.
    34. 34. INVESTORS USING SENTIMENT 1. 2. 3. 4. Timing Turning Points Relative Value Screens Identify Price Drivers Gauge The Consensus Before Events 5. Forecast Economic Activity
    35. 35. TIMING TURNING POINTS MOVING AVERAGES “We look to buy from pessimists and sell to optimists.” ~ Benjamin Graham
    36. 36. RELATIVE VALUE U.S. ETF’S Sector and industry sentiments such as Anger and PriceForecast (inverse) correlate with future weekly ETF returns. Below are equity curves derived from going long the top four and shorting the bottom four of sector and industry ETFs weekly.
    37. 37. MARKETS /COUNTRIES Question: What sentiment and macroeconomic factors drive international equity returns? SENTIMENT OPTIMISM FEAR JOY TRUST VIOLENCE URGENCY UNCERTAINTY MARKET RISK BUDGET DEFICIT CREDIT DEFAULTS ECONOMIC GROWTH ELECTION SENTIMENT INFLATION GOVERNMENT INSTABILITY AND 19 MORE... Government Instability, 2012
    38. 38. RELATIVE VALUE GLOBAL EQUITIES Country sentiments such as Joy and Government Instability inversely correlate with future country stock index returns. White paper available. “Buy to the sound of cannons, sell to the sound of trumpets” ~ Baron Nathan Rothschild, 1812 Government Instability, 2012 See the Equity curves of simulated strategies below. Using a rolling window of the 20 countries most frequently mentioned in the news: • These strategies go short the top 20% of countries high in Joy (MP_JOY) and go long the 20% low in Joy. • For GovernmentInstability (MP_GVTINST), they go long the most unstable 20% of countries and short the most stable 20%.
    39. 39. MARKETS /EXTREMES Question: How can we test the robustness of a rotational strategy? SENSITIVITY ANALYSIS Returns are robust and increasing with rank.
    40. 40. GLOBAL INVESTING /EQUITY CURVE MONTHLY ROTATIONAL MODEL Long on Government Instability, Low Joy, and Loose Fiscal Policy among others.
    41. 41. MARKETS /IDEAS Question: What is the forecast of the final rotational one-year model in November 2013? ONE YEAR MODEL Long on Government Instability, Disasters, and Low Joy. 1-YEAR LONGS: Russia and Indonesia 1-YEAR SHORTS: Australia and Japan
    42. 42. ECONOMIC FORECASTING PREDICTING PMI Econometric models fit to country PMI values since 2008. Updated daily using the latest news about a country’s economic activity and sentiment. Models predict Flash PMI releases.
    43. 43. SUMMARY /YOUR INVESTING BRAIN 1. 2. 3. 4. 5. Investors can’t reason themselves out of an investment they didn’t reason themselves into. G-R-O-U-N-D yourself when feeling emotional to reduce decision mistakes. In addition to fundamentals and technicals, consider market emotion. Social media and news content exacerbate emotion-based biases. Saavy funds trade against high investor emotion and consensus in news and social media flow.
    44. 44. SUMMARY Check out our sentiment tools, sign up for our free newsletter, and take a free Investor Personality Test at: www.marketpsych.com Sentiment Data Has Predictive Value Sentiment Indicators Relative Value Screens Price Drivers Anticipated Events Economic Forecasting

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