"a concern for skill reputation can help explain the central
prediction of prospect theory that people tend to overweight small
probabilities and underweight large probabilities"

Taken from the abstract:
Skill Reputation, Prospect Theory, and Regret Theory
RICK HARBAUGH, March 2002
Claremont McKenna College - Department of Economics
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=311409

PG

http://www.wilmott.com/310/today_detail.cfm?articleID=20




Emotionomics 1: Finance and Psychology: Dangerous Liaison or Marriage of
Convenience?
Henriette Prast
Introduction
Recent research in finance acknowledges that market participants herd, over-
and under-react to news, and panic. These phenomena are difficult to explain
within the framework of traditional rational expectations and efficient markets
theory. Finance theory has given it a try by developing a new area of research:
behavioral finance. Some authors in this field remain within the paradigm of
rational economic man. Desperate to hang on to their belief in rationality,
they construct concepts of human behavior that inevitably lead to the
conclusion that the observed 'irregularities' can be explained by optimizing
behavior of agents who use all available information in the most efficient
manner. The problem is that these concepts are merely theoretical inventions
developed in order to obtain the hoped-for result. They are not based on
empirical evidence on how people of flesh and blood gather, interpret and use
information. A more promising approach within the field of behavioral finance
uses the insight provided by cognitive psychologists - and supported by
empirical evidence from numerous experimental studies - that the human mind
treats information in a biased way.

In 1936 Keynes stressed animal spirits and a gambling instinct as driving
forces among entrepreneurs and investors.1 After World War II, economists
forgot his wise ideas and concentrated on the so-called rational economic man
or 'homo economicus'. Economic decision-making was depicted as the outcome of
maximization of a symmetric utility function, using all available information
in an unbiased way. Puzzling behavior observed in the real world was explained
by information asymmetries only. That some phenomena could be the result of
irrationalities was beyond the scope of the economist. However, some recent
examples of irregularities in financial markets suggest that even investors are
human beings, subject to emotions like anyone else.

Take the life of the euro since its birth on January 1, 1999. Initially, friend
and foe attributed the fall of the currency to economic fundamentals, with the
difference in GDP growth rates between the US and the euro area being the most
likely culprit. However, this position was difficult to maintain and recent
research shows that investors in currency markets show a biased reaction to
news: positive news about the US makes them buy US dollars, whereas good
European news fails to make them switch to the euro.2  A second example is the
development of technology stock prices. Empirical research at the University of
Amsterdam has indicated that the hype in technology stocks on the Amsterdam
Stock Exchange (AEX), which ended in March 2000 shortly after the glamorous
introduction of World Online, was at least partly due to a biased reaction by
investors to news about the IT sector. A third example is, again, found in the
Amsterdam stock market. Research for the period 1983-1999 indicates that from
the third year after their initial public offering (IPO) the performance of
newcomers on the AEX, measured by stock prices, stays significantly behind that
of established firms, with the difference increasing to 30% in the fifth year.
Further analysis shows that soon after their IPO, growth and profits of
newcomers fall. This is not reflected in stock prices until the third year. The
researchers conclude that investors react with a long lag to bad news about the
newcomers, something they feel unable to explain.3  A fourth example dates back
to the Asian crisis. Kaminsky and Schmukler4  try to explain the twenty largest
one-day swings in stock prices in nine Asian countries during 1997 and 1998.
They find that some of these swings cannot be adequately explained by economic
or political news only. With the deepening of the crisis, stock prices
overreact, and investors react more strongly to bad news than to good news.
Kaminsky and Schmukler explain this by assuming that bad news in crisis
episodes increases uncertainty. However, they do not explain what kind of
mechanism would be at work here.

Behavioral finance
These financial market irregularities have in common that investors over- and
under-react to news, exhibit herding behavior and may suddenly, without
apparent rational reason, panic. From the point of view of economic rationality
and efficient markets theory, the phenomena described here seem to be
anomalies. The overwhelming evidence of apparent market inefficiencies has
prompted finance theory to develop a new area of research: behavioral finance.
Two main approaches can be distinguished. The first preserves the rationality
assumption, the second takes a radically different approach by applying
concepts from cognitive psychology to explain investor behavior.
The rational investor  Within the paradigm of rational expectations several
explanations have been offered for financial market anomalies like herding. In
some models it is assumed that the utility function of market participants
contains more than only the risk and return of an investment. In others, the
observed actions by other investors are considered to be an important source of
information.

Investment and reputation
An example of the first is the reputational model by Scharfstein and Stein
(1990). S&S assume that professional market participants - investment analysts,
fund managers - are afraid that they have below-average abilities. Therefore,
they want to disappear in the crowd:  'Worldly wisdom teaches that it is better
for reputation to fail conventionally than to succeed unconventionally' 5

Obviously, this motto does not apply to those who know themselves to be
extremely talented. But the world is full of Peter Keatings, whereas one seldom
meets a Howard Roark.6  In the model by S&S, the investment analyst's income
depends on his reputation among the public, his potential clients. The
reputation is based on a benchmark or on relative performance. Analysts (fund
managers) are smart or dumb: they are or are not able to distinguish between
relevant and irrelevant information. Nobody knows who are the smart and who are
the dumb ones, in fact nobody is supposed to know his own intelligence. The
investment outcome is either high and low, and the analysts receive a signal
about the investment project. Obviously, the signals of smart analysts are
correlated whereas those of the dumb ones are not. Investments are chosen to
maximize the reputation of being smart, since a better reputation is good for
the professional's clientele. The result is that both dumb and smart analysts
are likely to herd: by joining the crowd, they can pretend that they act on
informative signals. Unfortunately, the model does not explain behavior by
amateur investors. Moreover, the assumption that professional market
participants have doubts about their ability is contradicted by empirical
evidence. Experimental research by cognitive psychologists has shown that
individuals, and especially expert professionals, are quite confident about
their abilities. In fact, 'perhaps the most robust finding in the psychology of
judgment is that people are overconfident' (see below).7

Informational cascades
The informational cascade model by Banerjee (1992) is another example of a
behavioral approach to investing behavior within the paradigm of rational
economic man. Banerjee assumes that market participants have limited private
information. Some individuals receive an informative signal, others do not.
Nobody knows what signals are informative. As a result,  publicly visible
actions by others act as an additional source of information. Under these
assumptions extensive herding may occur. This can be illustrated with a
restaurant example. Assume that you have been tipped about a new and trendy
London restaurant somewhere near St James Street. You go there with the person
you fancy most, hoping to give him or her a pleasant surprise. However, upon
arrival your attention is drawn by some well-dressed males and females in their
twenties and thirties, waiting in line at a restaurant on the other side of the
street. Already nervous about your chance of success, you start to doubt
whether your restaurant tip was really that hot. And thus you may decide to
cross the street. The next person approaching the restaurant is likely to
follow you, although he knows that your decision to cross over may have nothing
to do with any specific private information that you have received. The cascade
model shows that small changes in publicly available information can reverse
the direction in which a crowd is moving (Bikchandani et al., 1992). Therefore,
it can contribute to offering a rational explanation of financial fragility and
sudden panics and flights to safety. Still, the model has two important
drawbacks. First, it assumes that prices do not react to demand and, second,
investors are assumed to act in a given order. Without the latter assumption,
everybody would postpone investment decisions in the hope of receiving more
information through the actions of others.

Emotional finance
The rational models of herd behavior focus on the availability of information
and assume that investors gather and use news in an unbiased manner. By
concentrating on the homo economicus, they neglect the many dimensions of the
human mind. Emotions play a role in our private life. Would  it not be rational
to assume that they affect our behavior during office hours as well? In fact,
cognitive psychologists have studied the way human beings may gather, process
and interpret information and have come to a totally different conclusion. In
fact, most psychological theories are based on the assumption that emotional
biases play a role in the gathering and interpreting of information.
Freud's theory of repression assumes that the human mind treats information in
a biased way. In order to survive, we try to forget traumatic experiences:
unpleasant memories are locked away.8  Freud's focus was on psychopathology,
but he believed that healthy individuals do also, to a certain degree, turn
away from unpleasant information. Cognitive psychologists have studied this
issue further, concentrating on how individuals gather and use information and
knowledge, and how the memory works. Of the numerous concepts they have
developed, five are particularly useful for analyzing financial markets:
cognitive dissonance, biased self-attribution, overconfidence, conservatism and
the representativeness heuristic.

Cognitive dissonance
The theory of cognitive dissonance developed by Festinger9 assumes that nobody
likes to be confronted with two contradictory cognitive elements. If someone
holds a strong opinion, he hates to be faced with evidence showing that he may
be wrong. Therefore, he tries to reduce this so-called cognitive dissonance.
This can be achieved by filtering information. The individual turns a blind eye
to information that does not suit him, and actively searches for information
that confirms that his view is correct, or that he has made the right decision.
A case in point is wishful thinking by a person who is in love and does not see
the nasty habits of the object of his desire. Stereotypical interpretations of
the real world can also be explained by the theory of cognitive dissonance.
Every mother believes her baby girl has tiny feet. Men and women, however
politically correct they may think they are, do unconsciously have the
stereotypical 'dumb blonde' as their frame of reference and do not easily
process information that a blonde is not dumb. An extreme method of information
filtering is that of 'shooting the messenger'.10  A famous example is found in
the history of mathematics. History claims that Pythagoras was so convinced
that all natural phenomena can be explained with rational numbers (his frame of
reference) that he was unable to accept the existence of irrational numbers.
When one of his students, Hippasus, proudly  claimed he had discovered that ¡î2
cannot be expressed as a fraction, Pythagoras sentenced him to death by
drowning.11

Another way to reduce cognitive dissonance is by seeking support from others.
If many people suffer from the same cognitive dissonance, it is particularly
easy to find support from others in the pursuit of dissonance reduction, and to
ignore information. This is the link between the theory of cognitive dissonance
and herding behavior. The approach can also offer an explanation for sudden
changes in behavior, especially by groups. These changes occur because it is
impossible for the individual to keep on ignoring information. When the
dissonance between his fundamental opinion and new information becomes too
large, the individual switches to the opposite method of dissonance reduction.
Instead of trying to find evidence that his opinion is correct, he will now,
faced with too much unfavorable information, make an effort to change his
belief or opinion. He does so by actively searching for dissonance-increasing
information. Think of the man who initially refuses to deny any signs of his
wife's infidelity ('explains them away'), but suddenly, when he feels this
becomes too difficult, switches to hiring a private detective determined to
find proof that his wife betrays him. Turning to herding behavior, it is
obvious that once the first member of a group decides to leave, the dissonance
of the others increases and suddenly the crowd changes direction. Kindleberger
argues that cognitive dissonance has been a recurrent source of herding and of
inertia in decision-making.12  Cailloux develops a theoretical model of
investor behavior, taking the possibility of cognitive dissonance reduction
into account by assuming that investors seek and process information to make it
correspond to their strongly held internalized beliefs.13

Biased self-attribution and overconfidence
"Heads I win, tails it's chance". Blaming someone else for your mistakes, and
claiming the credit for your successes: it is the next pleasant thing to do.
Cognitive psychologists have labeled this behavior 'biased self-attribution'.
It leads to another empirically verified phenomenon: individuals are, on
average, overconfident. They believe in their own claims that successes are
entirely theirs and that their failures are the fault of others or the result
of bad luck, and this makes them overestimate their abilities. This phenomenon
is especially important among professionals in a discipline where it is easy to
blame others. Thus, mathematicians are not overconfident - you have either
proved a theorem, or you have not -, whereas economists and professional
investors are: the evil outer world is full of adverse shocks that cannot be
anticipated, and brains can easily be confused with a bull market.14  Evidence
of overconfidence has been found among psychologists, attorneys, investment
bankers, nurses, security analysts and economic forecasters. Research by
cognitive psychologists also suggests that the more diffuse the task, and the
more experienced the professional (derivatives trading?!), the more serious the
overconfidence and biased self-attribution.15  Also, overconfidence is found to
be more severe for tasks with delayed feedback.

Daniel, Hirshleifer and Subrahmanyam16 use the concepts of biased
self-attribution and overconfidence to explain sequential herding and under-
and overreactions in security markets. They argue that fundamental valuation of
securities 'requires judgment about open-ended issues, and feedback is noisy
and deferred'. Investors, being overconfident, overestimate their ability to
value securities. Often, they believe to have privately discovered a very hot
tip.  Daniel et al model this by assuming that some investors receive a common
private signal, which is correct but very imprecise. Due to overconfidence, the
investors overestimate the precision of their private information signal, but
not that of the information that is publicly received by all market
participants. They overreact because they overestimate its quality, and correct
this inefficiency, but only partially, when public information arrives. The
result is a pattern of over-reaction to private information, followed by
under-reaction to the public information that is announced at a later stage.
This corresponds to the pattern found  in empirical studies. The biased
self-attribution increases self-confidence: confidence grows when public
information confirms private information, but does not decline when the two are
contradictory. Daniel et al also conclude that if, as psychological evidence
indicates, experts are more overconfident than inexperienced individuals,
aggressive expert trading intimidates other traders and leads to higher
returns. If it is assumed that overconfident investors underestimate risk, they
may allocate wealth to riskier projects and receive higher returns. And whereas
some of them will fail, those who remain get rich and become more
overconfident. The result may even be that 'irrational traders drive out
rational traders'.

Conservatism and the representativeness heuristic
Both the trading pattern of 'investors' in experimental situations and
experimental research into learning by individuals suggests that individuals
react only slowly to new evidence.  Where a Bayesian individual would need only
one observation to induce a change in opinion, real-life humans need two to
five observations.17  Cognitive psychologist Edwards has identified this
phenomenon as conservatism, but it is closely related to the concept of
cognitive dissonance. On the other hand, experimental research shows that
people have a tendency to see patterns in random events.  For example, in a
random pattern of stars we are determined to see Ursa Major. This phenomenon is
the 'representativeness heuristic'. It may imply that the news value of one
element in a series of similar messages is overestimated. Thus, the investor
may conclude that a firm's exceptional earnings history is likely to repeat
itself. De Bondt studies both classroom experiments and investor surveys and
finds strong evidence that students and investors chase trends once they think
they see them.18  Whereas conservatism implies under-reaction to news, the
representativeness heuristic predicts an over-reaction to information that is
part of a string of similar messages. Barberis, Shleifer and Vishny19 use these
concepts to explain over- and under-reactions in security markets.

Conclusion
The efficient markets theory assumes that individuals gather and process
information in a non-emotional manner. Research by cognitive psychologists
shows that this assumption does not hold. Freud was right in assuming that,
instead of risk and return, anxiety and desire - emotions which go hand in
hand - are the driving forces of human beings, investors included.
Psychological evidence indicates that we see what we want to see, learn slowly,
and gather information with the purpose, subconsciously, of bringing order to
chaos, and of coping with emotional difficulties. Moreover, we flatter
ourselves and overestimate our abilities. Perhaps this is the reason why
rational expectations theory has gone unchallenged for such a long time.
Hopefully, the marriage between finance and psychology will be both passionate
and productive.



FOOTNOTES
1 Keynes, J.M. (1936), The General Theory of Employment, Interest and Money
2 Prast, H.M. and de M.P.H. de Vor (2001), Biased reactions to news: a
potential source of financial market instability?, in Bank for International
Settlements, Proceedings of the 2000 Autumn Meeting of Central bank Economists
(forthcoming)
3 Bosveld, R. and M.A. Venneman (2000), Initial Public Offerings on the
Amsterdam Stock Exchange ¡§C An Analysis of Short-run and Long-run Performance,
NUON nv/Boston Consulting Group
4 Kaminsky, Graciela L. and Sergio L. Schmukler (1999), What triggers market
jitters? A chronicle of the Asian Crisis, Journal of International Money and
Finance, June 1999
5 Keynes, J.M. , op. cit.
6 See Ayn Rand, The Fountainhead, Harper Collins, 1994
7 DeBondt, W.F.M., and R.H. Thaler (195), Financial decision-making in markets
and firms: A behavioral perspective, in R.A.Jarrow, V. Maksimovic and W.T.
Ziemba (eds), Finance, Handbooks in Operations Research and Management Science
9, North Holland
8 Freud, S. (1959), Repression, in Ernest Jones (ed), Sigmund Freud, Collected
Papers, Vol. 10, Hogarth Press, New York.
9 Festinger, Leon (1957), A theory of cognitive dissonance, Stanford University
Press
10 See Chancellor, E. (1999), Devil take the hindmost: a history of financial
speculationfinancial speculation, MacMillan, London
11 Singh, Simon (1998), Fermat's last theorem, Fourth Estate, London
12 Kindleberger, C. (1996), Manias, panics and crashes: a history of financial
crises, MacMillan, 3rd edition
13 Cailloux, J. (2000), Explaining the excess volatility of capital flows to
emerging economies, unpublished paper, Deutsche Bank Global Market Research,
London
14 Einhorn, H.J. (1980), Overconfidence in judgment, New Directions for
Methodology of Social and Behavioral Science 4
15 Griffin, D. and Tversky (1992), The weighing of evidence and the
determinants of overconfidence, Cognitive Psychology 24
16 Daniel, K., D. Hirshleifer and A. Subrahmanyam (1998), Investor psychology
and security markets under- and overreactions, The Journal of Finance Vol. LIII
(6)
17 Edwards, W. (1968), Conservatism in human information processing, in B.
Kleinmutz (ed.), Formal Representation of Human Judgment, John Wiley and Sons,
New York
18 De Bondt, W. (1993), Betting on trends: intuitive forecasts of financial
risk and return, International Journal of Forecasting 9
19 Barberis, N., A. Shleifer and R. Vishny (1998), A model of investor
sentiment, Journal of Financial Economics 49

Interesting, as it can start a debate between two
explanations of market anomlies :
* the "rational expectation" explanation
* and the explanations based on emotional factors.

Personnally, I make the distinction a little differently :
* cognitive biases (lack of attention, bounded rationality,
   cognitive overload, etc.) including some collective ones
  (social learning...)
* emotional biases
   ** individual(overconfidence, regret aversion, etc.)
   ** or collective (groupthink, herding, etc.)

The problem in my classification is that I don't know
if cognitive dissonance is purely cognitive or purely
emotional. And I have doubts about the nature of some
others animals I listed above.
Well, some animals are hybrids, thus maybe some biases
also, why not?
Other classifications?
PG

  --- In Behavioral-Finance@y..., "Gary Funck" <gary@i...> wrote:
>
> http://www.wilmott.com/310/today_detail.cfm?articleID=20
>
> Emotionomics 1: Finance and Psychology: Dangerous Liaison or
Marriage of
> Convenience?
> Henriette Prast

Peter's distinction is similar to mine. With that view, my question
is how someone knowing of such conditions can use that superior
knowledge for superior performance.

Not doing things that you know are a mistake helps you to avoid heavy
loss, and that is a real advantage and maybe the main benefit from
studying BF/investment psychology.

But can superior BF knowledge help one to profit from other peoples'
mistakes (which would really pay off) and beat the market?  That's an
open question.

1. Conceptual - The basic arguments for limits to arbitrage say that
there is real specific risk and trading costs to exploiting
mispricings so you can have an inefficient mkt with misallocation.

I'm sure this can often be true both in the capital mkts and product
(real-world goods and services) mkts, but I wouldn't assume it's
always true all the time.

2. Empirical - There are BF-driven investment strategies that try to
exploit over/under-reaction: Contrarian strategies which try to find
value where there's pessimism or obscurity, and early response
strategies (such as positive earnings suprises) which try to be ahead
of the curve in catching improving situations.

Both types of strategies are old and are volatile in their results,
and I suspect that success depends highly on individual investment
ability - and probably always has.

Jan

--- In Behavioral-Finance@y..., "pgreenfinch" <pgreenfinch@w...>
wrote:
> Interesting, as it can start a debate between two
> explanations of market anomlies :
> * the "rational expectation" explanation
> * and the explanations based on emotional factors.
>
> Personnally, I make the distinction a little differently :
> * cognitive biases (lack of attention, bounded rationality,
>   cognitive overload, etc.) including some collective ones
>  (social learning...)
> * emotional biases
>   ** individual(overconfidence, regret aversion, etc.)
>   ** or collective (groupthink, herding, etc.)
>
> The problem in my classification is that I don't know
> if cognitive dissonance is purely cognitive or purely
> emotional. And I have doubts about the nature of some
> others animals I listed above.
> Well, some animals are hybrids, thus maybe some biases
> also, why not?
> Other classifications?
> PG
>
>  --- In Behavioral-Finance@y..., "Gary Funck" <gary@i...> wrote:
> >
> > http://www.wilmott.com/310/today_detail.cfm?articleID=20
> >
> > Emotionomics 1: Finance and Psychology: Dangerous Liaison or
> Marriage of
> > Convenience?
> > Henriette Prast

Seems based on fuzzy logic / nonlinear research
Blake LeBaron appears to be working in it.
Somebody knows what it is about?
PG

Hi Peter the founder,

    Not exactly what you're looking for, but in the Spring number of JEP
there a number of articles about Evolutionary Economics, also check Van
Huyck's website (see down) here in A & M, he has been working in some
interesting stuff (see the paper about bounded rationality and pricing
uncertainty, and selection dynamics and adaptive behavior with incomplete
information), some with Battalio (also in Aggieland) and Larry Samuelson in
Wisconsin.

http://erl.tamu.edu/JVH_gtee/

FWIW
Ariel

----- Original Message -----
From: pgreenfinch <pgreenfinch@...>
To: <Behavioral-Finance@yahoogroups.com>
Sent: Wednesday, September 04, 2002 8:19 AM
Subject: [Behavioral-Finance] Evolutionary finance


> Seems based on fuzzy logic / nonlinear research
> Blake LeBaron appears to be working in it.
> Somebody knows what it is about?
> PG
>
>
>
> you may unsubscribe by sending an email to
>
> Behavioral-Finance-unsubscribe@yahoogroups.com
>
>
> Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/
>
>

Hi, members and vistors, this is not really a "back to school"
newsletter, as our group was rather active in Summer.
Thanks to the participants for all their holiday homework :-)

1) Membership stats:

There are still 20-30 new members a month.
But, as you know the total number of memebers is not really
known, due to the bouncing members phenomena.
To give round figures, let us say we have 760 reachable
members and 160 bouncing one. If we consider that about
3/4 are definitively lost in the bermuda triangle, that
would make a membership of about 800.
Again, hello to old members and new ones. And also to the
bouncing ones that did not completely disappeared underwater ;-)

Our sister list, Finance-academy is nearing 100 members
http://groups.yahoo.com/group/Finance-Academy

2) Group's messages

About 4250 messages posted since the start.
There is a nucleus of recurrent participants always posting
interesting things (congratulations for being so recurrently
inspired by the BF muse :-).
We should enlarge that nucleus, and really act as a
"think tank" on BF matters (well, what could we lobby for,
sustainable BF development? ;-)). I am sure there are other
hidden talents in the group, or members with questions that
would give us food for thoughts, and they are welcome ...
and implored, to express themselves here.

3) Our 24/7 free resources:

* Your "BF gallery" with links to
   **300+ BF keywords (your messages help, month after
     month, to enhance that "BF encyclopedia" ),
   **also to various member's more extended contributions:
http://perso.wanadoo.fr/pgreenfinch/behavioral-finance.htm

* Your BF Group's archives :
http://groups.yahoo.com/group/Behavioral-Finance/messages
(and then use "search")

* Your BF Bookmarks:
http://groups.yahoo.com/group/Behavioral-Finance/links

* Your behavioral stockpricer:
http://perso.wanadoo.fr/pgreenfinch/pricer.htm

* Your "BF papers pre-publication files"
http://groups.yahoo.com/group/Behavioral-Finance/files/

Good 29th month to all, whatever the stockmarket vagaries !
Well, they are an illustration of BF.
The bubble topped 2 months before this group was started.
Thus, all the time in the group's life we could enjoy
the most interesting part of the rollercoaster ride,
the downslide. Spiced with bursts of volatility for
loops-like excitement ;-))

PG

http://www.evolutionaryfinance.unizh.ch/program.htm

Dick March
South Florida Water Management District
Behavioral-Finance@yahoogroups.com wrote:

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------------------------------------------------------------------------

There are 3 messages in this issue.

Topics in this digest:

      1. Evolutionary finance
           From: "pgreenfinch" <pgreenfinch@...>
      2. Re: Evolutionary finance
           From: "Ariel M. Viale" <ariel@...>
      3. Our 28th month newsletter
           From: "pgreenfinch" <pgreenfinch@...>

________________________________________________________________________
________________________________________________________________________

Message: 1
   Date: Wed, 04 Sep 2002 15:19:43 -0000
   From: "pgreenfinch" <pgreenfinch@...>
Subject: Evolutionary finance

Seems based on fuzzy logic / nonlinear research
Blake LeBaron appears to be working in it.
Somebody knows what it is about?
PG

________________________________________________________________________
________________________________________________________________________

Message: 2
   Date: Wed, 4 Sep 2002 14:46:06 -0700
   From: "Ariel M. Viale" <ariel@...>
Subject: Re: Evolutionary finance

Hi Peter the founder,

   Not exactly what you're looking for, but in the Spring number of JEP
there a number of articles about Evolutionary Economics, also check Van
Huyck's website (see down) here in A & M, he has been working in some
interesting stuff (see the paper about bounded rationality and pricing
uncertainty, and selection dynamics and adaptive behavior with incomplete
information), some with Battalio (also in Aggieland) and Larry Samuelson in
Wisconsin.

http://erl.tamu.edu/JVH_gtee/

FWIW
Ariel

----- Original Message -----
From: pgreenfinch <pgreenfinch@...>
To: <Behavioral-Finance@yahoogroups.com>
Sent: Wednesday, September 04, 2002 8:19 AM
Subject: [Behavioral-Finance] Evolutionary finance

> Seems based on fuzzy logic / nonlinear research
> Blake LeBaron appears to be working in it.
> Somebody knows what it is about?
> PG
>
>
>
> you may unsubscribe by sending an email to
>
> Behavioral-Finance-unsubscribe@yahoogroups.com
>
>
> Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/
>
>

________________________________________________________________________
________________________________________________________________________

Message: 3
   Date: Thu, 05 Sep 2002 08:22:29 -0000
   From: "pgreenfinch" <pgreenfinch@...>
Subject: Our 28th month newsletter

Hi, members and vistors, this is not really a "back to school"
newsletter, as our group was rather active in Summer.
Thanks to the participants for all their holiday homework :-)

1) Membership stats:

There are still 20-30 new members a month.
But, as you know the total number of memebers is not really
known, due to the bouncing members phenomena.
To give round figures, let us say we have 760 reachable
members and 160 bouncing one. If we consider that about
3/4 are definitively lost in the bermuda triangle, that
would make a membership of about 800.
Again, hello to old members and new ones. And also to the
bouncing ones that did not completely disappeared underwater ;-)

Our sister list, Finance-academy is nearing 100 members
http://groups.yahoo.com/group/Finance-Academy

2) Group's messages

About 4250 messages posted since the start.
There is a nucleus of recurrent participants always posting
interesting things (congratulations for being so recurrently
inspired by the BF muse :-).
We should enlarge that nucleus, and really act as a
"think tank" on BF matters (well, what could we lobby for,
sustainable BF development? ;-)). I am sure there are other
hidden talents in the group, or members with questions that
would give us food for thoughts, and they are welcome ...
and implored, to express themselves here.

3) Our 24/7 free resources:

* Your "BF gallery" with links to
  **300+ BF keywords (your messages help, month after
    month, to enhance that "BF encyclopedia" ),
  **also to various member's more extended contributions:
http://perso.wanadoo.fr/pgreenfinch/behavioral-finance.htm

* Your BF Group's archives :
http://groups.yahoo.com/group/Behavioral-Finance/messages
(and then use "search")

* Your BF Bookmarks:
http://groups.yahoo.com/group/Behavioral-Finance/links

* Your behavioral stockpricer:
http://perso.wanadoo.fr/pgreenfinch/pricer.htm

* Your "BF papers pre-publication files"
http://groups.yahoo.com/group/Behavioral-Finance/files/

Good 29th month to all, whatever the stockmarket vagaries !
Well, they are an illustration of BF.
The bubble topped 2 months before this group was started.
Thus, all the time in the group's life we could enjoy
the most interesting part of the rollercoaster ride,
the downslide. Spiced with bursts of volatility for
loops-like excitement ;-))

PG

________________________________________________________________________
________________________________________________________________________

Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/

 

----- Original Message -----

From: Dick March

To: Behavioral-Finance@yahoogroups.com

Sent: Thursday, September 05, 2002 9:20 AM

Subject: [Behavioral-Finance] Re: Evolutionary finance

An international conference on Evolutionary Finance was held in June at Swiss Exchange in Zurich. See the link below to the program which contains links to most of the presentations. Blake LeBaron, whom Peter mentioned, was one of the presenters at the conference. An interesting mix of presenters and presentations.

http://www.evolutionaryfinance.unizh.ch/program.htm

Dick March
South Florida Water Management District

i want know more finance astrology.

where did i have to go.

--- In Behavioral-Finance@y..., "qykyjyk" <reichaplin@m...> wrote:
> i want know more finance astrology.
>
> where did i have to go.

www.one-is-born.every-minute.com

PG

On Fri, 6 Sep 2002, qykyjyk wrote:

> i want know more finance astrology.
>
> where did i have to go.

To the poorhouse? :))
--
Take Your Trading to the Next Level!
M. Edward Borasky, Meta-Trading Coach

znmeb@...
http://meta-trading-coach.com
http://groups.yahoo.com/group/meta-trading-coach

How to Stop A Folksinger Cold # 5
"Where have all the flowers gone..."
Beats me.

Bilo wrote:

given the fact that the majority of market participants ( traders ) are
players in a game of incomplete information
does anyone know of any recent papers that discuss optimal trading
strategies in that environment?

There is an article in this month's Scientific American about complexity
theory and they use
a stock market example.

Disclaimer: The information contained in this communication is confidential and
only for the use of the intended addressee(s).  If you have received this
communication in error, any disclosure or use of such information is strictly
prohibited.  Please notify the sender immediately and destroy all copies.
Thank you.

Thanks, Dick.

From the few things I know, there are now several schools
about evolution.
Some see it as a gradually adaptative, diversificative
and selective process,
Others see it as sudden "catastrophic" phenomena where
the whole ecosystem has an upheaval, 95 % of the old
species disappear and the remaining 5  % emerge and
build the new system (for example from saurians to birds
and mammals).

Maybe that is what happens when we go from a bull market
to a bear market?
Or when a new "evaluation paradigm" appears (from net
worth, to dividends, to net earnings, to cash earnings,
to ebitda, to pure "customer portfolio" goodwill,
and back, for example)
Or from fundamental analysis, to technical analysis,
to quantitative analysis, to, why not, behavioral
analysis, or even to ...evolutionary analysis

The problems / opportunities seems to be, in an
agent-based model:
1) How to predict, as long as the ecosystem stays "robust"
and do not break, the gradual shifts in advance,
and their effects on the markets?
2) When do we go from gradual shifts to a complete break
with completely new types of agents with totally
different behaviors or paradigms?

PG

--- In Behavioral-Finance@y..., Dick March <rmarch@s...> wrote:
> An international conference on Evolutionary Finance was held in
June at Swiss
> Exchange in Zurich. See the link below to the program which
contains links to
> most of the presentations. Blake LeBaron, whom Peter mentioned,
was one of the
> presenters at the conference. An interesting mix of presenters and
> presentations.
>
> http://www.evolutionaryfinance.unizh.ch/program.htm
>
> Dick March
> South Florida Water Management District

Some economists (Keynes, Allais, Ackerloft) admitted
that markets can be irrational, and jumped to the
conclusion that the state should intervene.
I have a lot of respects for them, and it could be
debated, but something worries me in the back of the
head: what if politicians and high level officials
were even more irrational than markets?
Where are the limit where you could say "well, the
markets are running wild, so the cavalry should step in"
Might some historical benchmarks help to say when
unbalances need fixing?
OK, but by whom? And with what side-effects?
By the way, is BE/BF subversive and a threat to the
market economy ? Or a tool to understand it better
and help it to self-adjust and perpetuate?
Meaning we can get hit by rotten tomatoes from both
sides, market lovers and market haters ;-)))
PG

abuse sent to yahoo.com,
member banned,
message deleted
PG

--- In Behavioral-Finance@y..., "ghahn4537" <ghahn4537@y...> wrote:
> XXXXXX (Stock Symbol: XXXX)
> Watch for analyst "Strong xxxxxxxx

I am a student and I am currently making a research on behavioral
finance.
If anybody could give me any information on the topic or books...
please, don't hesitate.

Thank you

A good book for ideas might be The Winner's Curse by Richard Thaler.

-mab

 patlenormand wrote:

I am a student and I am currently making a research on behavioral
finance.
If anybody could give me any information on the topic or books...
please, don't hesitate.

Thank you




you may unsubscribe by sending an email to

Behavioral-Finance-unsubscribe@yahoogroups.com


Your use of Yahoo! Groups is subject to the Yahoo! Terms of Service.

Andrei Shleifer,2000, " Inefficient Markets: An Introduction to Behavioral Finance", Oxford University Press, Oxford, United Kingdom

This textbook is recommended by Behavioral Finance course at Harvard University.
 

Cheers,
Nutcha

patlenormand wrote:

 I am a student and I am currently making a research on behavioral
finance.
If anybody could give me any information on the topic or books...
please, don't hesitate.

Thank you
 
 

you may unsubscribe by sending an email to

Behavioral-Finance-unsubscribe@yahoogroups.com
 

Your use of Yahoo! Groups is subject to the Yahoo! Terms of Service.

--- In Behavioral-Finance@y..., "pgreenfinch" <pgreenfinch@w...>
wrote:
> Some economists (Keynes, Allais, Ackerloft) admitted
> that markets can be irrational, and jumped to the
> conclusion that the state should intervene.
> I have a lot of respects for them, and it could be
> debated, but something worries me in the back of the
> head: what if politicians and high level officials
> were even more irrational than markets?
> Where are the limit where you could say "well, the
> markets are running wild, so the cavalry should step in"
> Might some historical benchmarks help to say when
> unbalances need fixing?
> OK, but by whom? And with what side-effects?
> By the way, is BE/BF subversive and a threat to the
> market economy ? Or a tool to understand it better
> and help it to self-adjust and perpetuate?
> Meaning we can get hit by rotten tomatoes from both
> sides, market lovers and market haters ;-)))
> PG


1.  Are you thinking here of capital and commodity mkts or the market
system in general?  In other words, how specific do you want get in a
discussion of market failure and intervention?

2.  From your post, it seems like you are focusing on disequibria and
vicious cycles - the effects of expectations/positive feedback loops
in trading (and some other) markets - a very dramatic type of mkt
failure.  We could also look at things like institutionalism and
externalities (private/public interests) and the results of state
intervention there.

3.  Which leads me to ask, who would benefit from proposed state
intervention?  Who would not?

(Reflectiving my native anarchist distrust of Gov't and politicians):
4.  Maybe NGOs would be preferable - more effective, trustworthy - as
the intervening rational authority? Gov't agencies have limited
incentives to make effective changes, bureaucrats by definition don't
care for high risk careers. Politicians are driven by money and power
and ally thenselves with special interests to get it; they have all
the wrong incentives.

5.  Perhaps we can automate much of the intervention decision-making
with artificial intelligence to increase the effectiveness and avoid
corruption?  Corporations use data mining and enterprise resource
planning systems in their business and quants operate in the trading
mkts.  It seems reasonable to me that if one accepts the value of
planning and calculated decisions for private profit in a competitive
environment, than it may be valuable for public good to have computer-
based coordination to improve or even replace market action as a
allocator of resources.

Jan

--- In Behavioral-Finance@y..., "leif_ericssen" <leif_ericssen@y...>
wrote:
> --- In Behavioral-Finance@y..., "pgreenfinch" <pgreenfinch@w...>
> wrote:
> > Some economists (Keynes, Allais, Ackerloft) admitted
> > that markets can be irrational, and jumped to the
> > conclusion that the state should intervene.
> > I have a lot of respects for them, and it could be
> > debated, but something worries me in the back of the
> > head: what if politicians and high level officials
> > were even more irrational than markets?
> > Where are the limit where you could say "well, the
> > markets are running wild, so the cavalry should step in"
> > Might some historical benchmarks help to say when
> > unbalances need fixing?
> > OK, but by whom? And with what side-effects?
> > By the way, is BE/BF subversive and a threat to the
> > market economy ? Or a tool to understand it better
> > and help it to self-adjust and perpetuate?
> > Meaning we can get hit by rotten tomatoes from both
> > sides, market lovers and market haters ;-)))
> > PG
>
>
> 1.  Are you thinking here of capital and commodity mkts or the
market
> system in general?  In other words, how specific do you want get
in a
> discussion of market failure and intervention?

In general, as long as it has some broad economic implication. The
same for state failures. Maybe with some special attention to
monetary markets, where  the central bank intervention is the rule
(see the present polemics about greenspan). Seems here that the last
stock bubble was a combination of investors biases and central
bank / gvt biases. A fightening situation when both sides are
loonies ;-)))
>
> 2.  From your post, it seems like you are focusing on disequibria
and
> vicious cycles - the effects of expectations/positive feedback
loops
> in trading (and some other) markets - a very dramatic type of mkt
> failure.  We could also look at things like institutionalism and
> externalities (private/public interests) and the results of state
> intervention there.

Yes, also, here again depends on the importance of the consequences.
>
> 3.  Which leads me to ask, who would benefit from proposed state
> intervention?  Who would not?

One of the big questions. Linked to the food chain. Who in the end
pay corporate taxes ? the shareholders ? the customers ? the
employees ? Difficult to identify, and it changes with the economic
situation or the kind of business.
>
> (Reflectiving my native anarchist distrust of Gov't and
politicians):
> 4.  Maybe NGOs would be preferable - more effective, trustworthy -
as
> the intervening rational authority? Gov't agencies have limited
> incentives to make effective changes, bureaucrats by definition
don't
> care for high risk careers. Politicians are driven by money and
power
> and ally thenselves with special interests to get it; they have
all
> the wrong incentives.

The problem for NGOs (I am thinking here about "militant" NGOs more
than caritative ones) is that they sometimes act as if they are self
proclaimed representative of the people when in facts they just
represent their members. Another thing, why this "non governmental"
phrase ? Why this reference to officialdom ? I tend to find it
suspicious (my native distrust also of politicians, even more when
they are in disguise ;-))). Would not the word "private" suffice ?

> 5.  Perhaps we can automate much of the intervention decision-
making
> with artificial intelligence to increase the effectiveness and
avoid
> corruption?  Corporations use data mining and enterprise resource
> planning systems in their business and quants operate in the
trading
> mkts.  It seems reasonable to me that if one accepts the value of
> planning and calculated decisions for private profit in a
competitive
> environment, than it may be valuable for public good to have
computer-
> based coordination to improve or even replace market action as a
> allocator of resources.
>
I think here we have something : to have ratings and benchmarks
tools, that would be widely known and set in advance by some moral
authority (like the Basle committee for banks) that would be
indicators that something is turning wrong.
If we take the example of stockmarkets, in my opinion, whatever
indicator that would have been set in advance would have shown the
bubble starting several year before reaching the top, and the need
to do something about it. But there is no Basle committee for
stockmarkets, nor private ranking (was standard and poors asked to
make a ratings of the DJIA, the nasdaq index or the CAC 40 if only
every year?)

PG

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Project Manager

School of Information Studies
Syracuse University
Syracuse, New York

--- In Behavioral-Finance@y..., "pgreenfinch" <pgreenfinch@w...>
wrote:
> --- In Behavioral-Finance@y..., "leif_ericssen"
<leif_ericssen@y...>
> wrote:
> > --- In Behavioral-Finance@y..., "pgreenfinch" <pgreenfinch@w...>
> > wrote:
>> > Some economists (Keynes, Allais, Ackerloft) admitted
>> > that markets can be irrational, and jumped to the
>> > conclusion that the state should intervene.
>> > I have a lot of respects for them, and it could be
>> > debated, but something worries me in the back of the
>> > head: what if politicians and high level officials
>> > were even more irrational than markets?
>> > Where are the limit where you could say "well, the
>> > markets are running wild, so the cavalry should step in"
>> > Might some historical benchmarks help to say when
>> > unbalances need fixing?
>> > OK, but by whom? And with what side-effects?
>> > By the way, is BE/BF subversive and a threat to the
>> > market economy ? Or a tool to understand it better
>> > and help it to self-adjust and perpetuate?
>> > Meaning we can get hit by rotten tomatoes from both
>> > sides, market lovers and market haters ;-)))
>> > PG
>>
>>
>> 1.  Are you thinking here of capital and commodity mkts or the
>market
>> system in general?  In other words, how specific do you want get
>in a
>> discussion of market failure and intervention?
>
>In general, as long as it has some broad economic implication. The
>same for state failures. Maybe with some special attention to
>monetary markets, where  the central bank intervention is the rule
>(see the present polemics about greenspan). Seems here that the last
>stock bubble was a combination of investors biases and central
>bank / gvt biases. A fightening situation when both sides are
>loonies ;-)))
>>

Well, I think that an argument can be made for a visible hand in mkts
where self-order breaks down. Perhaps through some kind of
contracyclical activity. For example, in commodities, setting "factor
prices" at which the crop will be financed and setting crop insurance
rates. I think the same principle can apply to other commodities.

>> 2.  From your post, it seems like you are focusing on disequibria
>and
>> vicious cycles - the effects of expectations/positive feedback
>loops
>> in trading (and some other) markets - a very dramatic type of mkt
>> failure.  We could also look at things like institutionalism and
>> externalities (private/public interests) and the results of state
>> intervention there.
>
>Yes, also, here again depends on the importance of the consequences.

Perhaps weighing the consequences by importance and long/short term
effect?
>>
>> 3.  Which leads me to ask, who would benefit from proposed state
>> intervention?  Who would not?
>
>One of the big questions. Linked to the food chain. Who in the end
>pay corporate taxes ? the shareholders ? the customers ? the
>employees ? Difficult to identify, and it changes with the economic
>situation or the kind of business.

Well, I'm thinking of fiascos like rent control and urban renewal,
which had the effect of making things worse!

>>
>> (Reflectiving my native anarchist distrust of Gov't and
>politicians):
>> 4.  Maybe NGOs would be preferable - more effective, trustworthy -
>as
>> the intervening rational authority? Gov't agencies have limited
>> incentives to make effective changes, bureaucrats by definition
>don't
>> care for high risk careers. Politicians are driven by money and
>power
>> and ally thenselves with special interests to get it; they have
>all
>> the wrong incentives.
>
>The problem for NGOs (I am thinking here about "militant" NGOs more
>than caritative ones) is that they sometimes act as if they are self
>proclaimed representative of the people when in facts they just
>represent their members. Another thing, why this "non governmental"
>phrase ? Why this reference to officialdom ? I tend to find it
>suspicious (my native distrust also of politicians, even more when
>they are in disguise ;-))). Would not the word "private" suffice ?
>

Well, private organisation is fine if there's no confusion that it's
not a profit-seeking firm, but a public service organisation. Like
the Better Business Bureau maybe, or a stock or commodity exchange.
But I wasn't thinking of Greenpeace or Earth First as a choice for
energy market management or economic development!

Maybe a Gov't agency would be best, if it could be set-up in such a
way that it was independant from political interference.  But then I
don't know how it would be accountable to the citizens - what would
stop it from being a CIA or Mossad.

>> 5.  Perhaps we can automate much of the intervention decision-
>making
>> with artificial intelligence to increase the effectiveness and
>avoid
>> corruption?  Corporations use data mining and enterprise resource
>> planning systems in their business and quants operate in the
>trading
>> mkts.  It seems reasonable to me that if one accepts the value of
>> planning and calculated decisions for private profit in a
>competitive
>> environment, than it may be valuable for public good to have
>computer-
>> based coordination to improve or even replace market action as a
>> allocator of resources.
>>
>I think here we have something : to have ratings and benchmarks
>tools, that would be widely known and set in advance by some moral
>authority (like the Basle committee for banks) that would be
>indicators that something is turning wrong.
>If we take the example of stockmarkets, in my opinion, whatever
>indicator that would have been set in advance would have shown the
>bubble starting several year before reaching the top, and the need
>to do something about it. But there is no Basle committee for
>stockmarkets, nor private ranking (was standard and poors asked to
>make a ratings of the DJIA, the nasdaq index or the CAC 40 if only
>every year?)
>
But how would the bubble be identified several years in advance?  One
thing about a bubble is that things get crazy before the top, but
prices are not soaring beyond reasonable valuation standards for most
of the bull mkt.  And what should be done about it?  (Yes, I agree
that bubbles are wasteful and distort priorities). Require full
disclosure and actually enforce platinum crime laws with prison
time?  Not fuel the flames with easy credit caused by monetary policy?

On another subject, would you accept price controls generated by
computers if the purpose was in the public interest, assuming that
the algorithms and models were fully disclosed so that anyone can
look for flaws or ways to improve them and the operations were
audited to guard against the risk of tampering?

Hi, my name is Nimalan Govender. I am a student at the University Of
Natal (Durban). I am in the finance honour class. I have an
investment essay titled :

Behavioural finance represents a new branch in the theory of
investment finance, casting fresh light and a different stance in the
understanding of the way in which financial markets operate and the
manner in which investments are managed.

Discuss.

Kindly provide items of interest regarding behavioural finance that
you guys think I should include in my essay. Also dont be afraid to
quote articles and books that provides good sources of research
material.

Regards,

Nimalan

P.S. For those wishing to do my essay kindly go ahead (lol)

Hi Nimalan,
I'm Gülüzar. I work in 9 Eylul University (Ýzmir - Turkey), in accounting
and finance department.

I'm interested in behavioral finance. So I made research about this.

I'm sending "Behavioral Finance Bibliography". This document contains the
articles that must be read if you want to prepare a good homework.

I found some of these articles. If you want them, please write me.

Bye.

Hi!
Seems to be a "macro" approach, centered on investments
(thus not day to day trading) and on the market in
general.
Thus, outside the "classical" aspects of behavioral finance
concerning investors behaviors (cognitive and emotional
biases), it seems to me that the subject could be centered
on the effects on investment pricings and the allocation
of resources.
But I might be wrong about what is "behind" the question
asked, as another approach could be what "methods", if any,
could be derived for sound investment.
Maybe also, the word "different" is the key, as investment
were supposed to be managed, since the advent of the
"modern finance theory" of the fifties and sixties, on the
idea that market are "efficients" (EMH / efficient market
theories"), without "arbitrage opportunities" (the only
thing investors could do would be to choose a portfolio
diversification that fit their risk aversion), while
behavioral finance tries (ideally) to detect and explain
inefficiencies that could help (ideally) to find
opportunities (in timing, in assets picking...)
Well, the big problem in any essay, is first to understand
the question, and as you can see, I'm not sure I would
pass the test ;-). Maybe other members have a sharper eye.
As for the sources, you will find plenty of links in our
"bookmarks" section.
http://groups.yahoo.com/group/Behavioral-Finance/links
PG

--- In Behavioral-Finance@y..., "libb_setag" <libb_setag@y...> wrote:
> Hi, my name is Nimalan Govender. I am a student at the University
Of
> Natal (Durban). I am in the finance honour class. I have an
> investment essay titled :
>
> Behavioural finance represents a new branch in the theory of
> investment finance, casting fresh light and a different stance in
the
> understanding of the way in which financial markets operate and
the
> manner in which investments are managed.
>
> Discuss.
>
> Kindly provide items of interest regarding behavioural finance
that
> you guys think I should include in my essay. Also dont be afraid
to
> quote articles and books that provides good sources of research
> material.
>
> Regards,
>
> Nimalan
>
> P.S. For those wishing to do my essay kindly go ahead (lol)

Basically, how does the after-market for bank loans to corporations
work?  Is it related/similar to syndicated loans?  Is there a
established market for loans and/or pieces of a loan portfolio that
other banks or outsiders can buy?  How liquid is it?

Regards,
Jan

----- Original Message -----

From: Zac

To: Behavioral-Finance@yahoogroups.com

Sent: Friday, September 13, 2002 4:41 PM

Subject: [Behavioral-Finance] On-line course. Beyond Irrational Exuberance: Course Author: Robert J. Shiller,

The BF list should be required reading :-)
Zac

 

Quite right, Zac ;-)

Economics/
Beyond Irrational Exuberance:
Making Sense of the Stock Market after the Bubble
http://www.alllearn.org/course.jsp?c=2105

Course Author: Robert J. Shiller, Stanley B. Resor Professor of Economics, Yale University, Yale University Profile >

Online Instructor: Andrey D. Ukhov; Sunil Gottipati Profiles >

Course Description

Drawing on a wide range of published research and historical evidence, and particularly on recent scholarly work in the growing field of behavioral finance, this online seminar will focus on the recent performance and behavior of the stock market. It will challenge conventional wisdom—that stock market prices are rational and efficient and that stocks make superior long-term investments—and suggest new explanations. The discussion will start with an examination of the recent stock market bubble and also place it in the context of speculative bubbles throughout history. Moreover, students will consider concrete suggestions regarding policy changes that should be initiated in response to this and other such bubbles.

While reading some of the papers given on previous posts regarding
evolutionary economics / finance I ran into some interesting articles
on genetic predisposition for risk aversion.

In as much as I did not find the papers to be all that insightful, I
nevertheless triggered some theoretical insights of my own on
questions I have being mulling over for years.

For instance it always intrigued me that self made people who create
great wealth were not necessarily above average intelligence.
Equally it has always intrigued me to know people who have
extraordinary skills and intelligence but that never in their lives
took the risks in order to meet their own self-actualized potential.

I define calculated risks as risks based on factual research and
experience not on presuppositions or reckless impulses.  I have an
older friend who at age 5 happened to be in the wrong place and the
wrong time when World War II erupted.  His father who was a man of
limited means but a risk taker with phenomenal instincts navigated
him, his four siblings and his mother to safety.  Crossing 7
countries and going around at least 5 potentially deadly events that
covered all the way from Poland, to Russia, to the Middle East, back
to Europe and finally landing the United States.  Using that very
same predisposition for intelligent risk taking his father made
fabulous wealth in Wall Street.

After hearing the story of his father I told my friend that I wished
I had met such a great man in person.  Initially my friend told
me "he got lucky."  To which I responded, "if your father had
survived just one or possibly two of the 5 potentially fatal events
he could be considered as lucky, but the fact that your father made
the right decisions / actions time after time, thereby saving all of
your lives is more than just luck."  My friend took a moment to think
about this, then he said:  "my father took risks, those that stayed
behind took their chances."

Genetic predisposition is just that, predisposition.  One of the most
fantastically persuasive extroverts I know tells me that she was
painfully shy all the way until her early 20s, after which she made
the conscious effort to break through her shyness and take
intelligent risks.  Wondering if shyness and risk aversion are often
inter related, as in her case she has consistently being able to take
intelligent risks that had led her into a successful life.   Know a
man who after a life of "playing it safe" career wise he started to
take intelligent risk at age 40, which skyrocketed him to
unprecedented success in his field.  Perhaps for some, taking risk
occurs only if and when they are press to do so in their lives.

On the other hand know of people who take risk, seemingly make all
the right decisions, are intelligent, have all the resources but
somehow their timing is consistently wrong and fail at whatever they
do no matter what.  Perhaps in part because although the initial risk
take was right on target, the follow up decisions and momentum was
not.

Thus my theory has the following points:

1. Nature seems to favor those who take intelligently aggressive
risks.

2. Skilled intelligence and good timing momentum is required in
order for risks to have a high likelihood of successes.

3. Although a genetic predisposition might exist in risk takers,
it is much more a question of learned behavior.

Whether humanity and its financial markets self-destruct or jumps to
the next level of conscious evolution will be in the hands of those
known as risk takers.



Wolfgang