Charlie Munger on The Psychology of Human Misjudgement

Investor Charlie Munger is well known for delivering his talk on The Psychology of Human Misjudgement at Harvard in 1995. 

A company called Tiny has created an animated and abridged version of the speech that hits the highlights and puts a visual twist on the talk.  So if you missed his talk or are looking for a quick refresh, this is a great synopsis. 

Embedded below is the video of Charlie Munger on the Psychology of Human Misjudgement:



For more on this investor, check out Charlie Munger's recommended reading list.

The Investor Sentiment Wheel

This is a classic for all investors.  The investor sentiment wheel illustrates the various emotions investors experiences during an investment cycle.  Of course, most investors panic at the bottom and sell low and then turn around and buy high.

Back in 2008 and then again in 2009, we posted up this picture of investor psychology illustrated.  

A new rendition has been created by Trustable Gold who sent us this new graphic on the roller coaster that is investor sentiment, embedded below:




What's your take on where we're at currently in the cycle? Obviously Ben Bernanke and QE3 throw another wrench into the equation encouraging "risk on."

Dan Ariely's Ira Sohn Presentation on Psychology

We're posting up notes from the Ira Sohn Conference.  Dan Ariely, Professor of Psychology at Duke University gave a presentation on loss aversion, regret, and various psychological topics.

Had extreme burn injuries in college. Researched pain, and became a behavioral scientist. Wrote the book "The (Honest) Truth About Dishonesty. Self control problems. Example only have $3 per day to motivate people to take their medicine.

Loss aversion: people hate losing more than they value gaining. People also love lotteries. They are motivated by 10% chance to win $30

Regret: Miss flight by 2 minutes or 2 hours? Two minutes is much more annoying, because you can imagine many ways to how you could have made it. Silver medal winners were most upset, because they could have made gold. Bronze, happy just to be there.

How to use regret? Give everyone a lottery ticket, whether you took medicine or not. Then, tell them they won, but since they didn't take their pill, they don't get paid. Wow- compliance goes up from 30% to 60%

Other ways to motivate, if they show up on time, they keep their deposit. Two thoughts: 1. To fight lack of self control, you need to change the environment  2. How do we create mechanisms to help us overcome our own limitations?


P.S. - Don't miss other presentations from David Einhorn, John Paulson, Bill Ackman & more: notes from Ira Sohn Conference 2012.

Investor Psychology Illustrated: Where Are We in the Cycle?

It's funny how cycles work. Exactly one year ago we posted up a chart illustrating investor psychology. As we now look back, April of 2009 marked a time when the market had just bottomed and was in the nascent stage of a comeback. Today, we find ourselves in a completely converse situation. Rather than watch the market decline and decimate, we're now faced with a seemingly never ending market rally that some would label an anomaly of an ascension. Ahh the market cycle, don't you just love it? Investors have certainly experienced a wide array of emotions over the past few years. Behavioral finance has long been a compelling topic and if you're interested in learning more, we defer to hedge fund Blue Ridge Capital's recommended reading list.

One year ago, for whatever reason, we were compelled to post up a chart illustrating investor psychology. Today, one year later, we felt compelled again. Below you'll find the 17 stages of investor psychology ranging from rage to disbelief to euphoria. Here is how investors feel during the peak-to-trough market cycle:

(click to enlarge)

As you can see, there are 19 stages in the cycle. By all accounts, it would seem that we are currently somewhere between points 15 and 19 on the chart. Are we past the "what the hell???" stage yet? Some would argue that we passed that point at around 1,100 on the S&P 500. Some would also argue that we are at point 17 in the cycle, the "more crazies who are going to get taken to the cleaners" stage. Who knows.

While it's uncertain where exactly in the cycle we are, the point is that we're still in a cycle. Given that we posted this chart up exactly one year ago, we found it fitting to remind everyone of the various levels of mania an investor can experience. We do know this though: many have turned cautious. While he admits market timing is not his forte, legendary investor Jim Rogers recently started some short positions. Additionally, over the past few weeks, hedge funds have drastically reduced long exposure as the smart money's been selling equities. Lastly, we covered how market strategist Jeff Saut summoned the old market adage, "sell in May and go away" and then said don't wait 'til then to do so. Many will deem this as rational thinking given the run the market's had. At the same time, this all reminds us of stage 18 in the cycle where everyone thinks the correction is coming but then the market actually heads higher. In this liquidity driven environment, it certainly wouldn't be the first time.

Couple the above chart with this additional one from Prieur du Plessis, and you've covered the full spectrum of investor psychology:

(click to enlarge)

For more on this topic, we recommend you check out the compendium that hedge fund Blue Ridge Capital has assembled via their behavioral finance reading list. Ahh the market cycle, don't you just love it? Round and round we go. Where we'll stop, nobody knows.