Lecture Judgment in managerial decision making (8e) - Chapter 9: Common investment mistakes
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Judgment in Managerial Decision
Making 8e
Chapter 9
Common Investment Mistakes
Copyright 2013 John Wiley &
Sons
Active Fund Management
•
25% of funds outperform market
•
Past performance poorly predicts future
•
Returns limited by high fees
•
Hedge funds
The Psychology of Poor
Investment Decisions
•
Overconfidence
•
Optimism
•
Denying random events
•
Anchoring, status quo, and procrastination
•
Selling winners and keeping losers
Overconfidence Produces
Excessive Trading
•
Frequent transactions increase costs
•
Transactions are becoming more frequent
•
Active investors underperform the market
•
Men trade more than women
Optimism about Investment
Decisions
•
•
Optimistic predictions of fund performance
Optimistic recollections of past
performance
Denying that Random Events
are Random
•
Underweighting randomness
•
Neglecting regression to the mean
•
Limited evidence of consistent
performance
–
Momentum effect
–
Performance reversals in outliers
Anchoring, the Status Quo, and
Procrastination
•
Retirement plans
–
Failing to change risk allocations
–
Arbitrary options influence risk allocations
•
Sticking to the status quo
•
Failure to “opt-in”
Prospect Theory, Selling
Winners, and Keeping Losers
•
Selling winners
•
Keeping losers
•
Impact on returns
Active Trading
•
The rise of online trading
•
Initial success stories
•
Underperforming the market
•
Considering other traders
Action Steps
•
Determine your investment goals
–
Save enough for retirement
–
Embrace risk now
–
Reduce risk later
–
Invest in annuities
•
Difficulty predicting the stock market
•
Putting this information to use
–
Avoid unnecessary fees
