Weekend Reading for Financial Advisers: Risk and Testosterone, the Bias Blind Spot, and a “Tasteless Tweet”

Here are my picks for some of the most interesting recent articles and blog posts, in case you missed them.

Behavioral Science and Risk

• Prospect theory and football? This piece is not exactly about finance, but it’s nonetheless interesting from a behavioral psychology perspective: “NFL 2012: The Two Common Fallacies That Explain Why NFL Coaches Punt on Fourth Down.” (Slate)
• In “The Behavioral Risk Manager,” Charlie Stout notes there are usually two images of a risk manager that make their way through Hollywood and the popular consciousness. He proposes a third: Someone who is “as much of a psychologist as a mathematician.” (Global Intelligence Squad)
• A trader turned neuroscientist decided to find out what was behind the narcotic-like “high” he experienced when he was on a winnng streak. What he has discovered — after several years of research — “is that risk taking is driven by a ‘winner effect’ — a hormonal mechanism in which each competitive victory leads to more wins.” Over the course of eight straight days, researchers took spit samples from 17 male traders (in the morning and again in the afternoon), to measure levels of the hormone testosterone during daily trading. Not surpsingly, the results showed that “daily testosterone was significantly higher on days when traders made more than their one-month daily average. And on mornings when they had high testosterone levels, their profits for the rest of the day were significantly larger than when testosterone levels were low.” One of the takeaways of the article is the extreme consequence of the “winner effect” — when traders who turn rogue. The conclusion? “The winning streak seems to foster excessive risk-taking.” (Reuters)
• Bob Seawright has a terrific 12-part series exploring everything from how to deal with risk to “black swan” risks and complexity risk. The final installment is “The Greatest Risk of All,” in which he discusses the bias blind spot. As he points out: “In the immortal words of Pogo, we have met the enemy and he is us.” (Above the Market)

Retirement Planning

• What happens when three prominent experts on safe retirement withdrawal rates are interviewed by another prominent expert (in this case the savvy financial planner Michael Kitces)? You learn where they agree, where they disagree, and where the discussion is going. (Journal of Financial Planning)

US Presidents and Stock Prices

• Assessing the impact of elections on stock prices is an exercise in futility, says CFA Institute’s Ron Rimkus. (Enterprising Investor blog)
• See also, “GOP Smacked: America’s Stockmarket Has Gained More Under Democratic Than Republican Presidents.” (The Economist)

The Industry

• Prefer to go it solo in your practice? You may want to think again. According to a Fidelity Investments survey of 1,207 advisers and brokers, advisers who are part of a team earn, on average, 32% more than their colleagues who are solo advisers. All in, advisers on a team earn about $296,210. Solo advisers average $223,859. (Investment News)

Tax Planning

• Morningstar’s video report with Michael Kitces (of the above-mentioned retirement panel) explores tactics for capital-gains-tax harvesting and other 2012 tax planning themes. (Morningstar)

Social Media

• If you or your firm has embraced — or is thinking ofembracing — social media, including Twitter, then What KitchenAid’s Tasteless Tweet Can Teach Us About Online Integrity is a must-read. The real takeaway is not the social media faux pas but rather about the importance of online integrity. (Rosetta Thurman)

And Now for Something Completely Different

• For the sci-fi fans out there: A naval analyst discusses what Battlestar Galactica gets right about space warfare. (Foreign Policy)

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.