Weekend Reads for Finance Pros: Trading on Fear, Robo-Advisers, and Retirement

Earlier this week I was reading MarketPsych’s newsletter, “Ebola, Hong Kong, and Trading on Fear,” when a sentence jumped out at me: “Our ability to trade against fear is, in large part, genetic.”

Richard Peterson, a medical doctor, writes: “Several traits influence how we take investment risk, including personal background, life experiences, age, and gender. Gene-environment interactions are also important. But primary among these influences is our personal genetic endowment.”

Peterson cites a study that examined the investing habits, genetics, and beliefs of a group of 60 retail investors. “They showed that all factors have some explanatory power over investment risk-taking, but that genes appear to be the strongest contributor. Our genes — an element out of control — determine the majority of our financial risk taking.”

It’s a dramatic conclusion. “It’s disturbing to discount the valuable notion of free will,” Peterson says. “But it’s only when we recognize that much of what we THINK is in our control actually is not, that we can we then accurately forecast and plan for our errant investing behaviors.”

“Meanwhile,” he notes, “the vast herd of investors is reading news and reacting in a knee-jerk biological manner. And the savvy (and self-controlled) investor can take advantage of the surges of market fear and relief.”

One topic that prompts a knee-jerk reaction? The Ebola outbreak. As this cartoon aptly illustrates:

65% of the world's population will die of a chronic disease. 1700 people have died from #Ebola. Cartoon by Jack Ohman pic.twitter.com/BGSxlgwNon

— Blue Zones (@BlueZones) October 9, 2014

Here are some other interesting reads, in case you missed them:

The Business of Advising

• “Boom or Bust for the Robo-Advisor?” (SoHo)
• “Raymond James CIO Focuses on Ease of Use” (InformationWeek)

making things easy for advisors has a downside too: a lack of understanding about the innardshttp://t.co/juP4IbTeJ0

— The Investment Ecosystem (@Inv_Ecosystem) October 9, 2014

Investing

• “Fat Tails and Hyperinflationary Fears” (A Wealth of Common Sense)
• Investing reflects skill and luck, and there are three lessons to learn. (Enterprising Investor)
• “Saving vs. Investing: The Trade-Off” (Abnormal Returns)
• “In Asset Management, Does Personality Matter?” (Institutional Investor)

https://twitter.com/LarrabeeCFA/status/519466975051788289

Elder Care

• “The Investment Industry’s Response to Dementia” (AAII Investor Update)

Statistics

• “Bayesian statistics are rippling through everything from physics to cancer research, ecology to psychology,” writes F.D. Flan in “The Odds, Continually Updated.” “Enthusiasts say they are allowing scientists to solve problems that would have been considered impossible just 20 years ago. And lately, they have been thrust into an intense debate over the reliability of research results.” (New York Times)

Retirement

• The 4% rule’s place in history. (Journal of Financial Planning)
• How to draw down your portfolio is just as important as how to build it. (MoneySense)

And Now for Something Completely Different

• A reminder of a great mindset to have at work, i.e., assume best intentions: “Judging Others Favorably — Stop, Think, and Consider” (Lead Change Group)
• “How Your Brain Actually Makes Decisions While You Sleep” (Washington Post)
• How do our brains select relevant data? How do we become conscious of a certain stimulus, or indeed “conscious” at all? “The Anatomy of Attention” (The New Yorker)
• “Philosopher Kings: Business Leaders Would Benefit from Studying Great Writers” (The Economist)
• “The Struggles of a Psychologist Studying Self-Control” (The New Yorker)

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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.

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