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When Do Investors Freak Out? Machine Learning Predictions of Panic Selling [pdf]
- 5faulker 5y agoAnother way where AI can be used to slowly dominate human activities.
- omarhaneef 5y agotl;dr It’s not the freaking out that hurts them so much as the lack of freaking back in on the rebound
- qeternity 5y agoWell, you either don’t freak out, or your freak out and freak in again. History has proven that the former is much easier than the latter. Bottoms occur when the last people panic sell. People tend to extrapolate trends poorly.
- quickthrowman 5y agoYou have it backwards in the last paragraph, shorts covering is generally what causes a bottom. This is why shorts are good for stocks, they’re the first to buy the crash.
- qeternity 5y agoHedge fund trader here. Who do you think shorts are buying from? Panic sellers. But anyway, in equities, which is what most people invest in, the longs greatly outnumber the shorts. So short covering has a much smaller impact than a reduction in panic selling.
- pashamur 5y agoBig crashes (and fast-drop bottoms) happen not because of panic selling, but because of forced selling (covering margin calls, getting liquidated, etc). Panic selling usually leads to slow grind downs. Shorts usually cover once the rebound starts, not when things are free-falling (their trailing stops get triggered, etc)
- qeternity 5y agoNo. Again, like short selling, you misunderstand the relative ratios of beta length vs. everything else. Smaller moves, at the money, occur because of this or in single names in multi SD moves (a la Archegos). The prevalence of vol control strats today means we also see these sorts of moves around key index gamma levels, but we're talking 100bps travel. Mar'20, 2008, etc - these did not happen because guys were getting margined. These happened because because were panic selling huge amounts of length.
- nostromo 5y ago> We analyze the financial activity of 653,455 anonymous accounts corresponding to 298,556 households from one of the largest brokerage firms in the United States. This pisses me off. I don’t want any of my financial firms handing out my data to anyone. It looks like they even gave them demographic information specific enough to likely be identifiable. What firm is this data from? This should be illegal.
- huitzitziltzin 5y agoI’m an economist who does research with sensitive data, though not in finance. I don’t know if I can assuage your concerns but… - any project like this goes through layers of lawyers on both sides (mit and the brokerage). They are extremely careful about exactly your concern. - mit has infrastructure to securely hold data. They do a ton of defense work, for example. They take it seriously. In the non-defense context, accidentally exposing certain health data can (iirc) lead to the entire university losing eligibility for NIH funding. At MIT that might be a half billion dollar hit. They don’t mess around with that. (Compare to the private sector where there are effectively no meaningful fines or consequences for data breaches.) - none of the researchers care about you as an individual enough to try to deidentify you in the data. I work with health data, some of which includes addresses. I have never thought for even one second that I should find out who lives at the address, even when dealing with data which includes the city I live in (so potentially my neighbors, eg.) - everyone involved in the project also separately promises not to de-identify anyone. Again: I really doubt anyone I have ever met in my field would care identify someone, but we do promise not to. - any data which is going to be merged with whatever the researchers got from the brokerage will be outlined in great detail in advance. As another point of comparison, how many breaches of university research data are you aware of? These things happen in the corporate world all the time with extremely sensitive data but I have not heard of university data beaches myself. Finally, there is generally some scientific benefit to the work that the researchers do. We know something from this paper about panic selling which we didn’t know before. That may be valuable.
- throwawaygh 5y agoIt used to be that IRBs required AFFIRMATIVE CONSENT from participants. It doesn’t matter what just so story you tell yourself. Research ethics 101: Don’t use people as lab specimens unless they affirmatively consent. Period. We should go back to the days of actual ethics in research. Banks and brokerages can do whatever they want with customer data, subject to relevant laws and contracts. Researchers who ever want a penny from the public should be held to higher ethical standards.
- dhosek 5y agoI can see this leading to a whole new category of flash crashes and exacerbating panic selling. Skynet doesn't need killer robots when it has the financial system.
- pishpash 5y agoFlash crash would happen so fast that it would recover before you'd notice though.
- matttproud 5y agoChartists 3.0
- rossdavidh 5y ago"Investors who are male, or above the age of 45, or married, or have more dependents, or who self-identify as having excellent investment experience or knowledge tend to freak out with greater frequency." In other words, investors more worried about avoiding huge losses than they are about missing out, are more skittish. Potentially rational behavior, if your particular situation puts more emphasis on avoiding catastrophe, than on maximizing your chance of hitting it big long-term. Not saying every instance of "freaking out" is rational, just pointing out that if you believe there's a 5% chance of losing almost everything, and a 95% chance of it being a buying opportunity, for some people that is a good reason to sell everything quick. Not everyone is in it for the long term, or most interested in maximizing their upside (rather than minimizing their downside risk). Age and dependents both point at investors who place greater emphasis on avoiding big losses than they do on attempting big wins, and they may be doing so for rational reasons.
- cosmojg 5y agoHolding beats timing in nearly all investable asset classes. If it's not FOMO, then what's stopping people in these risk-averse demographics from investing in bonds instead? Or some other asset with low volatility and positive expected returns?
- SubiculumCode 5y agoExample how you can be wrong: Holding beats timing unless you only have 1 year left to live.
- hogFeast 5y agoWhat timing? There are plenty of market timing strategies that will beat holding (the market is more volatile than underlying values so this is a natural certainty)...but it depends what you mean by timing. Most of the conventional things that people understand about holding are wrong though...unsurprisingly, given that most of these conventions are produced by people trying to sell you something (I know this, because I worked in financial services, and used some of these conventions to sell things...it makes sense because individuals are stupid enough to do themselves real harm by trying to be clever...but this does not mean that being clever doesn't work, it just means you are stupid).
- 11thEarlOfMar 5y agoFWIW, I've been an investor through three market meltdowns: - .COM bubble - Subprime mortgage crisis - COVID All three were nervewracking, but I held. In one case, I lost 101% on an Internet stock (CMTN for those who enjoy gloating). Total investments dropped 40% in the subprime crisis. COVID happened so fast, in both directions, that I really coudn't decide what to do. In each case, not selling was the right thing to do. Yes, I could have done far better by selling early in the event and the buying at the bottom. But timing is not what investing is about. This algorithm, if it's correct, can make a great deal of profit for the users: "major buying opportunity coming", at least until it's well known, at which point it might simply become a self-fulfiling prophecy.
- yazantapuz 5y agoAs allways, time in the market beats timing the market.
- godelski 5y agoThere's the old saying: time in the market is better than timing the market. If you're really not into doing tons of research to pick individual stocks then just buy ETFs and index funds. You'll do well. Even if you're into the research and stuff, it's probably good to hedge some that way. And for all those conservative investors I offer a new saying: buy low, buy high, sell even you're 65.
- bern4444 5y ago> at least until it's well known, at which point it might simply become a self-fulfiling prophecy. Exactly. Markets are extremely efficient. As soon as this becomes known as reliable, markets will begin pricing these possibilities in as investors make decisions around it.
- zz865 5y agoNot selling was the right thing to do (since 87 & LTCM) because the Fed came in and bailed everyone out. This has led to the huge inequality problem and the biggest asset bubble in history, and now everyone assumes the Fed will bail out everyone next time as well. The problem is one day it wont happen and a lot of people will get burned. Maybe it'll be next year, maybe it'll be generations following you.
- dkrich 5y agoMaybe the most common saying that you'll hear WRT to the markets is buy when there's blood in the streets. Then why do so few do it? It's because when there's blood in the streets and real fear it's for completely legitimate reasons. What about sell when others are greedy? This too is sage advice, except for one problem- when people are greedy nobody wants to sell, because the market is moving to ever higher prices for completely legitimate reasons. The thing about trying to be contrarian is that true contrarianism isn't just fading what seems like a popular take. Rather, it's fading your own instincts when they reach extremes and telling you to make impulsive decisions, which is one of the most difficult hurdles for humans to overcome. We are incredibly influenced by our environments with major recency bias. The truth about panics is that it isn't a real panic until everyone is panicking, bulls and bears because the reasons for the panic are completely real. Whether they prove to later be buying opportunities is totally irrelevant. The best traders who can actually not get caught up in the hoopla of a boom or bust are one in a million and still get it wrong more than half the time.
- JohnJamesRambo 5y agoI usually can’t buy because it’s my blood already on the streets. Because I’m already invested to the tits because that is what you are supposed to do to maximize gains and I didn’t sell because you aren’t supposed to do that either. I have no dry powder to buy with. But I’m looking to change that this time, I feel a big multi decade level drop coming. I may be wrong but I’ve got Warren Buffet and Michael Burry on my side.
- zz865 5y agoOne of the classic "illegal" strategies in a bad market is a bear raid when waves of short sellers short a stock so much it keeps going down in price and owners panic sell, further extending the crash. When the bots figure this out they'll all do the same. Nice.
- Animats 5y ago" We use a five-layer neural network model to predict freakout events one month in advance, given recent market conditions and an investor’s demographic attributes and financial history, which exhibited true negative and positive accuracy rates of 81.5% and 69.5%, respectively, in an out-of-sample test set." What did machine learning add here? They seem to have found some straightforward correlations. Training a machine learning model just means you now have a model that you don't understand. But you can sell it. With that model, you know who to cold-call.
- janto 5y agoBlack box ML models: the latest in code obfuscation ;)