4 ms·
"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 knowledg
by 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).
- lottin 5y ago> the market is more volatile than underlying values so this is a natural certainty What do you mean?
- hogFeast 5y agoThere is always going to be some timing strategy which beats holding. If we flip this and imagine that everyone knew with certainty what the underlying values (earnings, dividends, etc.) should be then the return on stocks would always just be the return on the underlying values (it is a bit more complex than this, in reality the cost of capital differs between individuals so you are always going to get volatility...but the point is that because people are trade their portfolios faster than fundamentals change, then there is always going to be a timing strategy that works...that is how HFTs make money most days over decades).
- lottin 5y agoThanks, I definitely don't understand the argument.
- hogFeast 5y agoThey are also selecting for 90% drops in equity (why 90%? what were the results when different numbers were selected?). In these cases, someone has lost most of their net worth and so they may find the rest of their assets are being liquidated, and they need to empty their account to discharge other liabilities. The reason why market downturns are correlated with panic selling is because market downturns are correlated with other things. The reason market cycles happen is largely because of the changing value that people place on cash...in 2008, lots of people needed cash. And 90% is a very large number, the max drawdown on the S&P in crashes is usually less than half this number...so I am not quite sure why they are looking at this number when it doesn't really reflect a realistic scenario for most people. Losing 90% is inherently extreme, I worked in finance, I am relatively good at investing...if I lost 90% of my money, I would time myself out. I know of no investment business in the world that would keep someone on after a 90% loss...zero. Some multi-strategy firms will fire you if you lose 5%. Additionally, as you say, people who have money tend to protect their downside. If you have $1m, and you lose 90%...you still have $100k. This tends to be particularly misleading when you look at a sample in which the market has always gone up and recovered...because it always looks like there was an opportunity cost from exiting (and if there wasn't, these papers don't get written). The paper is inferring reason to a decision that they don't really know the reason of. I 100% agree that "freaking out" can be (and often is) a rational choice. Ask someone who "freaked out" in 1991 when Japan tanked. I actually know a firm that didn't "freak out", they were strong investors...firm nearly died, they lost pretty much all their client's money, and the Japan business effectively folded...but yes, those idiots who "freaked out"...rakakakaka.
- jacobr1 5y agoI read it differently: "a decline of 90% of ... equity assets ... of which 50% or more is due to trades." This means that 45%-90% of equity was sold off ... they identifying the large sell-offs moreso than just equity drops.
- hogFeast 5y agoI thought I understood briefly...I don't anymore. I think the part that is confusing is the 50% part...50% of what? But I am right in saying that the drop in assets has to be at least 90%?
- vmception 5y agoYoung single childfree women are freaking out less because they have more lucrative choices than advertised? Someone should study that!