M Ozgur Altan’s Post

The most complex thing mentioned in this article is non-ergodicity in the economy and especially in financial markets. Non-linearity is manageable and non-convexity too, for example, using coherent risk measures (which is not used much in the industry and normality assumptions are common).

Harry Markowitz studied under Ken Arrow, who along with Gerard Debreu laid down the mathematical assumptions required for the existence of a general equilibrium. Harry made his name, as did many others like Bill Sharp and Eugene Fama, by applying the mathematics of Arrow and Debreu to finance. Arrow won a Nobel Prize but turned his back on GE theory because he considered the assumptions required to be utterly implausible. So, volatility is not risk. Markets cannot be “efficient” and pretty much everything taught to the current generation of orthodox economists is simply wrong. Economies and markets are Complex Adaptive Systems. Arrow knew this, and played a pivotal role in cementing Complexity Economics as a discipline at the Sante Fe Institute, which among many other scientific advancements pioneered AI modelling. For those with a mathematical bent, economies and markets are discontinuous, non-convex, and non-ergodic. This means - as Ken Arrow knew - that NONE of the mathematical assumptions on which the suite of general equilibrium theories used in economics and finance hold in the real world.

Our new blog is out now, click the link to learn more about Cognitive Biases in Investment Decisions by Rob Fezekas, CFA.

Professional money managers have offered their services for centuries, but until the 1960s, there was no empirical way to hold them accountable for their results. When computers became powerful enough to analyze immense amounts of data, researchers could start gathering and learning from historical stock returns. Now economists could measure the success of different investment strategies compared with the performance of the broader market. The science of finance took off. #investmentmanagement #investmentstrategy #investmentplanning https://lnkd.in/ec4AePDw

🔍 Behavioral Finance: Decoding the Investor's Mindset 🧠 In the world of finance, numbers, and data often take center stage. However, understanding the human element behind investment decisions is equally crucial. Enter Behavioral Finance—a field that blends psychology and economics to shed light on why investors behave the way they do. 🌟 Key Concepts in Behavioral Finance: 1. Cognitive Biases: Investors, like all humans, are prone to cognitive biases that can skew their decisions. Common biases include: - Overconfidence Bias: Overestimating one's knowledge or ability to predict market movements. - Anchoring Bias: Relying too heavily on the first piece of information (the "anchor") encountered when making decisions. 2. Emotional Influences: Emotions play a significant role in investment choices. Fear and greed, in particular, can lead to irrational decisions. For instance: - Loss Aversion: The pain of losing is psychologically more impactful than the pleasure of gaining, causing investors to avoid selling at a loss even when it might be the rational choice. - Herd Mentality: Following the crowd can lead to market bubbles and crashes, as seen in the dot-com boom or the housing market collapse. 3. Heuristics: These mental shortcuts can simplify decision-making but also lead to errors. For example: Representativeness Heuristic: Judging the probability of an event based on how similar it is to a known category, often leading to faulty assumptions. 📊 Practical Applications: Understanding these psychological factors can lead to better investment strategies and risk management. Here are some practical tips: - Diversification: Mitigate the impact of biases by diversifying investments across different asset classes and markets. - Regular Reviews: Periodically reviewing your investment portfolio helps in making objective decisions, free from emotional influence. - Education and Awareness: Educating yourself about behavioral finance can help in recognizing and mitigating cognitive biases in your decision-making process. 🏆 Case Studies: - Warren Buffett: Often cited as an example of an investor who successfully navigates cognitive biases by adhering to value investing principles and maintaining a long-term perspective. - The 2008 Financial Crisis: An illustration of herd mentality and overconfidence, where the housing bubble and subsequent market crash were driven by irrational investor behavior. 🌐 Join the Conversation: How do cognitive biases affect your investment decisions? What strategies do you use to counteract emotional influences? Share your experiences and insights in the comments below! #BehavioralFinance #businessanalyst #InvestorPsychology #Finance #InvestmentStrategies #CognitiveBiases #FinancialPlanning #RiskManagement

🔍 Unlocking the Power of Behavioral Finance: Navigating Cognitive Biases in Investment Decisions 🧠💼 In the intricate realm of finance, understanding the human psyche is as crucial as deciphering market trends. Introducing the concept of behavioral finance sheds light on how cognitive biases can shape our investment decisions, often leading to unexpected outcomes. Let's delve deeper into this fascinating intersection: What is Behavioral Finance? Behavioral finance explores the psychological factors that influence financial decisions, acknowledging that human beings are not always rational actors in the realm of investing. By integrating insights from psychology and economics, behavioral finance seeks to unravel the mysteries behind investor behavior and market anomalies. Cognitive Biases and Their Impact: Numerous cognitive biases can exert a profound influence on investment decisions, steering individuals away from optimal choices. Here are a few common biases and their implications: Loss Aversion: The fear of losses outweighing the pleasure of gains can lead investors to make irrational decisions, such as holding onto losing investments for too long or avoiding necessary portfolio adjustments. Confirmation Bias: Seeking out information that confirms pre-existing beliefs while disregarding contradictory evidence can result in flawed investment analysis and missed opportunities for diversification. Herd Mentality: Following the crowd without critically evaluating investment decisions can lead to groupthink and speculative bubbles, as witnessed in market frenzies driven by fear of missing out (FOMO). Navigating Cognitive Biases: Awareness is the first step towards mitigating the impact of cognitive biases on investment decisions. By acknowledging our inherent biases and adopting strategies to counteract them, investors can strive for more rational and disciplined decision-making. Techniques such as setting predefined investment criteria, maintaining a long-term perspective, and seeking diverse perspectives can help mitigate the influence of cognitive biases. In conclusion, understanding the principles of behavioral finance and recognizing the role of cognitive biases in shaping investment decisions are essential for navigating the complexities of financial markets. By embracing a mindset of self-awareness and rationality, investors can strive to make informed choices that align with their long-term financial goals. Let's embark on this journey of self-discovery and prudent decision-making together! 🚀 #BehavioralFinance #InvestmentInsights #CognitiveBiases #FinancialWellness #LinkedInLearning

Check out my article on behavioural biases! The fundamental idea of this article lies in the deviations of investment decision making that can massively differ due to biases 🧠 . Daily, millions of individuals make mistakes in trading or managing personal finances 💵 . A sound knowledge of the biases presented in this informative article would help investors to make well informed decisions keeping aside their cognitive or emotional beliefs. P.S: These biases are more prevalent in younger individuals or beginners in this field but can be applied to investment decisions regardless of experience. Any comment/feedback would be highly appreciated!

Recently read a paper by Andrew Lo that challenges the idea of the efficient market hypothesis. Lo doesn't argue that EMH is outright wrong or useless, just that it might be better served as a theoretical standard by which to compare real-life market conditions that are exposed to irrational risk-reward decisions by investors as well as transaction costs. Super interesting stuff on the theoretical side of finance, and emblematic of that kind of stuff that drew me to finance as a career path. You can read the paper for yourself here: https://lnkd.in/g6FKtjsT Also, Lo repeatedly cites his own previous work to make his point, which is such a chad move.

OUTLOOK 2024: Could a better understanding of psychology improve investor decision-making? Alexander Joshi, our Head of Behavioural Finance, lifts the lid on the cognitive biases that, if left unchecked, have the potential to derail your investment strategy. #BarclaysPrivateBank #Outlook2024 #BehaviouralFinance

In our latest ‘Quarterly Insights’ article, we pay tribute to Daniel Kahneman, the godfather of behavioural psychology, and apply it to the current world of finance.   We also introduce the often-overlooked concepts of Rentier Capitalism and Greed-flation, significant contributors to inflation. All this plus our usual review of economic growth, liquidity, thematic trends, valuations and our current positioning and markets outlook.   Read the article below 👇🏼   #DanielKahneman #financialmarkets #greedflation