Psychology 01 (Nov 08 - Jan 14)

[millionairemind]

I tot I start a thread on human psychology. This has always fascinated me since young. Among my staple reading list is Psychology Today and other books such as Stumbling on Happiness by Dan Gilbert (interesting book).

Of course the renowed Carl Jung, Sigmund Freud have both played a crucial role on the understanding of psychology. What makes a human tick? How did they derive at their decisions and actions? Why do criminals do the things they do? What other dark recesses of the human mind are there?? Of course it helps to understand this cos' the market is basically mob psychology at work.

You may have read about the "Broken Windows Theory" for the cleanup of NYC back in the 90s. Here is an article from this week's Economist. Tot you might enjoy it.

Criminology

Can the can
Nov 20th 2008
From The Economist print edition

The idea that graffiti-spraying and other forms of low-level delinquency promote further bad behaviour has now been tested experimentally

A PLACE that is covered in graffiti and festooned with rubbish makes people feel uneasy. And with good reason, according to a group of researchers in the Netherlands. Kees Keizer and his colleagues at the University of Groningen deliberately created such settings as a part of a series of experiments designed to discover if signs of vandalism, litter and low-level lawbreaking could change the way people behave. They found that they could, by a lot: doubling the number who are prepared to litter and steal.

The idea that observing disorder can have a psychological effect on people has been around for a while. In the late 1980s George Kelling, a former probation officer who now works at Rutgers University, initiated what became a vigorous campaign to remove graffiti from New York City’s subway system, which was followed by a reduction in petty crime. This idea also underpinned the “zero tolerance” which Rudy Giuliani subsequently brought to the city’s streets when he became mayor.

Many cities and communities around the world now try to get on top of anti-social behaviour as a way of deterring crime. But the idea remains a controversial one, not least because it is often difficult to account for other factors that could influence crime reduction, such as changes in poverty levels, housing conditions and sentencing policy—even, some people have argued, the removal of lead from petrol. An experimental test of the “broken windows theory”, as Dr Kelling and his colleague James Wilson later called the idea, is therefore long overdue. And that is what Dr Keizer and his colleagues have provided.

The writing’s on the wall
Dr Kelling’s theory takes its name from the observation that a few broken windows in an empty building quickly lead to more smashed panes, more vandalism and eventually to break-ins. The tendency for people to behave in a particular way can be strengthened or weakened depending on what they observe others to be doing. This does not necessarily mean that people will copy bad behaviour exactly, reaching for a spray can when they see graffiti. Rather, says Dr Keizer, it can foster the “violation” of other norms of behaviour. It was this effect that his experiments, which have just been published in Science, set out to test.

His group’s first study was conducted in an alley that is frequently used to park bicycles. As in all of their experiments, the researchers created two conditions: one of order and the other of disorder. In the former, the walls of the alley were freshly painted; in the latter, they were tagged with graffiti (but not elaborately, to avoid the perception that it might be art). In both states a large sign prohibiting graffiti was put up, so that it would not be missed by anyone who came to collect a bicycle. All the bikes then had a flyer promoting a non-existent sports shop attached to their handlebars. This needed to be removed before a bicycle could be ridden.

When owners returned, their behaviour was secretly observed. There were no rubbish bins in the alley, so a cyclist had three choices. He could take the flyer with him, hang it on another bicycle (which the researchers counted as littering) or throw it to the floor. When the alley contained graffiti, 69% of the riders littered compared with 33% when the walls were clean.

To remove one possible bias—that litter encourages more litter—the researchers inconspicuously picked up each castaway flyer. Nor, they say, could the effect be explained by litterers assuming that because the spraying of graffiti had not been prevented, it was also unlikely that they would be caught. Littering, Dr Keizer observes, is generally tolerated by the police in Groningen.

The other experiments were carried out in a similar way. In one, a temporary fence was used to close off a short cut to a car park, except for a narrow gap. Two signs were erected, one telling people there was no throughway and the other saying that bicycles must not be left locked to the fence. In the “order” condition (with four bicycles parked nearby, but not locked to the fence) 27% of people were prepared to trespass by stepping through the gap, whereas in the disorder condition (with the four bikes locked to the fence, in violation of the sign) 82% took the short cut.

Nor were the effects limited to visual observation of petty criminal behaviour. It is against the law to let off fireworks in the Netherlands for several weeks before New Year’s Eve. So two weeks before the festival the researchers randomly let off firecrackers near a bicycle shed at a main railway station and watched what happened using their flyer technique. With no fireworks, 48% of people took the flyers with them when they collected their bikes. With fireworks, this fell to 20%.

The most dramatic result, though, was the one that showed a doubling in the number of people who were prepared to steal in a condition of disorder. In this case an envelope with a €5 ($6) note inside (and the note clearly visible through the address window) was left sticking out of a post box. In a condition of order, 13% of those passing took the envelope (instead of leaving it or pushing it into the box). But if the post box was covered in graffiti, 27% did. Even if the post box had no graffiti on it, but the area around it was littered with paper, orange peel, cigarette butts and empty cans, 25% still took the envelope.

The researchers’ conclusion is that one example of disorder, like graffiti or littering, can indeed encourage another, like stealing. Dr Kelling was right. The message for policymakers and police officers is that clearing up graffiti or littering promptly could help fight the spread of crime.

[kennynah]

i shiok, so i happy...... - psychology made simple by kennynah, 2008

[fclim]

hey mm,

i also interested in this topic...
i learnt about B F Skinner while reading Mr Munger's book... its really quite interesting on the conditioning concepts.... below is an excerpt from wikipedia (http://en.wikipedia.org/wiki/B._F._Skinner)

have fun,
fc

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Biography
B. F. Skinner was born on March 20, 1904, in Susquehanna, Pennsylvania to Grace and William Skinner. His father was a lawyer. His brother Edward, two and a half years his junior, died at age sixteen of a cerebral hemorrhage.

He attended Hamilton College in New York with the intention of becoming a writer. While attending, he joined Lambda Chi Alpha Fraternity. He wrote for the school paper, but as an atheist, he was critical of the religious school he attended.[12] He received his B.A in English literature in 1926. After graduation, he spent a year at his parents' home in Scranton, attempting to become a writer of fiction. He soon became disillusioned with his literary skills and concluded that he had little world experience and no strong personal perspective from which to write.

During this time, which Skinner later called "the dark year," he chanced upon a copy of Bertrand Russell's recently published book An Outline of Philosophy, in which Russell discusses the behaviorist philosophy of psychologist John B. Watson. At the time, Skinner had begun to take more interest in the actions and behaviors of those around him, and some of his short stories had taken a "psychological" slant. He decided to abandon literature and seek admission as a graduate student in psychology at Harvard University. While a graduate student, he invented the operant conditioning chamber and cumulative recorder, developed the rate of response as a critical dependent variable in psychological research, and developed a powerful, inductive, data-driven method of experimental research. During this time Skinner was influenced by the physiologist Crozier.

Skinner received a PhD from Harvard in 1931, and remained there as a researcher until 1936. He then taught at the University of Minnesota at Minneapolis and later at Indiana University, where he was chair of the psychology department from 1946–1947, before returning to Harvard as a tenured professor in 1948. He remained at Harvard for the rest of his career.

In 1936 Skinner married Yvonne Blue (1911–1997); the couple had two daughters, Julie (m. Vargas) and Deborah (m. Buzan). He died of leukemia in 1990 and is buried in Mount Auburn Cemetery, Cambridge, Massachusetts.


[edit] Theory
He conducted pioneering work in psychology and innovated his own school of Radical Behaviorism, which seeks to understand behavior as a function of environmental histories of reinforcing consequences. He is known as the inventor of the operant conditioning chamber (or Skinner box), a research tool used to examine the orderly relations of the behavior of organisms (such as rats, pigeons and humans) to their environment. He is the author of Walden Two, Beyond Freedom and Dignity, Verbal Behavior, Science and Human Behaviour and numerous other books and articles. He discovered what is now called operant conditioning and articulated the now widely accepted term reinforcement as a scientific principle of behavior. His position reflects the extension of the influence of physicist Ernst Mach's The Science of Mechanics to the subject of psychology.[13] Skinner's pioneering research reflected the dual influence of whole organism research in Ivan Pavlov and Jacques Loeb.[14]

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[millionairemind]

Not sure if anyone of you guys have taken the Myers-Briggs Personality test. I took it when I was 21 and it was very interesting to use your known personality to look for a job that suits oneself.

Why Optimists Are Healthier People
The Personality Trait Optimism Has Health Benefits© Laurie Pawlik-Kienlen

Jan 27, 2007

Optimists are healthier & have lower risks of death than pessimists. The latest research shows you can change your Big Five Personality Traits to get healthier & happier.

Psychologists once believed that your Big Five Personality Traits were set in stone...but research shows that you can change your personality traits. Not only can you potentially be happier, you could also have a healthier heart and immune system. For instance, research shows optimists are healthier people.

Without a doubt, your personality affects your health - but you don't need a personality test or personality profile to make personality changes. To take advantage of the fact that optimists are healthier people, you can learn personality trait of optimism.

Research Shows Optimists are Healthier People
An article in The Archives of General Psychiatry (Nov 2004) states that major depression is a known risk factor in cardiovascular death – this isn’t new news. Optimists have a 55% lower risk of death from all causes ("all-cause death") and a 23% lower risk of cardiovascular death than pessimists. Optimists are simply healthier people. Optimism isn't a Big Five Personality Trait, but it does have a stronger protective effect in men than women for all-cause death, (but not cardiovascular mortality).

Why Optimists Are Healthier People
Optimists are healthier because they may have better coping strategies. Optimists don’t feel the same sense of hopelessness that pessimists do. Optimists are healthier people because they don't feel the pessimism that increases the incidence and progression of disease. The personality profiles of optimists includes more friends and happier outlooks on life. Optimists are healthier because they have a reduced risk of disease.

Optimists are healthier people because their personality profile makes them more prone to making changes in their lifestyles, such as quitting smoking or eating more nutritiously. Optimists tend to have strong survival mechanisms that they adhere to all their lives, which affects their coping strategies.

Optimists Are Healthier People: Why Curious People Are Healthier Than Shy Introverts
Like the difference between optimists and pessimists, shy, introverts and cautious people may have different health forecasts and different coping strategies than outgoing people or extroverts. Penn State researcher Dr. Sonia Cavigelli found that curious rats survive tumors longer than cautious ones. She admits that “it’s difficult to extrapolate from rats to people” but says that shy elderly people (introverts) report more symptoms than outgoing peers.

Optimists Are Healthier People: Changing Your Personality Traits
Extroverts are open and outgoing, which is the opposite introverts' personality traits (extroversion and openness are two of the Big Five Personality Traits). Extroverts often have stronger social ties and more friends – which can set them up for a healthier, happier life. Psychologists once believed that personality traits are set in stone by age 30, but new research shows that not only does it change with age, people can actively make the personality changes they want!

Introverts can become more extroverted; pessimists can become more optimistic. When there's a real motivation to change - such as learning that optimists are healthier people - change becomes possible.

According to personality researchers at the University of California in Berkeley, the Big Five Personality Traits do change over time on their own:

Conscientiousness (disciplined, organized) increases in the 20’s.
Agreeableness (warm, generous, helpful) increases in the 30’s.
Neuroticism (emotional instability, worry-prone) declines in women, but not in men.
Openness (willing to try new things) declines for both men and women.
Extraversion (friendliness, outgoingness) declined for women but didn’t change for men.

Like it or not, your personality changes as you get older, and could increase the personality trait optimism. Hopefully, your personality changes will increase your overall health and wellness -- not set you up for an early "retirement"!

[kennynah]

i dont believe in personality tests.... never have and never will.....

no offense intended

[millionairemind]

One school of thought that is rapidly catching hold is behavioral finance and its relationship to the stock market. Below is an article on Behavioral Finance which I tot our readers might be interested. I will update it when I get a chance on different aspects of Behavioral Finance as we go along.


Behavioral Finance: Introduction
By Albert Phung

According to conventional financial theory, the world and its participants are, for the most part, rational "wealth maximizers". However, there are many instances where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways.

Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.


Behavioral Finance: Key Concepts - Anchoring

Similar to how a house should be built upon a good, solid foundation, our ideas and opinions should also be based on relevant and correct facts in order to be considered valid. However, this is not always so. The concept of anchoring draws on the tendency to attach or "anchor" our thoughts to a reference point - even though it may have no logical relevance to the decision at hand.

Although it may seem an unlikely phenomenon, anchoring is fairly prevalent in situations where people are dealing with concepts that are new and novel.

A Diamond Anchor
Consider this classic example: Conventional wisdom dictates that a diamond engagement ring should cost around two months' worth of salary. Believe it or not, this "standard" is one of the most illogical examples of anchoring. While spending two months worth of salary can serve as a benchmark, it is a completely irrelevant reference point created by the jewelry industry to maximize profits, and not a valuation of love.

Many men can't afford to devote two months of salary towards a ring while paying for living expenses. Consequently, many go into debt in order to meet the "standard". In many cases, the "diamond anchor" will live up to its name, as the prospective groom struggles to keep his head above water in a sea of mounting debt.

Although the amount spent on an engagement ring should be dictated by what a person can afford, many men illogically anchor their decision to the two-month standard. Because buying jewelry is a "novel" experience for many men, they are more likely to purchase something that is around the "standard", despite the expense. This is the power of anchoring.

Academic Evidence
Admittedly, the two-month standard used in the previous example does sound relatively plausible. However, academic studies have shown the anchoring effect to be so strong that it still occurs in situations where the anchor is absolutely random.

In a 1974 paper entitled "Judgment Under Uncertainty: Heuristics And Biases", Kahneman and Tversky conducted a study in which a wheel containing the numbers 1 though 100 was spun. Then, subjects were asked whether the percentage of U.N. membership accounted for by African countries was higher or lower than the number on the wheel. Afterward, the subjects were asked to give an actual estimate. Tversky and Kahneman found that the seemingly random anchoring value of the number on which the wheel landed had a pronounced effect on the answer that the subjects gave. For example, when the wheel landed on 10, the average estimate given by the subjects was 25%, whereas when the wheel landed on 60, the average estimate was 45%. As you can see, the random number had an anchoring effect on the subjects' responses, pulling their estimates closer to the number they were just shown - even though the number had absolutely no correlation at all to the question.

Investment Anchoring
Anchoring can also be a source of frustration in the financial world, as investors base their decisions on irrelevant figures and statistics. For example, some investors invest in the stocks of companies that have fallen considerably in a very short amount of time. In this case, the investor is anchoring on a recent "high" that the stock has achieved and consequently believes that the drop in price provides an opportunity to buy the stock at a discount.

mm comments - Think of some stocks and how your think it is "cheap or expensive" relative to the recent price. When Yang Zi Jiang fell from $2.80 to $1.80, alot of ppe. thought it was cheap.. then $1.50.. cheaper... and the most recent low - around 30cts

While, it is true that the fickleness of the overall market can cause some stocks to drop substantially in value, allowing investors to take advantage of this short- term volatility. However, stocks quite often also decline in value due to changes in their underlying fundamentals.

For instance, suppose that XYZ stock had very strong revenue in the last year, causing its share price to shoot up from $25 to $80. Unfortunately, one of the company's major customers, who contributed to 50% of XYZ's revenue, had decided not to renew its purchasing agreement with XYZ. This change of events causes a drop in XYZ's share price from $80 to $40.

By anchoring to the previous high of $80 and the current price of $40, the investor erroneously believes that XYZ is undervalued. Keep in mind that XYZ is not being sold at a discount, instead the drop in share value is attributed to a change to XYZ's fundamentals (loss of revenue from a big customer). In this example, the investor has fallen prey to the dangers of anchoring. (For related reading, see

Avoiding Anchoring
When it comes to avoiding anchoring, there's no substitute for rigorous critical thinking. Be especially careful about which figures you use to evaluate a stock's potential. Successful investors don't just base their decisions on one or two benchmarks, they evaluate each company from a variety of perspectives in order to derive the truest picture of the investment landscape.

For novice investors especially, it's never a bad idea to seek out other perspectives. Listening to a few "devil's advocates" could identify incorrect benchmarks that are causing your strategy to fail.

[millionairemind]

Behavioral Finance: Key Concepts - Mental Accounting
By Albert Phung

Key Concept No.2: Mental Accounting
Mental accounting refers to the tendency for people to separate their money into separate accounts based on a variety of subjective criteria, like the source of the money and intent for each account. According to the theory, individuals assign different functions to each asset group, which has an often irrational and detrimental effect on their consumption decisions and other behaviors.

Although many people use mental accounting, they may not realize how illogical this line of thinking really is. For example, people often have a special "money jar" or fund set aside for a vacation or a new home, while still carrying substantial credit card debt.

In this example, money in the special fund is being treated differently from the money that the same person is using to pay down his or her debt, despite the fact that diverting funds from debt repayment increases interest payments and reduces the person's net worth. Simply put, it's illogical (and detrimental) to have savings in a jar earning little to no interest while carrying credit-card debt accruing at 20% annually.

In this case, rather than saving for a holiday, the most logical course of action would be to use the funds in the jar (and any other available monies) to pay off the expensive debt.

This seems simple enough, but why don't people behave this way? The answer lies with the personal value that people place on particular assets. For instance, people may feel that money saved for a new house or their children's college fund is too "important" to relinquish. As a result, this "important" account may not be touched at all, even if doing so would provide added financial benefit.

The Different Accounts Dilemma
To illustrate the importance of different accounts as it relates to mental accounting, consider this real-life example: You have recently subjected yourself to a weekly lunch budget and are going to purchase a $6 sandwich for lunch. As you are waiting in line, one of the following things occurs: 1) You find that you have a hole in your pocket and have lost $6; or 2) You buy the sandwich, but as you plan to take a bite, you stumble and your delicious sandwich ends up on the floor. In either case (assuming you still have enough money), would you buy another sandwich?

Logically speaking, your answer in both scenarios should be the same; the dilemma is whether you should spend $6 for a sandwich. However, because of the mental accounting bias, this isn't so.

Because of the mental accounting bias, most people in the first scenario wouldn't consider the lost money to be part of their lunch budget because the money had not yet been spent or allocated to that account. Consequently, they'd be more likely to buy another sandwich, whereas in the second scenario, the money had already been spent.

Different Source, Different Purpose
Another aspect of mental accounting is that people also treat money differently depending on its source. For example, people tend to spend a lot more "found" money, such as tax returns and work bonuses and gifts, compared to a similar amount of money that is normally expected, such as from their paychecks. This represents another instance of how mental accounting can cause illogical use of money.

Logically speaking, money should be interchangeable, regardless of its origin. Treating money differently because it comes from a different source violates that logical premise. Where the money came from should not be a factor in how much of it you spend - regardless of the money's source, spending it will represent a drop in your overall wealth.

Mental Accounting In Investing
The mental accounting bias also enters into investing. For example, some investors divide their investments between a safe investment portfolio and a speculative portfolio in order to prevent the negative returns that speculative investments may have from affecting the entire portfolio. The problem with such a practice is that despite all the work and money that the investor spends to separate the portfolio, his net wealth will be no different than if he had held one larger portfolio.

Avoiding Mental Accounting
The key point to consider for mental accounting is that money is fungible; regardless of its origins or intended use, all money is the same. You can cut down on frivolous spending of "found" money, by realizing that "found" money is no different than money that you earned by working.

As an extension of money being fungible, realize that saving money in a low- or no-interest account is fruitless if you still have outstanding debt. In most cases, the interest on your debt will erode any interest that you can earn in most savings accounts. While having savings is important, sometimes it makes more sense to forgo your savings in order to pay off debt.

[RidingOnTop]

Mental Accounting In Investing
The mental accounting bias also enters into investing. For example, some investors divide their investments between a safe investment portfolio and a speculative portfolio in order to prevent the negative returns that speculative investments may have from affecting the entire portfolio. The problem with such a practice is that despite all the work and money that the investor spends to separate the portfolio, his net wealth will be no different than if he had held one larger portfolio.

Hmmm... Isn't it a good thing to have some form of diversification into our portfolio to balance the Low Risk/ Low Gain and the High R/ High G investments?

Or the author is trying to say False diversification = High Risk vs Low Risk , True diversification = Different industries but all Low Risk (given proper research + experience)?

[millionairemind]

From my understanding, some investors/traders will allocate say 10% of their money for "risky investments". When they lose that money... they don't log it down as part of their "total portfolio return".

Example.

50% of money in stocks that gained 10% for the year, at end of year, amt left = 55%
40% in bonds that gained 5% for the year. Amt left at end of year = 42% (edited to 42% from 44%.. what was I thinking??)
10% in risky investments that resulted in 90% loss of capital. Amount left at end of year = 1%.

Total amount left at end of year = 98%, resulting in a loss of 2% for the year.

But investors will count their returns as 7.8% return due to mental accounting(7% out of 90% of portfolio)

[kennynah]

too much trickery involved here with "mental accounting" for me...i just need to open up my trading account and wah lah... the numbers are there...they dont ever lie...and so, why the extra spray with such "mental accounting"...hahaha... macam...eat full full, no shit to purge...

however, rather than a pyschological affair, i feel it should be more a systematic process to manage overall trading positions in terms of risks/return and target outcome over a period of time... let's use an example...

i LONG several DOW component stocks... and that is ONE directional bet..and therefore, risks can be high and does not mean anyone should just let these positions go unmanaged (even if this is that 10% high risk investments)... u mean, 10% is not money meh ? so, in order to contain the inherent risks of these Long stock positions, I may choose to Short /YM (which is e-mini DOW futures)..

my point therefore is PSYCHOLOGY is a double edged sword... it can unrealistically fly you to the moon (meaning, think that the 10% can bring you that $10 Mil) or it can unduly inhibit your confidence level (meaning, you lessen your innate ability)

talking cock here....boring afternoon....