5/1/15 Understanding Market Anomalies:
The Roles of Prediction, Probability and Perception
Jay Mooreland, MS, CFP®
Behavioral Economist
Introduction
Anomaly defined
1.  Deviation from normal or common order
(Dictionary.com)
2.  Something that is so remote that it is impossible for economic
models to account for. A six sigma event. (Wall Street)
3.  The natural result of a scheme in which outcomes are_______
Everything that has ever happened,
at one point __________________
©2014 The Emo/onal Investor 1 5/1/15 Problem with Predictions
§  14,000 matches
§  67 page report
§  Brazil will win
§  Qualifies Predictions (“all else equal”)
§  Updates Predictions Based on New Data
§  1st Round – Changed 50% of Predictions
§  Results: Source: Wall Street Journal, July 10, 2014
©2014 The Emo/onal Investor “Expert” Predictions
§  Empirical Evidence (N = 28,000)
“ …experts’
predictions barely beat random
guesses – the statistical equivalent of a dartthrowing chimp…Ironically, the more famous the
expert, the _______________ his or her predictions
tended to be”1
1.  Philip Tetlock, Professor of Organizational Behavior UC Berkeley
©2014 The Emo/onal Investor 2 5/1/15 Forecast Challenges
§  Predictability
§  Lack of Omniscience
©2014 The Emo/onal Investor Clients Bombarded by Forecasts
TV Print Media ©2014 The Emo/onal Investor 3 5/1/15 Forecasts – What to do?
§  Create a range of possible outcomes
§  Educate clients
“ The question is not whether these
experts are well trained. It is whether
their world is predictable.”
- Daniel Kahneman
©2014 The Emo/onal Investor Probability Problem
§  Brain loves certainty, details and causality
§  Probability is the product of uncertainty
§  Details, Details, Details
©2014 The Emo/onal Investor 4 5/1/15 Is the Market Random?
1,000 Coin Tosses
(4)
vs.
1,000 Trading Days
(2)
©2014 The Emo/onal Investor Randomness Abounds
§  Brain constantly searches for patterns to divine
future
§  1962 – 2010: S&P 500 positive 53% of days1
§  Security returns are mostly random in short term
1.  Source: BTN Research
2.  Montier, James (2010). The Little Book of Behavioral Investing, John Wiley & Sons, New Jersey.
©2014 The Emo/onal Investor 5 5/1/15 Investing: Skill or Luck?
§  Randomness is systemic, luck is individual
§  Investment performance - luck or skill?
Luck
Skill
§  Is it skill?
©2014 The Emo/onal Investor Probability and Returns
§  Frequency or probability of gains/losses needs to be
coupled with magnitude of return
§  Investors prefer greater frequency of gains than
optimizing total return1
1. Taleb, Nassim. (2004). Fooled by Randomness. Random House. New York.
©2014 The Emo/onal Investor 6 5/1/15 Uncertainty – What to do
§  Advisers are practitioners of randomness (anomalies)
§  Educate clients on uncertain nature of markets
§  Focus on what you can control (Skill)
©2014 The Emo/onal Investor Client Perception
§  Perception
§  Perception is point of view, it is our reality
©2014 The Emo/onal Investor 7 5/1/15 Influencing Perception
1)  Why are market/economic forecasts seldom correct?
2)  Why does Wall Street not forecast “big moves”?
3)  Why diversify? When does it work best? Worst?
©2014 The Emo/onal Investor Defining Yourself
OR
Anticipate what will improve investor experience
©2014 The Emo/onal Investor 8 5/1/15 Online Resources (Free)
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www.theEmotionalinvestor.org ©2014 The Emo/onal Investor The 9 Habits of Successful Investors
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§  Develop Proper Investment Habits
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Jay Mooreland
[email protected]
©2014 The Emo/onal Investor 10