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Why we trade

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Meeting Investors' Goals

Университет Женевы

4.8 (оценок: 1,041) | Зарегистрировано учащихся: 15K

Курс 2 из 5 — Управление инвестициями Специализация

In this course, you will dive into the concepts of rationality and irrationality and understand how they impact our investment decisions and what the consequences can be at the market level. You will first explore the different biases that we, as humans, are subjected to when facing investment decisions and how they may impact the outcomes of these decisions. Moreover, you will see how emotions and ethical concerns such as honesty and trust influence market participants. When they are considered as a group rather than individually, you will discover how rationality and irrationality can drive asset prices to and away from their fair value. Finally, you will be presented with different portfolio construction methodologies and investment styles that make up the landscape of today's portfolio management industry. At key points throughout the course, you will benefit from the practical knowledge of experts from our corporate partner, UBS, in how to build and manage clients' portfolios.

Просмотреть программу курса

Получаемые навыки

Portfolio Construction, Investment Style, Cognitive Bias, Investment

Рецензии

4.8 (оценок: 1,041)

5 stars
821 ratings
4 stars
191 ratings
3 stars
23 ratings
2 stars
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1 star
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SX

Mar 05, 2019

Excellent coverage of topics. Personal favorite was the behavioral aspects in investing- the biases. Great practical industry insights from the UBS team as well. Highly recommended course.

AD

Jul 16, 2017

this is a very good course. I couldn't have learnt much anywhere else. The practical examples and assignment help you get a grip on how to apply your skills to the real world.

Из урока

How Individuals Make Financial Decisions

The focus of this second week is on you, the investor: what are the reasons you participate in financial markets? How do you make investment decisions? What can go wrong in your decision process and what are the consequences? What can you do about it? To answer these questions, we will talk about cognitive biases, emotions and moral values and their respective link with investment decisions.

How our emotions impact our investment decisions4:59

Why we trade6:12

What can we learn from this?9:39

The role of media in financial markets10:46

Преподаватели

University of Geneva- Tony Berrada
SFI Associate Professor of Finance
University of Geneva- Jonas Demaurex
Teaching Assistant
University of Geneva- Rajna Gibson Brandon
SFI Senior Chaired Professor of Finance and Managing Director of the GFRI
University of Geneva- Michel Girardin
Lecturer in Macro-Finance - Project Leader for the "Investment Management" specialization
University of Geneva- Kerstin Preuschoff
Associate Professor of Neurofinance and Neuroeconomics
University of Geneva- Olivier Scaillet
SFI Senior Chaired Professor of Finance and Vice-dean (research) at GSEM
University of Geneva- Philip Valta
SFI Assistant Professor of Finance

Текст видео

[MUSIC]

Why do we invest in financial markets instead of just putting our money into

simple, almost risk-free savings accounts?

Now the first answer you might want to give is, well,

financial gain, increasing personal wealth.

Savings accounts, while they give a steady return,

that return often barely offsets inflation rates.

So it's not very desirable and

not a good investment in terms of increasing personal wealth.

Now the second set of answers actually

are also the kind of answers that somebody who enjoys gambling would give you.

Right, they do it for the thrill.

They do it for the uncertainty, not knowing what is going to happen.

They like the emotions behind the gamble, or in this case, behind the investment.

That's to say that we enjoy emotions that the market events trigger in us.

But I could also come back to the first motive,

the one where people say they want to increase personal wealth.

And I could ask you why do you want to increase personal wealth?

And the answer's likely going to be something like I would like to retire

early, have a nice retirement, secure the financial future for

my children, some kind of personal motive.

So this seemingly objective goal of increasing

personal wealth is really also driven by personal and emotional needs.

The third motive relates to things like status and value.

That is, how do other people perceive us when they know that we are investors,

when they know what we invest in?

We may enjoy outperforming our peers, our family, our friends.

We may enjoy saying, I knew it, even though we didn't.

The first of these three motives is really the only one from which you can

derive a purely return maximization strategy.

And by return here, I mean financial return.

The other two motives indicate that you're willing to give up money,

to pay a price to satisfy emotional or personal needs.

If you're truly interested in maximizing personal financial gain,

then you need to learn to identify the second and

third motive in yourself and eliminate them from your decision making process.

Now if you're interested in investing in the market primarily for

the gambling aspect, there's nothing wrong with this per se.

You just need to understand how this is going to affect you financially.

You need to develop a strategy that is not going to hurt you financially in

the long run.

We have already seen that risk avoidance is rooted in emotions,

more in particular in fear.

But fear isn't the only emotion that you experience when you're trading in markets.

Different market events are accompanied by different physiological and

emotional responses.

So any time you experience a gain or a loss,

you will also experience some form of physiological or emotional response.

And it is important to know that the reward that we experience when we receive

financial gains from a neuro perspective, from the perspective of our brain.

They're not different from the reward we experience when we get food or cocaine.

It's the same region in the brain that processes these rewards.

The same is true for losses.

So the losses are also processed in regions of the brain that

process other negative stimuli such as pain, disgust, or danger.

Now besides these basic emotions like happiness and

fear in response to gains and losses,

you will also experience other emotions such as anxiety, anger, hope, greed.

And all of those will influence the financial decisions that

you're going to make.

Now while your rational self may be able to work out the math and tell you what

are true expected returns and risks, your emotions are not that good at this.

So you will experience emotional and

physiological responses to both virtual and real losses and gains.

And this isn't just true for novices or non-professional traders.

It is actually also true for professional traders.

They too experience emotional and

physiological responses as a result of market events.

One interesting observation is that our trading decisions can at least in part

be explained by cognitive biases and emotions.

That is, if I was to look at the market,

just at the actual information that's in the market, I expected returns, risks.

It would be very difficult for

me to predict what investors are actually going to do.

However, if I take into account cognitive biases and emotions,

things like overconfidence for instance, I can actually predict

very well the decisions that people are going to make in the market, because it is

really these cognitive biases and emotions that drive your decisions.

Let me give you one specific example.

What we observed in today's market is an incredibly high volume of trades.

That is, people perform a lot of transactions in the market as compared to

say 20 or 30 years ago.

And that cannot just be explained because there are maybe more companies in

the market now.

Even when we account for that, people trade a lot.

So why is that?

Because if you just look at the, say the information in the market,

that doesn't trigger trades.

That should not trigger trades, right?

So if you run a computational model of the market,

that will tell you trade occasionally, but not as often as people do.

However, if we add to this model an assumption that people are overconfident.

So a lot of people just overestimate the probability of gains of certain stocks.

Then that will result in a massive increase in trading volume.

So it is the overconfidence that potentially triggers trades.

That is to say, the simple belief that a stock is going to

perform better than it actually will can trigger a lot of trades,

which will not generally result in better portfolio performance.

[MUSIC]

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