Irrationality ... and Decision Making

  • So I get an e-mail from my son-in-law about a book by Dan Ariely.
  • Then I look at this video by this behavioral economist.
  • Then I discuss these "irrational" behaviours with my wife over our morning coffee.
  • Then I figure I need to play with the ideas and the stock market and Buy&Sell rituals.       
  • Then I note that Ariely has a PhD in Business !
  • Then I buy the book on eBay    
  • Then ...
>Huh? Irrational behaviours?
Yes ... it's quite fascinating.
Example #1:
    You collect together a diverse group of people.
    You hand out a sheet of paper with various items depicted: watches, luggage, whatever.
    You ask the people to indicate the maximum dollar amount they'd pay for each item ... sort of like eBay bidding.
    Those that indicated large amounts tended to have large numbers as the last 2 digits of their Social Insurance Number.
    Those indicating smaller amounts tended to have smaller numbers (as the last 2 digits of their SIN).

>What's their S.I.N. got to do with anything?
That's the interesting thing:
Each person was asked, initially, to write the last 2 digits at the top of the sheet of paper ... preceded by a $dollar sign.
Surprisingly, THAT influenced the size of their bid.

When I mentioned the results to my wife she thought those who bid larger amounts for the listed items were probably influenced by their parents, upbringing, job, hobbies etc.

>But they were influenced by their SIN? You're kidding, right?
The interesting thing is that these decisions were somehow "imprinted".
Those that bid higher (lower) amounts tended to subsequently bid higher (lower) ... even when their SIN number was not on the paper.
There's more:

Example #2:
    You divide a bunch of people into two groups.
    One group is asked to read a passage from a novel.
    The second group is asked to recite the Ten Commandments.
    Then, each group is given the opportunity to cheat (at some game).
    The Ten Commandments group cheated much less.

>Why? Did reading a passage from the bible make them more honest?
Did I mention that I bought the book on eBay? It hasn't arrived ... yet.

However, it'd be neat to analyze what makes investors Buy and/or Sell stock and at what price.
Is it the fact that the stock price is increasing or decreasing, how it compares to some moving average, whether it's bouncing off a Bollinger Band
... or is it often some other (less rational) decision-making process.

>What do you think?
Did I mention that I haven't read the book ... yet?

>How about an experiment? You show a bunch of investors some recent stock behaviour, ask them to write the last 2 digits of their SIN, then ...
Then ask what price they'd pay for that stock? Funny!!

Remember when we said theire was some kind of "imprinting" by the SIN number?
In earlier experiments (Tverskyand Kahneman, 1974), a wheel of fortune was spun with numbers ranging from 0 to 100.
Subjects were then asked if the number of African nations in the United Nations was greater or less than the number appearing on the wheel.
Then they were asked to guess at the number of African nations in the U.N. and (surprise!) their guesses were related to that random number generated by the wheel!!
That's called "anchoring and adjustment". The guesses were adjustments to the anchor number on the wheel.
Facinating, eh?

>So, what about buying stocks ... and what price you'd be willing to pay
Patience. I haven't finished the book!

>But what do you think?
There's this popular ritual called "momentum investing". The price is rising and you buy ... jumping on the bandwagon.
Who knows. Maybe the rate of ascent affects your decision.
Then again, suppose a $20 stock has been at $30 and that's "imprinted". The stock price is now rising. The $30 figure is in your grey cells. You buy.

>That sounds pretty rational, to me.
Okay, suppose you wake up and look at the day-of-the-month.
If it's near the beginning of the month (the day-of-the-month is a small number, eh?) then you think small and won't pay a high price for your favourite stock.
Indeed, you may sell. On the other hand, if it's near the end of the month, then ...

>Yeah, so what do you get?
I get this (for the DOW over the past five years, looking at the daily Close / Open returns):


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