This post is a continuation of my earlier posts. I suggest reading The Art of Selling - Preview,
The Art of Selling - Winning the Loser's Game,
The Art of Selling - Who is on the Other Side?,
The Art of Selling - 10 Commandments,
The Art of Selling - Coffee Can Portfolio, and
The Art of Selling - Psychology of Investing, before you read this post.
How do Colours Lead to Bias?
The National Stock Exchange of India (NSE) uses the colour Red to show a downward tick in the Last Traded Price (LTP) and the colour Blue to show an uptick in the LTP of any given stock symbol. Bloomberg terminals all over the world also use colours to highlight changes in the LTP. Three types of shades are ubiquitous; Red, Blue and Green. Whereas the tone Red is ALWAYS used to show a downward tick, one of the other two colours (Blue or Green) are used to highlight upticks in the LTP.
The colours bring about an association in our minds. As a result, we associate the colour blue with an uptick and the colour red with a downward tick. On live screens, (with prices continually getting updated during market hours), the changes in the colours form a wavelike formation. The stream of imagery affects the way we think and decide. The question is: do these waves of colour have a deleterious impact, whereby they nudge the investor into activity when none is warranted?
In a research paper published on July 20, 2017, Messrs William J. Bazley, Henrik Cronqvist, and Milica Mormann examine the effects of Colour on Investment Behaviour. You can click here to read: Visual Finance: The Pervasive Effects of Red on Investor Behavior by William Bazley, Henrik Cronqvist, Milica Milosavljevic Mormann :: SSRN. For the sake of brevity, I’ll stick to the conclusions that they have arrived at:
1. Since potential losses are displayed in Red and potential profits in Blue, the colours act as stimuli for determining investor behaviour.
2. The colour Red leads to reduced risk-taking behaviour by investors/traders.
3. When historical graphs of individual stocks or the index are shown using colours, a red colour in the historical chart leads to lower expectations about future returns.
4. There are two exceptions. These are: (a) Colour Blind investors are immune to the effects of the colours and (b) in China they found that ‘colour effects’ were muted since the tone Red is NOT used to portray financial losses.
I think the exceptions mentioned effectively prove that colours influence our investing behaviour.
Many of us don’t log in to live terminals. Investors in Mutual Fund Schemes need to know that their fund manager is invariably sitting in front of a live terminal. Almost all investors check on their portfolios daily, if not multiple times a day. Portfolio Tracking Softwares use colours for showing ‘day’s gain’ and ’overall gain’ on individual prices and the portfolio. Names of the stocks that are trading higher than the previous days close are shown in green, those that are unchanged aren't coloured and the names of stocks that are trading below their prior close are shown in red. The colour scheme nudges our thinking process. (To be sure, I have nothing against portfolio tracking software, and there are some very good softwares without the colour schemes). The unintended consequences of staring at stock prices is that it affects our investing mindset in the following manner.
Foremost, if our time horizon is 10 years, why should we be checking on prices 10 times in a day? This is Cognitive Dissonance, which is the contrast between our beliefs and our behaviours. By definition, our time horizon is long term, but we are behaving as if it were short term.
Second, we end up focusing on the stock price. We seem to fool ourselves into believing that by checking on live prices, we are ‘in charge’ of our portfolio. Taleb calls this ‘illusion of control’. In reality, nobody has any control over short-term price discovery. If you are day trading, it is understandable, but not otherwise.
Third, the more often we stare at stock prices, the more likely we are to trade - it triggers an action bias. When you combine this with the media noise, it has a disastrous effect. The problem is that our brains are pretty skilled at suppressing good news when it's irrelevant. But the brain is not so good at suppressing irrelevant bad news. Indirectly, we let stock prices decide how we feel. Inherently, humans are pattern-matching creatures. We find randomness hard to accept and we look for meaning in chaotic events. We see patterns in random data.
Fourth, we mistake short-term changes in price as a change in value. The sin of extrapolation of short-term price discovery is the business model of financial media. Over the short-term, the price of the stock may or may not correctly reflect the value of the company. Stocks have prices and companies have value. Here is what Benjamin Graham has said about the effect of staring at stock prices: The true investor is free to disregard the current price quotation. He should pay attention to it only in so far as it suits his book and no more. If an individual investor permits himself to be stampeded or unduly worried by unjustified market declines in his holdings, he is transforming his basic advantage into a basic disadvantage.
Fifth, we buy to sell. The perception by many market participants is that stocks are little more than pieces of paper that bounce around. The fact that stocks represent ownership stakes in businesses that we want to buy at a discount, is lost on most market participants. Almost every investor asks me for target prices on stocks that I recommend. The reason is that we have been mentally conditioned by the street that stocks have targets. How stupid is that? Yet, every research report that is published by leading brokerages has a target price pinned right at the top. This tends to further inflame the speculative mindset and we feel the urge to stare at stock prices.
Sixth, when stock prices become an ambient presence in our daily lives, it triggers an action bias and leads to a fight-or-flight response in our brains. And the news cycle ensures stock prices are indeed an ambient presence in the lives of everyone, even those who don’t invest in the stock market. I cannot understand why daily gyrations in the stock market should be headline news? The point is that the news cycle follows the market. Most of us wrongly think that the news precedes market activity. It doesn't. When the news does precede market volatility, that is the exception, not the rule. Here is Taleb: "To be completely cured of newspapers, spend a year reading the previous week's newspapers."
Lastly, some excellent advice from Warren Buffett: ‘If you can enjoy Saturdays and Sundays without looking at stock prices, try it on weekdays.’ Looking less often would improve most investors' results.”
The entire system, as in the regulators, the government and the stock exchanges themselves, is very much part of this ‘gamification of terminals via colour schemes’. Whether we win or lose in the stock market game, these guys always win. The whole concept of gamification isn’t new at all. In the 1930s, Keynes observations are (emphasis added):
“When discriminating investors are "so much in the minority that their behavior does not govern the market," Keynes argued, a stock exchange could assume the traits of its "game players," evincing an excessively short-term approach and presenting with bipolar tendencies. Keynes also lamented that the financial exchanges-with their constant price quotations and potential to readily monetise investments-gave: . . . a frequent opportunity to the individual . . . to revise his commitments. The perception by many market participants that stocks are little more than a number in a newspaper column or on a computer screen-a mere trading chip divorced from the underlying business, rather than a part-interest in the business itself-further inflames the speculative mindset.”
Jason Zweig has written several books on how our biases come in the way of our behaviour. I will cut and paste directly from one of his newspaper columns.
When stock prices are no longer discrete units of information but morph into animated and brightly coloured displays, they acquire a life -- and apparent predictability -- of their own. The human mind automatically attributes propensity and causality to these movements. To see what I mean, take a minute to watch this classic video (literally: it's only one minute and 19 seconds long) - Experimental study of apparent behavior. Fritz Heider & Marianne Simmel. 1944.
From a classic 1944 experiment by psychologists Fritz Heider and Marianne Simmel, this video shows a few lines, a dot and two triangles moving around on a screen. Almost no one who has ever watched it, however, describes it that way. Instead, people intuitively interpret the shapes as living creatures with personalities, whose "behavior" is shaped by their "objectives." The motion of these two-dimensional objects automatically seems to us like intention and direction.
Brokerages insist that turning the stock market into a video game makes investing fun for people who've never tried it before. Fair enough. But it also makes people perceive patterns that aren't there, imagine they can control random events and believe that markets are far more predictable than they really are.The human mind isn't built to resist this temptation.
There is one more bias that I want to highlight and I’ll write about that in the next post.
The Art of Selling - Winning the Loser's Game,
The Art of Selling - Who is on the Other Side?,
The Art of Selling - 10 Commandments,
The Art of Selling - Coffee Can Portfolio, and
The Art of Selling - Psychology of Investing, before you read this post.
How do Colours Lead to Bias?
The National Stock Exchange of India (NSE) uses the colour Red to show a downward tick in the Last Traded Price (LTP) and the colour Blue to show an uptick in the LTP of any given stock symbol. Bloomberg terminals all over the world also use colours to highlight changes in the LTP. Three types of shades are ubiquitous; Red, Blue and Green. Whereas the tone Red is ALWAYS used to show a downward tick, one of the other two colours (Blue or Green) are used to highlight upticks in the LTP.
The colours bring about an association in our minds. As a result, we associate the colour blue with an uptick and the colour red with a downward tick. On live screens, (with prices continually getting updated during market hours), the changes in the colours form a wavelike formation. The stream of imagery affects the way we think and decide. The question is: do these waves of colour have a deleterious impact, whereby they nudge the investor into activity when none is warranted?
In a research paper published on July 20, 2017, Messrs William J. Bazley, Henrik Cronqvist, and Milica Mormann examine the effects of Colour on Investment Behaviour. You can click here to read: Visual Finance: The Pervasive Effects of Red on Investor Behavior by William Bazley, Henrik Cronqvist, Milica Milosavljevic Mormann :: SSRN. For the sake of brevity, I’ll stick to the conclusions that they have arrived at:
1. Since potential losses are displayed in Red and potential profits in Blue, the colours act as stimuli for determining investor behaviour.
2. The colour Red leads to reduced risk-taking behaviour by investors/traders.
3. When historical graphs of individual stocks or the index are shown using colours, a red colour in the historical chart leads to lower expectations about future returns.
4. There are two exceptions. These are: (a) Colour Blind investors are immune to the effects of the colours and (b) in China they found that ‘colour effects’ were muted since the tone Red is NOT used to portray financial losses.
I think the exceptions mentioned effectively prove that colours influence our investing behaviour.
Many of us don’t log in to live terminals. Investors in Mutual Fund Schemes need to know that their fund manager is invariably sitting in front of a live terminal. Almost all investors check on their portfolios daily, if not multiple times a day. Portfolio Tracking Softwares use colours for showing ‘day’s gain’ and ’overall gain’ on individual prices and the portfolio. Names of the stocks that are trading higher than the previous days close are shown in green, those that are unchanged aren't coloured and the names of stocks that are trading below their prior close are shown in red. The colour scheme nudges our thinking process. (To be sure, I have nothing against portfolio tracking software, and there are some very good softwares without the colour schemes). The unintended consequences of staring at stock prices is that it affects our investing mindset in the following manner.
Foremost, if our time horizon is 10 years, why should we be checking on prices 10 times in a day? This is Cognitive Dissonance, which is the contrast between our beliefs and our behaviours. By definition, our time horizon is long term, but we are behaving as if it were short term.
Second, we end up focusing on the stock price. We seem to fool ourselves into believing that by checking on live prices, we are ‘in charge’ of our portfolio. Taleb calls this ‘illusion of control’. In reality, nobody has any control over short-term price discovery. If you are day trading, it is understandable, but not otherwise.
Third, the more often we stare at stock prices, the more likely we are to trade - it triggers an action bias. When you combine this with the media noise, it has a disastrous effect. The problem is that our brains are pretty skilled at suppressing good news when it's irrelevant. But the brain is not so good at suppressing irrelevant bad news. Indirectly, we let stock prices decide how we feel. Inherently, humans are pattern-matching creatures. We find randomness hard to accept and we look for meaning in chaotic events. We see patterns in random data.
Fourth, we mistake short-term changes in price as a change in value. The sin of extrapolation of short-term price discovery is the business model of financial media. Over the short-term, the price of the stock may or may not correctly reflect the value of the company. Stocks have prices and companies have value. Here is what Benjamin Graham has said about the effect of staring at stock prices: The true investor is free to disregard the current price quotation. He should pay attention to it only in so far as it suits his book and no more. If an individual investor permits himself to be stampeded or unduly worried by unjustified market declines in his holdings, he is transforming his basic advantage into a basic disadvantage.
Fifth, we buy to sell. The perception by many market participants is that stocks are little more than pieces of paper that bounce around. The fact that stocks represent ownership stakes in businesses that we want to buy at a discount, is lost on most market participants. Almost every investor asks me for target prices on stocks that I recommend. The reason is that we have been mentally conditioned by the street that stocks have targets. How stupid is that? Yet, every research report that is published by leading brokerages has a target price pinned right at the top. This tends to further inflame the speculative mindset and we feel the urge to stare at stock prices.
Sixth, when stock prices become an ambient presence in our daily lives, it triggers an action bias and leads to a fight-or-flight response in our brains. And the news cycle ensures stock prices are indeed an ambient presence in the lives of everyone, even those who don’t invest in the stock market. I cannot understand why daily gyrations in the stock market should be headline news? The point is that the news cycle follows the market. Most of us wrongly think that the news precedes market activity. It doesn't. When the news does precede market volatility, that is the exception, not the rule. Here is Taleb: "To be completely cured of newspapers, spend a year reading the previous week's newspapers."
Lastly, some excellent advice from Warren Buffett: ‘If you can enjoy Saturdays and Sundays without looking at stock prices, try it on weekdays.’ Looking less often would improve most investors' results.”
The entire system, as in the regulators, the government and the stock exchanges themselves, is very much part of this ‘gamification of terminals via colour schemes’. Whether we win or lose in the stock market game, these guys always win. The whole concept of gamification isn’t new at all. In the 1930s, Keynes observations are (emphasis added):
“When discriminating investors are "so much in the minority that their behavior does not govern the market," Keynes argued, a stock exchange could assume the traits of its "game players," evincing an excessively short-term approach and presenting with bipolar tendencies. Keynes also lamented that the financial exchanges-with their constant price quotations and potential to readily monetise investments-gave: . . . a frequent opportunity to the individual . . . to revise his commitments. The perception by many market participants that stocks are little more than a number in a newspaper column or on a computer screen-a mere trading chip divorced from the underlying business, rather than a part-interest in the business itself-further inflames the speculative mindset.”
Jason Zweig has written several books on how our biases come in the way of our behaviour. I will cut and paste directly from one of his newspaper columns.
When stock prices are no longer discrete units of information but morph into animated and brightly coloured displays, they acquire a life -- and apparent predictability -- of their own. The human mind automatically attributes propensity and causality to these movements. To see what I mean, take a minute to watch this classic video (literally: it's only one minute and 19 seconds long) - Experimental study of apparent behavior. Fritz Heider & Marianne Simmel. 1944.
From a classic 1944 experiment by psychologists Fritz Heider and Marianne Simmel, this video shows a few lines, a dot and two triangles moving around on a screen. Almost no one who has ever watched it, however, describes it that way. Instead, people intuitively interpret the shapes as living creatures with personalities, whose "behavior" is shaped by their "objectives." The motion of these two-dimensional objects automatically seems to us like intention and direction.
Brokerages insist that turning the stock market into a video game makes investing fun for people who've never tried it before. Fair enough. But it also makes people perceive patterns that aren't there, imagine they can control random events and believe that markets are far more predictable than they really are.The human mind isn't built to resist this temptation.
There is one more bias that I want to highlight and I’ll write about that in the next post.
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