-
7/24/2019 Mit Feb 2016
1/30
MIT SLOAN
Investment Conference 2016
Presentation by
Barry Ritholtz,
Chairman & CIO
Ritholtz Wealth Management
Crashes, Terrorists,
and Sharks Oh, My!
Why investors fear
the wrong things,
and what to do about it
-
7/24/2019 Mit Feb 2016
2/30
Todays Discussion:
What we fear and why
How distress hurts investment performance
Recognizing and preventing this
-
7/24/2019 Mit Feb 2016
3/30
1. Herding, Groupthink
2. Optimism Bias
3. Confirmation Bias
4. Expert Opinions
5. Recency Effect
6. Endowment Effect
7. Hindsight Bias
8. Risk Aversion
Behavioral Economics
Neuro-Finance
How Your Brain Interferes with Your Investing
Risk Aversion
1. Anticipation vs. Rewards
2. Selective Perception/Retention
3. Words vs Images
4. Pattern Recognition
5. Data vs Narrative
6. Cognitive Dissonance
7. Species of Dopamine Addicts
1. Misunderstanding risk
2. Why you fear
3. Black Swans
4. What will kill you5. Your biggest financial fears
6. What hurts performance
-
7/24/2019 Mit Feb 2016
4/30
A brief introduction toUnderstanding Risk
-
7/24/2019 Mit Feb 2016
5/30
Defining Investment Risk
The probability that actual returns
on an investment will be lower than
the expected returns.
-
7/24/2019 Mit Feb 2016
6/30
You Are Going to Die . . . Heres How.
Shark: A perfectly evolved killing machine, immortalized in
Spielbergs 1975 film, Jaws.
-
7/24/2019 Mit Feb 2016
7/30
6-10 peopleper year are
killed by sharks worldwide
Other large predators:
Lions (100)
Elephants (100)Hippos (500)
Crocodiles (1,000)
Dogs (25,000)
Snakes (50,000)
-
7/24/2019 Mit Feb 2016
8/30
Source: Ritholtz.com
Death by Selfie1. An American woman fell to
her death while taking a selfie
with her boyfriend on a cliff in
South Africa.2. Two Russian men were killed
while taking a selfie with a hand
grenade.
3. Three Indian students were
killed by an oncoming train
while taking selfies on train
tracks.
4. A Romanian teenager was
electrocuted when she was
taking a selfie on top of a train
and touched a high-voltage
wire.5. A Russian teen was also
electrocuted after touching live
wires while taking a selfie near
railway tracks.
6. A Russian woman shot
herself in the head while trying
to take a selfie with a gun.
7. A woman in Moscow City
died falling from a bridge,
where she was trying to take a
selfie.
8. A teenager in Houston,
Texas, fatally shot himself while
taking a selfie with a gun.
9. A Japanese tourist died
falling down the stairs while
taking a selfie at the Taj Mahal.
-
7/24/2019 Mit Feb 2016
9/30
Source: Gates Foundation, CDC
The Deadliest Animal in the World
Mosquitoes are the deadliest creature
on earth; (Human are only second)
-
7/24/2019 Mit Feb 2016
10/30
Source: Ritholtz.com
Sentiment Cycle
-
7/24/2019 Mit Feb 2016
11/30
Source: DALBAR
Investor Performance (10 Years)
-
7/24/2019 Mit Feb 2016
12/30
Risk of Terrorism
Source: CDC, Mueller & Stewart, Terror, Security, and
Money.
2010: U.S.
noncombatant
fatalities from
terrorism
worldwide = 25
2011: Terror
deaths = 8
Annual deaths
due to struck
by lightning =
29 .
-
7/24/2019 Mit Feb 2016
13/30
Source: LA Times
What killed Americans in 1900 vs. 2010
-
7/24/2019 Mit Feb 2016
14/30
Your Actual Risk
You are 35,079 times more likely to die of heart disease
33,842 times more likely to die of cancer
than a terror attack.Source: CDC
-
7/24/2019 Mit Feb 2016
15/30
What are YOU afraid of?
Market Crashes
HyperInflation
Collapse of the
Dollar
Looking foolish
-
7/24/2019 Mit Feb 2016
16/30
1987 Crash in Imminent!Marc Faber: 2014 crash will be worse than
1987sCNBC, April 10, 2014
-
7/24/2019 Mit Feb 2016
17/30
Faber on Hyperinflation: Not A Matter Of If But When Business
Insider, 9/23/2010
'The Bear Market Is Starting' Marc Faber CNBC, August 3,
2011
Faber: The Dollar's Value In The Future Will Be Zero Business
Insider, 4/18/ 2011
Marc Faber: We Could Experience A 1987-Style Crash This Year
Business Insider,
5/10/2012
Marc Faber: Look out! A 1987-style crash is coming. CNBC, August
8, 2013
2014 crash will be worse than 1987's: Marc Faber CNBC, April 10,
2014
Dr. Doom calls bubble, adding to gloomy calls CNBC, Nov 2,
2015
My prediction? Sometime in 2016, Faber will predict a 1987-like
crash . . .
Catastrophizing Markets
-
7/24/2019 Mit Feb 2016
18/30
S&P500 Declines of 20% (or more)
-
7/24/2019 Mit Feb 2016
19/30
Investor Performance (20 Years)
-
7/24/2019 Mit Feb 2016
20/30
Global Central Banks Are Running Out of Ammo
(CNN/Money February 9, 2016)
Rate-Hikers At the Fed Are Running Out of Ammo
(CNBC May 13, 2015)
Fed Has No Ammo Left (USA Today March 2014)
Federal Reserve: What Happens When The Fed ReallyDoes Run Out of
Ammo? (Time February 27, 2013)
Fed Running Out of Ammo (Politico July 31, 2012)
Fed Out of Ammo For Economy (WaPo 8/26/ 2011)
Fed Running Low on Ammo (WSJ August 26, 2010)
Fed Running Low on Ammo (Reuters August 18, 2009)
Catastrophizing Central Bankers
Economist, Feb 20th 2016
-
7/24/2019 Mit Feb 2016
21/30
Risk Aversion: Pleasure versus Pain
-
7/24/2019 Mit Feb 2016
22/30
Risk . . .
!"#$
!$
!'#$
!(#$
!)#$
!*#$
!+#$
!,#$
!-#$
#$
./0!,(
./0!,&
./0!+#
./0!+,
./0!+*
./0!+(
./0!+&
./0!*#
./0!*,
./0!**
./0!*(
./0!*&
./0!)#
./0!),
./0!)*
./0!)(
./0!)&
./0!(#
./0!(,
./0!(*
./0!((
./0!(&
./0!'#
./0!',
./0!'*
./0!'(
./0!'&
./0!
./0!&,
./0!&*
./0!&(
./0!&&
./0!"#
./0!",
./0!"*
./0!"(
./0!"&
./0!##
./0!#,
./0!#*
./0!#(
./0!#&
./0!-#
./0!-,
./0!-*
./0!-(
102!34056 78 9:2/;?@@; 8AB )## C0D2E
-
7/24/2019 Mit Feb 2016
23/30
Reward !
F-##
F-G###
F-#G###
F-##G###
F-G###G###
./0!,(
H2I!,&
3/:!+#
JK:!+,
3/=!+*
.
