The above file is the receipt provided by Margret C.
And below is the photo provided by Margret C.
The above file is the receipt provided by Margret C.
And below is the photo provided by Margret C.
Plan Continuation Bias is a major factor driving investor losses in stock and other financial markets. For example, many investors tend to hold on to losers for too long when they should cut their losses. In this article, I will outline how this bias permeates our psychology by looking at how it works in air crashes, and then go on to examine its effects in financial markets. Investors will learn how to address this bias and improve trading performance.
Plan Continuation Bias, simply put, is the tendency we all have to continue on the path we have already chosen or fallen into without rigorously checking whether that is still the best idea or even advisable at all. Operating with this bias, as with the other 180+ biases that are an unavoidable feature of our psychology, is generally a good idea. We simply don’t have the time to constantly re-analyse our decisions.
Berman and Dismukes wrote a NASA report on this problem, which they describe in a brief article. They define Plan Continuation Bias as follows:
a deep-rooted tendency of individuals to continue their original plan of action even when changing circumstances require a new planBerman and Dismukes “Pressing the Approach” Aviation Safety World, December 2006, pp. 28–33
The authors describe two air crashes which were in their view caused by the operation of Plan Continuation Bias. Flight 1420 into Little Rock, Arkansas crashed in June 1999 because the pilots ignored alarms and persisted with an approach in difficult weather conditions. Similarly, Flight 1455 crashed in March 2000 in Burbank, California because the pilots continued with an approach even though they knew that they were flying at 182 knots which they knew was 40 knots above the target touchdown speed.
It is very easy for us to sit here on the ground and do armchair flying. We would not have made these errors we say to ourselves, wrongly. If we saw that we were flying too fast or that there were multiple alarms sounding, we would abort the landing and go around. This is not difficult to do. This quick and wrong simulation of the pilots misses out many germane factors. The pilots are under some pressure to land planes quickly and efficiently for cost reasons. There are no guarantees that going around will improve weather conditions. But ultimately, the major factor in these crashes in human cognitive bias.
Plan Continuation Bias has significant effects on the psychology of all of us. As the authors observe,
Our analysis suggests that almost all experienced pilots operating in the same environment in which the accident crews were operating, and knowing only what the accident crews knew at each moment of the flight, would be vulnerable to making similar decisions and errorsBerman and Dismukes “Pressing the Approach” Aviation Safety World, December 2006, pp. 28–33
Plan Continuation Bias is just as relevant a factor in making decisions in financial markets. We can be just as liable as the pilots described above to sticking to the plan. We bought a stock, it was a good idea at the time, and we continue to hold it even though the original reasons for it being a buy have dissipated or not transpired.
In trading, while no one is going to be killed, it is still an environment in which decisions need to be made on an inadequate data set and sometimes under time pressure. It is also going to be a highly charged situation emotionally. The inadequate data set could result from factors such as the impossibility of predicting the future or the sheer scale of the operations of a listed company. Time pressure is particularly prevalent in day trading, but even more long-term investors are susceptible to effects such as feeling that “money is burning a hole in their pocket” and they need to put a trade on right now. The emotional charge comes from losing money. We are all highly averse to losses — in fact, we seem to be 2.5x more averse to losing money than we favour gaining the same amount. It hurts to lose. It challenges our self-perception.
These observations lead to immediate suggestions as to how one can prevent Plan Continuation Bias from impairing one’s trading psychology.
Why women are better traders and investors than men — a psychological explanation
Warwick University Business School (“WUBS”) have conducted a fascinating study on the investment performance of men and women. They show that women perform significantly better with a good sample size and temporal range. They make some interesting remarks on why this might be. I think I can add some extra psychological depth to this — so we can see that female traders appear to have some quite deep natural advantages and they should feel encouraged about managing their own investments.
What WUBS did was collaborate with the share dealing service offered by Barclays Bank. They looked at 2800 investors over three years. There are various ways of measuring stock market performance, but one of the most common is to compare the performance of a portfolio with a relevant stock market index. (I explain what a stock market index is here: What Is A #Bear #Market?)
It is quite hard to outperform an index consistently. This fact is what lies behind the recent strong growth of tracker funds. You may as well buy the index if you can’t beat it. The results from the WUBS study showed that women consistently outperformed the FTSE-100 index and men did not. The male investors returned 0.14% above the index which is basically statistically consistent with having performed equivalently to it. However, I suspect that these investors would have been better off just buying the index rather than paying a lot of trading fees to obtain the same performance.
The female investors outperformed the FTSE-100 by a massive 1.80%. This may not sound much, but it is actually huge. Done over a lengthy period, it would lead to significantly improved results. Let us assume that the FTSE-100 returns 5% a year. If you started with £10,000 and performed as the male investors do, you would end up with £45,000 after 30 years. (It is always important to think long term in the stock market; to prefigure part of the answers I will discuss below, the women seem to understand this.) The female investors would turn £10,000 into £72,000 over the same 30 year period. That is a huge improvement over £45,000 and bear in mind that the female investors have taken the same risk, making it even more impressive. (One caveat is in order here: no one performs this consistently over the long-term–if they say they do, it is a huge red flag. Remember Madoff? But the point stands.)
How are female investors outperforming?
WUBS and Barclays set out a few reasons which could explain the outperformance. One of them is the one we already know about. Women are less over-confident than men. I explain how that works here: Women Are Better Traders Than Men. In summary, women tend less often to think that their new idea is brilliant and then abandon their previous idea before it has had time to work. Men on the other hand just get extremely convinced about their new sure-fire idea and go with it. Interestingly, women’s lack of over-confidence is not manifested in what they say about their beliefs. They just don’t act on them as often. We could discuss philosophically what that means about our account of belief — but the key point is that women are less likely to trade in deleterious ways!
But there are new reasons suggested. There are three that I think are especially interesting.
In conclusion, we have seen some deep-seated psychological advantages which female traders will have over male ones. This should encourage women in their investing.
I would like to thank Dr M R Hampson for suggesting I look at this.
I will argue that The Affair is a philosophically interesting piece of TV drama which raises deep questions in the areas of memory and our access to “the truth.” Some of these may be understood by reference to Nietzsche’s account of truth (and some of them relate to interpretations of quantum mechanics!) There are no significant spoilers and no references to events beyond the first episode.
The aspect of The Affair that is most immediately apparent is that it is told from multiple perspectives. This is made dramatically arresting by the way it becomes clear that the different perspectives are incoherent with each other — and probably with themselves. In this, the situation parallels real life.
Moreover, the cinematography seems to reflect this. Noah’s view seem somewhat brighter literally and metaphorically. Alison seems more beautiful, which partly perhaps reflects the way she smiles more in his section and could also mean that he perceives her as being more beautiful than she perceives herself to be. It is also a reflection of her affective state, presumably. There are interesting feminist points to be made here also about the male vs the female perspective.
I will focus on a single tiny episode and note the multiple readings. As a preliminary, I should point out that the story at this point is being told in flashback from a subsequent police interview.
The episode in question is when Noah is approaching up the driveway of Alison’s house while she is having sex with her husband in the driveway. The sex is rather aggressive and it is unclear to Noah whether an assault is taking place. The precise event I wish to discuss is that in Noah’s version, Alison shakes her head. Noah appears to interpret this as meaning “no, this is not an assault.”
The head shake does not appear in Alison’s version. There are at least seven readings of this.
I hope it will serve as an indication of the dramatic quality of this production that this amount of consideration needs to go in to a single micro-event!
How does this relate to Nietzsche?
The starting point of Nietzsche’s doctrine of Perspectivism holds that we need to take multiple perspectives to approach the truth. In a way, it is post-modern in that it denies there is any one truth. There are only truths from a perspective. Put another way, since god is dead, there is no omniscient unbiased perspective from which there could be a single truth.
This does not mean Nietzsche is a nihilist or someone who thinks there can be no better or worse ways of proceeding. He instead claims that the optimal approach is one that adopts multiple perspectives. He then adds a couple of typically radical Nietzschean riders which really give the position a strong flavour.
Many philosophers would proceed thus far and then say “but it is important to avoid contradictions.” Not only does Nietzsche not do this, he does the exact opposite. He says that the wisest choice is to hold multiple perspectives especially when they are contradictory!
This is what I think is being brought out in The Affair with great aplomb and intelligence. I commend it to you.
(I won’t discuss the many worlds interpretation of quantum mechanics here, but I think it is also in play, not least because it is actually mentioned by Noah.)
I will argue that the recent McDonnell proposal on share ownership for workers does not achieve its objectives and is unfair to shareholders.
The BBC* reports the proposal as follows:
“Under Labour’s “inclusive ownership fund” proposal, Mr McDonnell said workers would be given a financial stake in their employers and more say over how companies are run.
Firms would have to put 1% of their shares into the fund every year up to a maximum of 10%.”
This is outside the usual run of taxation because it has the same effect as removal of assets from existing shareholders, since it is uncompensated. It is also unreasonable to describe it as an inclusive ownership fund since it mostly generates cash for the government. This is the case since there is a cap (£500 per employee) above which the dividends go to HMRC.
What Is The Proposal?
Every year, companies listed in the UK will have to put 1% of their equity in a misnamed “Inclusive Ownership Fund.” This will continue for ten years so we can expect that after that period, 10% of the equity of all such companies will be placed in a fund. The current situation today is that existing shareholders have a claim on the future cashflows of the company in proportion to their shareholding. I will explain below why this will affect shareholders immediately since shares are valued on a forward-looking basis.
Right now, all the shareholders together can expect to benefit from 100% of the companies’ cashflows. If the McDonnell proposal takes effect, they will only be in a position to expect the benefit of 90% of future cashflows, because there will be another 10% of new shares in issue.
It might be thought that the shares issued will not be new ones. This is not the case because the proposal is unfunded. There is no plan to compensate existing shareholders. As will become clear when I consider objections to my account below, many of the problems with the proposal flow from its uncompensated nature.
We may safely assume that the proposal does not include compensation even though this is not stated for three reasons. Firstly, McDonnell has a track record of proposing uncompensated asset seizures.** Secondly, I estimate that the costs to FTSE-100 firms alone will exceed £100bn. This is the case since there are 100 firms in the FTSE-100 of a similar size to Shell and the proposal applies to the much larger group of all companies listed in the UK. The UK Government does not have access to sums of that nature. Finally, it would be extraordinary to fail to mention such an aspect of the policy when discussing it since that would make it much less unjust.
It is important to note that one reason this is a problem is that the new shares will not be paid for. This is one defence against dilution — the issuing of new shares which is detrimental to existing shareholders — under normal circumstances. If a company issues new shares on the stock market, they are sold at market value. The company then owns that cash, and shareholders have a claim on it. Similarly, they have a claim on a share of anything the company does with that cash. Ideally, it will invest it in growing its existing business or starting new ones, and everyone is happy.
The McDonnell proposal does not involve any compensation. So it will just be a dilution of existing shareholders by 10%. Given the forward-looking valuation I will describe below, this means that all existing shareholders will see their share prices decline by 10% immediately. That is why this proposal amounts to an asset confiscation.
Simon Jack, the BBC’s Business Editor, summarises the effects of this disastrous policy as follows:
“workers will not be able to buy and sell the shares – so they won’t really “own” them in a traditional sense. They will be eligible to receive dividends on the shares up to a value of £500 per worker per year. The government gets the rest.
The Labour Party reckons this will raise about £2bn a year. It could end up much more. Let’s take just one company – bumper dividend-payer Shell. Ten percent of its £12bn annual dividend comes to £1.2bn.
If each of its 6,500 UK employees got £500 each (totalling £3.25m) that leaves £1.116bn for the government. That’s just from one company – every year. Wow.”
This clearly means that calling the proposal an Inclusive Ownership Fund is a misnomer since in the case of Shell, the total cost to the company of £1,119.25m would be divided between employees, who would get £3.25m or 0.29% of the cost and the government would get £1,116m, or 99.7%. So in fact the amounts going to employees are irrelevant.
Share valuation is based on fractional ownership of a company — this is why it is called a “share.” This means that if I own a share of a company, I am entitled to a small percentage of the value of that company. If the company has issued ten shares and I own one of them, I own 10% of the company and I can expect to benefit from 10% of it’s future cashflows. Note immediately that it is important to avoid what is known as “dilution.” This, as mentioned previously, is the issuing of large numbers of new uncompensated shares. That dilutes the claims of existing shareholders which is obviously unfair and so this area is highly regulated. It is not legal to dilute existing shareholders; McDonnell’s proposal is dilution on a massive scale. Again, as I mentioned above, this cannot be avoided by buying the shares on the open market unless funding is provided and there is no proposal to provide such funding.
Share valuation must also take account of the fact that shares are a claim on future cashflows. These must be therefore be considered on a Net Present Value (“NPV”) basis, to reflect the fact that money in the future is worth less than money today. This is because in a world of positive interest rates, it is slightly better to have money today than money in a year from now.
For example, imagine you have £90 today and interest rates are 10%. This means you could save the £90 for a year and at the end of a year, you would have £99. Turning this around, we can say that the value today of £99 to be received in a year from now is £90, if interest rates are 10%. We need to discount the values of all future payments by the amount of interest we would receive over the period between now and the time of the payment. So clearly, payments far in the future are worth much less today than payments closer to the present.
Discounting all the future cashflows like this gets you the NPV. A share of a company is worth the NPV of the expected future cashflows. It has to be, because if it moves out of line with that, the market will either buy it or sell it so it moves back in line.
The reason this is a serious problem is that it means proposals to take value away from shareholders in the future cost them money today, since that is how shares are priced.
Before considering some objections to my account, I will finally mention that the effects of this policy could easily avoided by companies if they simply delisted from London. Many large companies already have multiple listings in places other than London, such as New York or Frankfurt. It would be wise to avoid giving them a powerful reason to delist from London, especially give the strong commercial disincentives created by Brexit.
I conclude that this is a bad policy. Since pension funds are major shareholders, it would have major negative financial implications for current and future pensioners as well.
— where the proposal is to cancel existing contracts without compensation current holders of bonds (which we know for the same reason as above, it is unaffordable). In addition, the proposal to renationalise water companies involves swapping equity for government bonds. Even if done on reasonable terms, that is a compulsory change of asset class.
Understanding basic psychology is one of the most important but also most neglected tasks for investors. Of course, everyone realises that they need to analyse the investments they are considering buying. But many traders do not realise that winning in investment is also about successfully predicting what other market players will do. And that is a psychological task.
Most of the advice on the internet is not really psychology. It is quasi-psychology. You might get famous traders telling you things like “I always played tennis in the morning before my best trades to make sure I felt good.” This is useless. By all means, study what these guys do to get insights into how they analyse opportunities and maybe any tricks they have for bouncing back from a loss. But famous traders don’t have any specific training in psychology so if you are specifically wanting to improve your own trading psychology, adopting their tips (such as the tennis one above) won’t really help you in achieving that goal.
Alternatively, there are some actual psychologists who write on the topic and are experts in the field of psychology. But be careful about their specialisms. Someone who is a clinical psychologist may be an expert in schizophrenia but not necessarily other aspects of human psychology. And of course the main thing is that these experts do not have any serious trading experience, so they also can’t help you improve your trading psychology.
To identify the right sort of person, you need to ask two questions: does this person have significant trading experience and are they qualified in a related field? I am one of these people.
To try to convince you of this, I will outline my ideas on how to optimise your trading psychology. The first thing to know about is that we have a lot of cognitive biases — mental shortcuts that are often useful when we want a quick and dirty answer and often very unhelpful when we are trying to get something right. One example is Confirmation Bias, where people look only for evidence that supports what they already believe. There have been many robust psychology experiments published, that show time and time again that we do this often and consistently.
The first thing to note here is that if you use this bias when making your own trading decisions, you will make bad decisions. Every time! So you will definitely not be optimising your trading psychology. But here’s the key point: everyone else in the markets will be doing it too.
So what does that mean? It means you need to know about Confirmation Bias and think about it in a market context. Look out for it in yourself and be careful. Expect it in other market players and trade accordingly.
That’s how you stand the best chance of optimising your trading psychology.
Strumia made the claim of the title in a controversial talk at CERN.* I will show that this claim is falsified by the psychological literature.
There are a large number of cognitive biases operative in our psychology: over 180 at the last count, and that is just the ones we know about so far. All of these biases share the characteristics of being largely invisible to us in their operation and extremely hard to eradicate. Data show for example that significant financial incentives do not cause reduction of the effects of some of these biases. And I have discussed myself at length (Short, 2017) the way biases can cause highly suboptimal decision-making, even when there are very serious financial consequences.
The types of bias I mean would be exemplified by Confirmation Bias, which occurs when people look for evidence which confirms hypotheses they already believe. I think we should also consider Gender Bias in this same arena, though the claim we should not represents an objection to my position. I will show below that my position has adequate resources to defeat that objection, but first I will show that intelligence offers no protection against implicit biases.
I will do that by mentioning three types of bias where it was not the case that more intelligent subjects exhibited less bias, and then making a broader point.
More generally, we may note that many experiments in social psychology are conducted on psychology undergraduates. This has been mooted in the past as a potential “ecological” objection, meaning that the results could be unrepresentative of the general population. Nevertheless, robust and widely replicated data exists to show the existence of 180+ cognitive biases. We may assume that undergraduates in psychology are a more intelligent subset than the population in general.
I will close by considering one potential objection to my account. This is that Gender Bias is not a cognitive bias and should not be considered in the group above where intelligence is not a protective factor. I will counter this objection in a number of ways.
I conclude that this objection fails, and that therefore the claim that intelligence protects against implicit bias is false.
*According to a letter published by the Office of the Chair, Department of Physics and Astronomy, University of California, Irvine on 01 October 2018.