1 Business System Analysis & Decision Making - Lecture 8 Zhangxi Lin ISQS 5340 July 2006

2 Chapter 7: Common Investment Mistakes The psychology of poor investment decisions Active trading The Beardstown Gang and Other Groups That Limit Investment Returns Action Steps

3 Issues in Mutual Fund Investment Index fund or alternatives? If the pattern of the fund repeated for years what you should do? Problems behind the temp How top funds were selected Fees of the funds

4 Strategies in Mutual Fund Investment Discuss the following strategies Looking for good mutual funds from Yahoo FinanceYahoo Finance Diversifying the investments to different funds regarding Types, risk levels, regions, categories Adjusting allocation among “aggressive”, “moderate” and “conservative” funds

5 Strategies in Stock Investment Buy low, sell high – a great and universally perfect idea, but how? The context with a stock A stock price is high – buy or sell? If it has been high before If it was low before If there is a good news about it If the market is up/down now A stock price is low – buy or sell? If it was good If it touched the bottom several times. Now it is again the bottom price If there is bad news about it Any psychological biases behind our decisions?

6 The Psychology of Poor Investment Decisions Overconfidence Women performed better than men – less active and did less badly than men Optimism Negative effects from too frequent trades Advices for the investment Denying that random event are random Stocks are less predictable Anchoring, the status quo, and procrastination Professors’ choice of TIAA-CREF retirement plan anchored to the recommendation Procrastinated decisions because of tendency of status quo Prospect theory, selling winners, and keeping losers How about selling losers and keeping winners?

7 Active Trading Electronic trading is cheaper and convenience, hence encourages active trading The problems of daytraders – full time traders Tax rates for different kinds of gains: 35% vs. 15% Reason: People respond to vivid data

8 The Beardstown Gang and Other Groups That Limit Investment Returns Investment clubs may limit investment returns The outperformance may not be true

9 Action Steps How to plan your life regarding the investment? End up dying with mountains of money in the account vs. Good life and peaceful mind In 1997, 6% of US citizen felt the have surpassed their retirement goal, but 55% felt behind – Americans save too little for retirement