Psychology of Investing, Boston, MA, November, 2003

Having just arrived from Washington, Robert Shiller rushed to the podium so as not to be late for his address "From Efficient Market Theory to Behavioral Finance" at The Seventh Congress on the Psychology of Investing. Shiller, a professor of economics at Yale University, is famously known as the author of "Irrational Exuberance." His book’s title entered the financial lexicon when Allen Greenspan, chairman of the Federal Reserve Board, used it to describe the market climate of the late nineties.

Jeremy Grantham, The Psychology of Investing (Credit: Edwin C. Fancher)

In his talk Shiller postulated that the ups and downs of markets have no correlation with consumption, dividend rates or present value and that earnings grew only 2% a year in the last century. He added that the "new economy" along with "envy and the gambler’s instinct" perpetuated the bubble. Additionally he mentioned that "word-of-mouth" keeps a bubble going.

When Dr. Shiller finished talking one of the attendees at the two- and one-half day symposium rose to say that as he listened to the other speakers he could guess how they invested their own money. In Shiller’s case he said he was clueless. The professor was not shy about revealing how he allocates his assets among real estate, municipal bonds and other financial classes. As expected, he owns no equities.

The Congress was organized by two psychiatrists, Richard Geist and John Schott, who teach at Harvard Medical School and who have a deep interest in markets and the interaction between emotions and finance. Dr. Geist treats many financial planners in his practice and Dr. Schott, who is also in private practice, manages a global asset fund. Both papers, among the best and most relevant of the conference, focused on how emotional factors lead to market behavior (i. e. success or failure.) Dr. Schott mentioned that markets mimic manic-depressive states. He discussed anxiety, obsessive-compulsiveness, rivalry, security, self-esteem and masochism as they relate to investing. Dr. Geist said that investing is an unnatural act, an idea that was repeated by others, and that if you keep track of emotions you might discover a pattern. He added that we should all find a niche that fits our genetics and personalities. For example, right-brained or inductive thinkers might do best in emerging markets and left-brained or deductive thinkers ought to succeed in large caps. He cautioned not to trade in the first hour because market reactions are likely to be more emotional than rational. He also spoke about financial losses mirroring losses in life.

Robert Siroka conducted one of three experiential workshops, "Psychological Attitudes Towards Money: Our Personal Money Histories & Financial Decision Making," Through the use of group exercises we learned how any of 15 financial traumas that families go through, business failures, windfalls and so forth affect our money attitudes. We talked about intergenerational messages and learned the 20 psychological uses, including unconscious ones, of money. Of the 15 faculty members some were theoretical while others gave concrete information about how to invest.

One of my favorites, John Dorfman, has a disciplined approach to seeking out stocks. As a contributor to Bloomberg network, he often speaks on TV and writes a column for them. By creating a set of closely adhered to stock-picking models or screens, he created several portfolios that completely remove emotions from the market arena.

David Dreman, another value manager, spoke about how affect, a recently discovered heuristical bias, has implications for good and bad decision making.

Robert Cialdini, the keynote speaker, whose topic was "Using Science to Improve the Art of Persuasion" is dynamic, charismatic and interesting. However, his presentation bore no connection to the subject at hand.

Jeremy Grantham, although eternally pessimistic (or realistic, if you prefer) is an experienced and very wise money manager. He shared his system for achieving results that place investors in the top 7%.

Michael Mauboussin, was also well received by the audience when he discussed "The Wisdom and Whims of the Collective" and how a complex adaptive system allows markets to shift from robust to fragile states.

Robert Deel’s presentation was a like a canned sales pitch or TV advertorial to sell his fee-based system, tradingschool.com. Although he titled his workshop "Mind Over Money," his approach was very commercial. Despite the synopses of Paul Merriman’s and Ed Young’s talks having included "fear, greed, discipline, and behavioral hurdles" their presentations were as disappointing as Deel’s. Deel substituted for Abby Joseph Cohen who had a scheduling conflict.

Message to Abby: We missed you. Please try to attend in 2004.

When our redesign is finished we will no longer have seasonal issues. CEO Traveler will be arranged by topic. Click "Investment Trips" in September, 2004 for information about the next Psychology of Investment Congress.

Winter 2003-04