Posts Tagged ‘risk taking’

The Buttonwood Gathering – View from the Top

This was an interesting event!  

On May 17th 1792, twenty-four stock brokers met under a buttonwood tree outside 68 Wall Street and agreed to set up the New York Stock and Exchange board. The tree was a symbol of Wall Street, but also, it was where people originally met to trade, to discuss and to argue.

The Economist has done an excellent job of keeping the tradition alive by bringing together top global financial executives, policymakers, global regulators and opinion leaders to discuss and debate proposed guidelines for the financial community, seeking to bridge fundamental financial issues with macroeconomic and geopolitical viewpoints.

As I mentioned yesterday, I usually don’t like conferences but not only did I find myself sitting between BOE Governor Mervyn King and Nobel Prize winner Joseph Stiglitz but we got to watch my favorite economics rap video together and even met the guys who created it from EconStories, who have lots of good videos on their site (of a more serious nature). 

The conference itself does not take itself too seriously.  Even Nassim Taleb was able to make a few jokes while explaining to us why the financial system is irrevocably screwed up unless we give it a major overhaul.  Taleb’s main points were:

  • People are inherently greedy.
  • The Financial Crisis was caused by and increase of hidden risks that was encouraged by the rules set forth in Basel II
  • Multiple exposure to low-probability, high-risk events accumulate to high probability of bad outcome (Taleb’s "Black Swan").
  • Bonus packages and compensation encourage very bad risky behavior. Stock options that offer potential upside and no downside encourage the maxing of risk-taking by potential beneficiaries.
  • This leads to a banking system where all the traders get rich and all the investors become poor.
  • There is a general,.chronic underestimation of risk and business schools reinforce this bad behavior.
  • Regulation gives investors a false sense of security. 
  • Capitalism must be symmetrical – bonus without penalties (clawbacks, etc.) must be eliminated.

When I am at one of these conferences, I like to watch the audience reaction to what is being said.  Here we have a gathering of the World’s movers and shakers and sometimes the reaction to what is being said is more important than the thing that is said.  For instance, my note on Taleb’s comment that regulations give investors a false sense of security is that
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2007 Redux?

2007 Redux?

Courtesy of Michael Panzner at Financial Armageddon

The market value of the high yield FINRA-BLP Active U.S. Corporate Bond Index relative to its investment grade counterpart has now exceeded the level seen in May 2007, at the peak of the credit bubble.


If you ask me, it looks like risk-taking is back with a vengeance.

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Driven toward reward without regard for consequence

This is interesting. However, the conclusion that "individuals with antisocial personality disorder may not be unaware of… consequences… but instead that their intense reward-seeking motivation consumes their attention wholly until they have fulfilled their desire for reward" seems overstated, and only a small piece of the psychopath puzzle.

For a different perspective, that of a financial writer, and an even farther-fetched conclusion, read the second article below. The same data can be interpreted to show that a trader taking on excessive risk is "hopped up on dopamine" so they can’t see negative consequences, making them "kind of a psychopath." Take all this with a grain of salt haloperidol. - Ilene 

Driven toward reward without regard for consequence

Courtesy of TIME, by Tiffany O’Callaghan

TIMEAn overactive dopamine reward system in the brain may help explain why psychopaths pursue rewards without regard for consequences, according to new research published this week in the journal Nature Neuroscience. Previous research has found that individuals who suffer from antisocial personality disorder—often referred to as sociopathology or psychopathology, despite debate over whether these are distinct conditions—lack empathy and fear. Yet this new study, from researchers at Vanderbilt University examines what these individuals may have in excess. According to the study, led by Joshua Buckholtz, a graduate student in psychology at Vanderbilt, individuals with antisocial personality disorder traits show signs of dysfunction in dopamine reward systems—suggesting that, in psychopaths, the drive toward reward can overwhelm all else.

Prior to participating in two different experiments, study subjects completed personality tests to identify presence and severity of psychopathic characteristic—including aggression, lack of empathy, and capacity for manipulation, among other things. Drawing on previous research that has established a strong link between substance abuse and psychopathology, in the first experiment researchers gave participants amphetamine, then used functional Magentic Resonance Imaging (fMRI) brain scans to monitor how dopamine release was affected by the stimulant. In a second experiment, study participants were told that they would be paid for performing a simple task, and researchers conducted brain scans while they completed the tasks.

In both experiments, researchers found that participants who had psychopathic characteristics according to the personality test, were more likely than those without those traits to have greater activity in the nucleus accumbens, the area of the brain associated with dopamine reward processing—whether in response to the chemical stimulant, or the suggestion of monetary reward.

The findings suggest that individuals

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The Lottery of Stock Picking

This is a terrific essay on risk taking by Tim.  Highly recommended reading for traders. – Ilene

The Lottery of Stock Picking

Courtesy of Tim at The Psy-Fi Blog

Crumpled Lottery Ticket

Risk Seekers, Risk Fearers

On average stock traders lose money. So do people who play the lottery. Yet both sets of people will often buy insurance as well. On one hand people are risk takers, engaging in risky and usually unprofitable activities, yet on the other they’re risk adverse, looking to protect themselves against possible, although often unlikely, losses.

Mostly we don’t find this particularly odd. Yet it poses a particular problem for economists and psychologists trying to disentangle the various threads that make up the skein of the human condition. They feel we should either be risk seekers or risk fearers: to be simultaneously both suggests something strange is going on. Stock pickers take note: sell insurers, buy lotteries. Or is it the other way around?

Markowitz’s Lottery Puzzle

One of the earliest researchers to note this gambling/insurance peculiarity was Harry Markowitz who we’ve met before in Markowitz’s Portfolio Theory and the Efficient Frontier. In the same year he published the paper that eventually led to modern Portfolio Theory, the efficient markets mayhem and a Nobel Prize he also wrote The Utility of Wealth in which he both described this confused risk model and sought to explain it.

It’s a bit of surprise to find the father of rational investing theories elaborating on a subject which describes how irrational people really are. However his two 1952 papers are linked. While The Utility of Wealth describes how people really behave Portfolio Selection describes how they should behave to maximise their wealth. We can’t blame Markowitz for the investment industry using his ideas with all the subtlety of a Mob family collecting a debt from the man who wasted their mother with a cheesegrater.

Models which really aim to describe the way humans deal with risk are deluded and denuded if they exclude the risk-seeking part of the human experience. Deluded because they ignore the evidence of everyday life and denuded because they strip away the essence of human experience. Humanity would still be trolling around on its knuckles in East Africa if curiosity about what was on the other side of the forest canopy hadn’t…
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Investors, Embrace Your Feminine Side

Investors, Embrace Your Feminine Side

embrace the feminine sideCourtesy of Tim at The Psy-Fi Blog

Testosterone Is Not Destiny

There’ve been a lot of studies that indicate that women make better investors than men. They’re less inclined to overtrade, which reduces the fees they pay and means they start with an inbuilt advantage. However, there’s not been much analysis of why this behaviour occurs.

For it’s not self-evident that the lack of a pair of testicles should automatically make you a better investor. The pop-psychological view that this is due to surges of testosterone driving risk taking actions by red-blooded alpha males is highly seductive, but also pretty useless. Humans are uniquely evolved to allow us to override the urgings of of our genes, regardless of what sex organs they endow us with.

Cool Female Heads

femalenessHowever, there’s not much doubt that the basic finding – that women are less active traders and produce better returns on average over the long-term – is correct. Odean and Barber showed this in their 2001 study on overconfidence for instance. What’s more interesting, though, is how easily the idea that this is simply due to non-eradicable sex differences is accepted. In fact some observers have gone so far as to suggest that market extremes could be avoided by ensuring more women are present in investment houses – the idea being, presumably, that the cooler headed females will reduce the hot-headed male impulses to trade irrationally.

Like hell. More likely, of course, the presence of additional women would simply stimulate the men into ever more risky trades in feverish attempts to impress them: taking risks may have benefits that don’t translate into pure financial advantage. Meanwhile any women interested enough to get involved in market trading are more likely to do so in order to become rich rather than to act as a self-regulating safety valve for their male colleagues.

Risky Sociobiology

Now before we can investigate this more we need to take a careful look at what causes sex differences. It’s perfectly obvious that our genes have fitted males and females differently for the purposes of reproduction but beyond that it’s surprisingly difficult to definitively tease apart the influences of genes and environment. Even the well known male map reading advantage can be traced to the greater willingness of parents to allow young

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Phil's Favorites

PSW's Weekly Trading Webinar - 11-24-15

The PSW weekly webinar is ready to watch if you missed the live version. Enjoy!

[Subscribe to our YouTube Channel here.]


Major Topics:

00:01:53 Quick look at the stock market.

00:02:47 Markets Overview: Germany, DAX, Nikkei, Euro Stoxx, S&P, $SPX, AMZN, WMT, VMW, EMC, GOOG


00:32:00 IBM: It does a lot of buybacks!

00:41:33 MCD

00:47:04 IBM

00:50:40 IBM: Review Positions

00:55:10 NKE

01:04:41 IBM: puts and bull calls spread

01:10:21 BID

01:22:43 TASR

01:26:20 IBM puts, trade idea

01:29:24 DOLLAR Stronger, GLD, SLV, TLT  ...

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Zero Hedge

"We Reduced Our Short In The Euro" - Did Goldman Just Hint Draghi May Do Nothing Next Week

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Over the past year, there has been no stauncher supporter of the short-EUR trade than Goldman: so staunch in fact that Goldman's top trade for 2015 was basically a short EUR trade (which however ended up being a total loss for anyone who put it on because the EUR did not drop as fast as Goldman had expected ...

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All About Trends

Mid-Day Update

Reminder: David is available to chat with Members, comments are found below each post.

Click here for the full report.

To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Market News

News You Can Use From Phil's Stock World


Financial Markets and Economy

Asia stocks mixed amid geopolitical tension, oil eases from highs (Business Insider)

Asian stocks were mixed in early trading on Wednesday as investors assessed the geopolitical risk surrounding Turkey's downing of a Russian fighter jet, while crude oil prices eased from two-week highs.

If China Killed Commodities Super Cycle, Fed Is About to Bury It (Bloomberg)

For commodities, it’s like the 21st century never happened.

The last time the Bloomberg Commodity Index of investor retu...

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Insider Scoop

Morgan Stanley Thinks SPX Flow Is Cheap Compared To Peers, Initiates At Equal-Weight

Courtesy of Benzinga.

Related FLOW Benzinga's Top Initiations Benzinga's Top Initiations

  • Shares of SPX Flow Inc (NYSE: FLOW) have been trading at a discount to its peers since the company’s spin in September 2015.
  • Morgan Stanley’s Nigel ...

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    Chart School

    2-0 Bulls

    Courtesy of Declan.

    A second day for bulls to shine despite modest end-of-day gains. Some indices did better than others. The Russell 2000 was the key performer. It finished with a MACD trigger 'buy' and looks ready to outperform the Nasdaq 100.  This is an important development for bulls looking for more from other indices. A move to challenge - then break - its 200-day MA, would convert August-November action into a healthy basing action.

    The Nasdaq registered higher volume accumulation as a brief sojourn below the 20-day MA was reversed. It's nicely set up for a push to new swing highs.


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    Kimble Charting Solutions

    S&P 500 – Dangerous for bull case, if prices turn weak here!

    Courtesy of Chris Kimble.


    The S&P 500 remains inside of a rising channel that has been in place since 2010. The 5-year trend is up.

    The 5-month trend is a different story, at this time.

    Over the past 5-months, the S&P 500 has created a series of “falling weekly closing highs,” which is represented by line (1) above.

    The S&P is testing this falling resistance line at (2) above.

    If weakness takes place at (2) above, at falling resistance, it would be concerning price action for the bullish case!


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    Sector Detector: Bulls wrest back control of market direction, despite global adversity

    Reminder: Sabrient is available to chat with Members, comments are found below each post.

    Courtesy of Sabrient Systems and Gradient Analytics

    Some weeks when I write this article there is little new to talk about from the prior week. It’s always the Fed, global QE, China growth, election chatter, oil prices, etc. And then there are times like this in which there is so much happening that I don’t know where to start. Of course, the biggest market-moving news came the weekend before last when Paris was put face-to-face with the depths of human depravity and savagery. And yet the stock market responded with its best week of the year. As a result, the key issues dominating the front page and election chatter have moved from the economy and jobs to national security and a real war (rather than police ...

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    Swing trading portfolio - week of November 23rd, 2015

    Reminder: OpTrader is available to chat with Members, comments are found below each post.


    This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

    We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

    Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

    To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...

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    Digital Currencies

    Bitcoin's Computing Network is More Powerful than 525 Googles and 10,000 Banks!

    Courtesy of ZeroHedge. View original post here.

    Submitted by Reggie Middleton.

    I've decided to build our startup - Veritaseum, a peer-to-peer financial services platform, directly on top of the Bitcoin Blockchain. Many queried why I would voluntarily give up a lucrative advisory and consulting business to chase virtual coins in cyberspace. That's exactly why I decided to do it. That level of misunderstanding of what is essentially the second coming of the Internet gave me a fundamental advantage over those who had deeper connections, more capital and more firepower. I was the first mover advantage holder.

    You see, Bitcoin is not about coins, currency or price pops. It is a massive computing net...

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    PSW is more than just stock talk!


    We know you love coming here for our Stocks & Options education, strategy and trade ideas, and for Phil's daily commentary which you can't live without, but there's more! features the most important and most interesting news items from around the web, all day, every day!

    News: If you missed it, you can probably find it in our Market News section. We sift through piles of news so you don't have to.   

    If you are looking for non-mainstream, provocatively-narrated news and opinion pieces which promise to make you think -- we feature Zero Hedge, ...

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    Whitney Tilson On LL, EXACT, And Martin Shkreli


    Whitney Tilson On LL, EXACT, And Martin Shkreli

    Courtesy of Value Walk

    1) The shares of one of my largest short positions (~3%), Exact Sciences, crashed by more than 46% yesterday. Below is the article I published this morning on SeekingAlpha, explaining why I think it’s still a great short and thus shorted more yesterday. Here’s a summary:

    • The U.S. Preventative Services Task Force’s Colorectal Cancer Screening Draft Recommendation issued yesterday is devastating for Exact Sciences’ only product, Cologuard.
    • I think this is the beginning of the end for the company.
    • My price target for the stock a year from now is $3, so I shorted more yes...

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    Baxter's Spinoff

    Reminder: Pharmboy and Ilene are available to chat with Members, comments are found below each post.

    Baxter Int. (BAX) is splitting off its BioSciences division into a new company called Baxalta. Shares of Baxalta will be given as a tax-free dividend, in the ratio of one to one, to BAX holders on record on June 17, 2015. That means, if you want to receive the Baxalta dividend, you need to buy the stock this week (on or before June 12).

    The Baxalta Spinoff

    By Ilene with Trevor of Lowenthal Capital Partners and Paul Price

    In its recent filing with the SEC, Baxter provides:

    “This information statement is being ...

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    Mapping The Market

    An update on oil proxies

    Courtesy of Jean-Luc Saillard

    Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself. 


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    Help One Of Our Own PSW Members

    "Hello PSW Members –

    This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible.  Feel free to contact me directly at with any questions.

    Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts.  After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.)  Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.

    Thank you for you time!

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    Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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