Turmoil in Financial Markets: decision-making bias in financial trades

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silmcoach
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Re: Turmoil in Financial Markets: wind of change?

Post by silmcoach »

Is this the turning point?

After softer gains on the US markets last evening (GMT), falls began overnight in Asia, and continued in Europe on opening this morning. With the realization that the coronavirus will not be going away anytime soon, sales warnings in the luxury goods sector, and supply chain concerns for major manufacturers, sentiment may now turn negative. Friday's close, and Monday's opening will give a good indication of how negative that might be.

My inclination before the 8 a.m. deadline (to sell funds today) was to cash in and secure the gain, but as the objective experimenter I'm going to stick with Kahneman and hold on to "winners".

Guess I will just have to steel myself for the appearance of red on my account summary, resist my subjective innate aversion-to-loss, and hang on to what I define as winners, even though they may show a loss in the short term.
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
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Posts: 218
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
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Re: Turmoil in Financial Markets: Coronavirus; good news

Post by silmcoach »

The good news is that the number of new coronavirus* cases in China was down 20% yesterday. People's lives and health are what matter most.

Update 4 p.m. (GMT): The new coronavirus has now officially been named "Covid-19" by the World Health Organization
silmcoach
Greatest wealth - happy heart, peace of mind :D

silmcoach
Site Admin
Posts: 218
Joined: Tue Aug 16, 2005 4:28 pm
Location: Dorset, UK
Contact:

Re: Turmoil in Financial Markets: Coronavirus - deaths spike

Post by silmcoach »

Some 242 deaths from Covid-19 (the new coronavirus's official name) were recorded on Wednesday with the number of cases jumping to 14,840.

Apparently, this dramatic rise in deaths & cases is due to the use of a broader definition.

I don't want to be flippant, but a person is either alive or dead. So the dramatic rise in the number of deaths is absolute fact.

Although I feel uncomfortable thinking about finance at this time, this experiment is testing the theory of an innate human aversion to loss. Therefore, objectively, considering factors that increase the risk of financial loss is relevant.

In December 2018 markets around the world fell up to 25% on fear of a global trade war. Yet throughout 2019 they have bounced back to achieve record highs showing gains of up to 35%.

What's interesting is that investors over the year appear to have steadily become immune to risk as threats to stock values never materialised. It seems that the more risk investors were exposed to the more confident they became that they couldn't lose.

This might explain why the markets have reached record highs when the risk to the global economy could not be greater. It may be that a fear of losing out on likely future gains may actually have overridden any aversion to loss.

The question is whether the aversion to loss is innate human behaviour or not. If investors over the last year have learnt that fears of a loss were exaggerated, then we might expect markets to hold their nerve at this concerning time. However, if aversion to loss is an innate human survival mechanism then we could see a sudden and dramatic sell off as it kicks in with the sudden realisation that recently learnt behaviour (can't lose) proves mistaken.
silmcoach
Greatest wealth - happy heart, peace of mind :D

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