Your Silent Trading Partner

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• Your Silent Trading Partner
• IBD MIT
• March 25, 2009
• Mark Passacantando
• No part of this written or oral presentation
  should be implied to be a recommendation or
  construed to be a sale of a security and there
  are no explicit representations. This
  information is purely educational in nature.

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The Big 3 Questions !!!

• Are there key factors that stack the deck against
  us (investor/traders)?
• Are we aware of them?
• Is there anything we can do to swing some of that
  probability back in our favor?

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The Big 3

• Yes, 90 of new traders fail in the first year!
  Research due to the fact that we are irrational
  in execution miscalculate probability, risk,
  reward, randomness
• Most people are not maybe some remote awareness
  dots are not connected greed fear ignorance
  we are too smart
• Absolutely! Read on

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VBB Visceral, Brain, Bias

• Visceral things hit us without us knowing about
  it - influence?
• Brain Chemicals are so powerful they rule
  influence?
• Bias We come to the table with Rules already
  built-in Investors are never neutral!
  -influence?

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Visceral Game Rules

• Quiet, relax, heighten senses
• It straight, hands out, feet flat
• Press left hand/foot for STOP negative
• Press right for GO positive

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Thevote.abc.com

• Thevote.abc.com

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Pinknews.com/uk
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Vulcansmercy.com
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Sanityisland.us.com
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NFLlogos.com
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Sidelinehelmets.com
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(No Transcript)
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What Did You Feel?

• Any patterns?
• Observations?
• Impact on state of mind?
• Impact on investment decisions?

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Control Center It Is Working Right Now!

• More than 100,000 chemical reactions go on in
  your brain every second! The brain is also a
  radio transmitter, which sends out measurable
  electrical wave signals. The brain continues to
  send out these signals many hours after death!
• Among the brain's many jobs is to be your own
  chemist. The brain produces more than 50
  identified active drugs. Some of these are
  associated with memory, others with intelligence,
  still others are sedatives.
• Source Altered-States.net

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HAPPY BRAIN CHEMICALS

• Endorphin Brain's painkiller, and it is 3 times
  more potent than morphine. Scientific research
  over the last several decades has led to the
  revolutionary discovery of opiate-like chemicals
  in the body that associate with opiate specific
  receptors in the brain and spinal cord, including
  Serotonin, a hormone manufactured by your brain.
• Serotonin a neurotransmitter, involved in the
  transmission of nerve impulses. Besides being
  involved in the process of addiction, low
  Serotonin levels are believed to be the reason
  for many cases of mild to moderate depression
  which can lead to symptoms like anxiety, apathy,
  fear, feelings of worthlessness, insomnia and
  fatigue.

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Happy (cont)

• Dopamine, which makes people more talkative and
  excitable. It affects brain processes that
  control movement, emotional response, and ability
  to experience pleasure and pain.

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Happy (cont)

• Exercise has been shown to produce another
  chemical known as endorphins, which help with
  depression, anxiety, sleep, and sexual activity.
  So, besides eating certain foods, relaxation,
  exercise, and are things that we do that can also
  affect the level and activity of these chemicals.

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Happy to slooooooow down

• Relaxation produces the chemical norepinephrine
  tied to depression in some studies.

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Stress

• Cortisol
• Stress impairs memory and judgment
• Stressors are never static they mount
• Past stress (e.g.PTSD) affect current ability to
  handle stress
• Stress neuron firing slows less flexible
  connections not made as readily

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Cocaine and Investments I am About to Make
Money!

• MRI brain scans are remarkably the same!
• Frontal cortex same neural network controls
  pleasure networks control buying Google at
  350/share, orgasm and cocaine

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MRI Brain ScansSource Happy Health Long Life.com

• Reading vs. Google Search!

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Brain Addiction Post Stroke, patients found
it easy to quit smoking damage to left side of
the brain (insula)The Dana Foundation, photo
Antonie Bechara
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The Brain MattersThe FMRI scan on the right
detects a brain processing a false statement the
less colorful brain on the left corresponds to
someone in the middle of a truthful
statement.The Neurocritic blogspot 9/1/2007
ABC
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Anterior Cortex Analytical vs. Emotional
Response Gamble or Dont Gamble All Showed an
Emotional Bias Emotions Rule! University
College- London USA Today 8/07/06
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Our Home Grown Bias

• Childhood
• Values
• Beliefs
• Mores
• Experiences
• Contact with Others

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Wisdom Of CrowdsJames Surowiecki

• New England Patriots vs. New York Giants
• Success rate
• IBD at MIT influence - positive

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IBD Strength, but Possible Achilles?

• Wisdom of Crowds does not Equal the wisdom of
  one in the crowd
• Halo Effect person has one good quality,
  other characteristics are judged as better than
  they really are
• Psychology of group persons conform to
  attitudes/beliefs of the group toward midpoint
  regression to the mean
• Tendency for groupthink our skills are
  superior a given approach IBD, Chapman, Elliot,
  etc.
• Individual can suppress own thoughts to conform
  to the group
• Choose individuals to speak whos views conform
  others?

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Bias 1 Hate Loss!

• Have 1,000 choose either
• A) Sure gain of 500 or,
• B) 50 chance to gain 1,000 and a
• 50 to gain nothing.
• Audience, you choose
• -------------------------------------------------
• Nobel prize winner Daniel Kahneman 2002
• Tversky and Kahneman study

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Cont

• Have 2,000 choose either
• Sure loss of 500 or,
• 50 chance to lose 1,000 and a 50 chance to
  lose nothing.
• Audience, you choose

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Result

• Two problems are identical in terms of probable
  net cash!
• Option A certain 1,500
• Option B 50/50 chance to get either 1,000 or
  2,000

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Why?

• People are risk averse strong bias to avoid loss
  regardless of risk
• Argument framed in how much you GAIN vs. how much
  you LOSE
• If sure gain, OK, Ill take risk
• Possible loss, No thanks we quickly lose sight
  of net outcomes and actual probabilities

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Bias 2 Recent Information

• We usually place more emphasis on recent events
  (and therefore overreact to this information)
• Examples Look at in and out trading a lot
  recent news, look at co/stock frequently
• Later, look backit was a blip Elliot
  Snap-back? Fence? EMA
• Thaler, Tversky Kahneman - most feedback traders
  recd lowest returns, lowest money
• Mood changes 1x/day 6x/day 390/day 100,000
  year!

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Bias 3 - Availability

• We tend to overemphasize information that is in
  front of us and/or easily attainable! We then
  make decisions based on it.
• U.S. vs. International Investing?

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Bias 4 Over-confidence

• We tend to be overconfident in
• Our abilities (I avoided tech crash!)
• Our (believed) understanding of something (co.,
  industry, market)
• Our ability to bounce back
• True of mutual fund managers DALBAR/Morningstar
  media (CNBC)
• Usually exists with recent gains.
• e.g. Dougs Lead Members Predictions
• e.g. Freds IMHO

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Bias 5 - Anchoring

• We have a bogie or benchmark or event in mind
  that is what we peg all other observations to
• Tied to our past job? Beliefs?
• Last Years Returns
• Deutche CEO example Dow 14,000
• clients

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Bias 6 ConfirmationSource fun.front.lv/i/illu
ssion

• We are always scanning the environment for
  information that supports or confirms our own
  beliefs.
• When we see it, does that make it true?
• WFMI, SBUX, TIF, APOL, FNM, RGR, SWHC

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Bias 7 Outcome

• Judge things based on our hoped for outcome or
  desired result as opposed to current conditions
  or what you see!
• Head/Tails Coin Toss (H-T-T-H-T-H or
  H-H-H-T-T-T)which is more likely?
• It will come around! It must! I did the
  research! I will wait until it does.

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Regret Aversion

• Admit I am wrong! Never!
• Mistake. Hold. Not a mistake.
• Winner! Congrats! Hold, hold, hold
• (regret selling, watch it go higher)
• Motto use pre-determined rules, use discipline
  let go of ego, emotion

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Help The Brain

• Exercise help executive functions
• Diet stay sharp prevent defense
• Stimulants increase short term memory/reaction
  time
• Music activate reward centers reduce activity
  in amygdala
• Meditation cells fire in synchrony

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Self-Test ChecklistBias???
Yes No Maybe
1 Loss Aversion
2 Recent Information
3 Availability
4 Over-Confidence
5 Anchoring
6 Confirmation
7 Outcome

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Tips

• Heighten awareness of these facts YOU!
• Understand your biases
• Dont over-trade
• Self-analysis tools
• Hire a coach
• Emotional discipline have it?
• Stress must be controlled
• Consistency strive for it measure
• Risk Management always
• Humility Great traders have it I have no
  control over the markets

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Marks Tips to Mark

• Understand each Yes/Maybe Bias
• Manage emotion
• Use tech tools(stops, programs, etc.)
• Invest v. swing trade v. day trade

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Final Tip!((_(

• Dont look at beautiful women anchors in
  business channels when you are making investment
  decisions.
• means
• Never make financial decisions when you are
  sexually stimulated!!
• Source High Risk Investments and Sex Stock
  Market Guide April 6, 2008
• Northwestern University Stanford University
  joint study