Investment newsletter - October 2017

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Investment Newsletter October 2017

Markets Behaving Badly Glamorous pop star Selena Gomez leans across the black jack table. She scoops up her winnings, a giant stack of betting chips. She wins again. The crowd builds, there’s a buzz. A grey-haired professor is sat next to her. Selena wins once more. The crowd loves it.

Neal Foundly Investment Analyst

The professor turns to the camera and explains the analogy with the property boom ahead of the 2007-9 Credit Crisis, pointing out that the crowd, “…think it will go on forever. It’s called extrapolation bias. People see something happening and they extrapolate that it will continue to happen.” Regardless, Selena continues to win. The crowd want a piece of the action. One spectator bets that Selena will carry on winning and another takes the bet. Others make bets based on the original wager and then more make bets on the secondary bets, and so on.

At the time of the Credit Crisis these bets on bets on bets, known as synthetic credit default obligations were massive (totalling $1.47 trillion or about 10% of the US GDP). The crowd are really behind Selena now. She’s a lucky lady but perhaps more than that, something special? The professor dryly points out that this is the ‘hot hand fallacy’, seen so many times in fields such as sports and finance, and drives the belief that the success will continue because of recent wins. The good times roll on and the crowd is loving it. Then Selena loses. Big. The crowd is crushed, mentally and financially. The professor, hitting the nail on the head, sums it up that, “The one loss becomes thousands of losses… The crazy part is assuming people will act logically all the time.”

Equilibrium Asset Management LLP (OC316532) and Equilibrium Investment Management LLP (OC390700) are authorised and regulated by the Financial Conduct Authority and are entered on the financial services register under references 452261 and 776977 respectively. Registered Offices: Brooke Court, Lower Meadow Road, Handforth Dean, Wilmslow, Cheshire SK9 3ND. Both companies are registered in England and Wales.


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Investment newsletter - October 2017 by Equilibrium Financial Planning LLP - Issuu