Behavioural Finance - Cognitive Biases In Decision Making

Price category: B
Date: Check the Agenda section on this website
Location: Amsterdam
Duration: 1 Day
Time: 09:00 - 17:00
Language: NL / EN
Lecturer(s): Bob Emanuels
PE points:  7

Introduction:

This is the answer to the never ending search to better understand one's behaviour and to improve strategies in order to avoid poor decision-making. 

Most conventional economic theories are based on the assumption that all individuals taking part in an action or activity are behaving rationally. The assumption of rational behaviour implies that people would rather be better off than worse off. Rational behaviour refers to a decision-making process that is based on making choices that result in the optimal level of benefit or utility for an individual.

However, in actuality there are countless instances in which emotion and psychology have undue influence upon our decisions, and the result is that “rational” actors can display unpredictable or irrational behaviours. This can include making decisions based primarily on biases or emotion, even if financial models suggest the decision is not wise. The branch of economics which is concerned with this paradox is called behavioral finance.

This relatively new field seeks to combine behavioral and cognitive psychological theory with conventional economic theory in order to propose explanations as to why people might make irrational financial decisions. We will confront our trainees with their biases and irrational decisions, but we will also give them tools how to control their behaviour and how to mitigate risk.

Learning objectives:

After this training you will be able:

  • generate an in-depth, shared understanding of complex pitfalls in the mind of financial decision makers
  • acquire insight into the judgement and the decision making process under stress
  • recognize and describe illusions and fallacies
  • gain more insight in how our brain uses heuristics - rules of thumb so to speak - to reach decisions when it comes to very complex questions
  • develop a generally applicable strategy in order to control decision making under risk

Target group:

  • This is a training for every decision maker on every level throughout the busines.
    Whether you are a manager or a consultant, a programmer or a sales, back-office or front desk employee, everyone will benefit from the understanding of this natural human behaviour

Content:

This 1-day course gives a clear in-depth view on

  1. Why investors are hopeless at forecasting
    1. The structure of Financial Markets
      1. Order in Chaos – determining the statistical significance of autocorrelations in time series
      2. Lack of Information – a fundamental problem
      3. Inefficient Markets – Why efficient markets won’t help
    2. Fundamental Analysis vs. Behavioral Analysis
      1. The missing link – CAPM, DDM or …
    3. Financial Forecasting: Biases to overcome
      1. Over optimism bias
      2. Self-serving bias
      3. Representativeness
  2. Practice Money Management Guidelines
    1. Exit and Entry Stops
      1. Anchoring – Support & Resistance in financial markets
      2. Recency Effect – Which levels matter?
      3. Law of Small Numbers – The truth about timeframes
      4. Framing – Building a Tactical Trading System
    2. Building a tactical system
      1. Conjunction Fallacy – The more the better?
      2. Clustering Illusion – Valid patterns
      3. Loss-Aversion Bias – Cut your profits short and let your losses run
      4. Self-control Bias – Hyperbolic discounting – How to please your boss?
    3. Case: Mutual Fund Psychology
  3. The Rollercoaster of Emotion – Buying & Selling Financial Instruments
    1. The Process – Greed, Hope, Pride, Love, Euphoria, Doubt, Disbelief, Denial, Fear, Panic, Desperation, Capitulation
    2. Emotional Biases & Stress – Containing the catalyst
    3. How to Master Stress
      1. The Gamboni secret
      2. The Alligator principle
      3. Thinking in Probabilities
    4. A Business Philosophy
      1. Preservation of Capital – absolute returns
      2. Consistent Profitability – risk mitigation
      3. Pursuit of Superior Returns – position sizing
  4. A Practical Guide

Methodology:

  • We will take the trainees on a journey through their minds. We will explain why humans are are hopeless at forecasting, why they fail to apply Money Management guidelines, how they miss out on profits when making financial decisions and why risk is often subject to misinterpretation.

 

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