The tricks and traps of making money: Use monkeys and penalty shoot-outs to adjust your investing behaviour and strike it rich

How do monkeys react to making trading gains and losses? What do football penalty shoot-outs tell us about the dangers of over-active investing?

These are the types of questions behavioral investing experts ponder when they look at how we make financial decisions, and why we so often get them wrong.

Understanding all of this means that hopefully you should get the decisions right and make more money. We take a look at just how you can do that.

Too much monkey business: From how monkeys react to losses, to how footballers take on penalty shoot-outs can help influence your investing decisions


How to improve your investing behaviour

Investor motives and behaviour have become matters of increased interest of late, as we try to understand the financial crisis and how best to manage our money during its volatile aftermath.

We asked finance industry experts to explain the main types of investor behaviour and how to avoid or exploit them.

Greg Davies is head of behavioural and quantitative investment philosophy at Barclays, which has had a team looking at this area for five-and-a-half years.

He says: 'We have had the rather dubious task of looking at investor behaviour and activity throughout the financial crisis. It's been an extraordinary time to study investor decision making.'

Tom Stevenson, investment director at Fidelity Worldwide Investment and another expert in the field, says it's a 'fantastically interesting' subject.

'It shows that on the surface it's to do with facts and numbers but investing is about humans with all the frailties and weaknesses that humans have.'

But he warns that although instinctive investor behaviours can be combated to some extent, they cannot be overcome altogether.

He said: 'To successfully overcome these biases is effectively to deny your humanity and that is impossible.'


The investing tricks and traps

Stampede: Dotcom bubble was a classic example of herding behaviour by investors



People draw comfort and reassurance from doing the same as everyone else and an example of this is investors 'herding together' in pursuit of a popular trend.

The dotcom bubble of 1999-2000 saw people joining in because others were making money, and by doing so encouraging yet more people to get caught up in it.

An old American investment adage is based on the reputed experience of John D Rockefeller just before the 1929 crash.

It suggests that when the bellhop in your hotel starts talking about share tips, it's time to get out of the market.

'Herding encourages people to buy at the top of markets and sell at the bottom,' explains Tom Stevenson of Fidelity. 'The way to avoid it is to adopt a contrarian approach to investing. Do the opposite of what everyone else is doing.'

He says the best investors have contrarian mindsets and there is a good reason for this - when everyone is negative the price is dragged down and you can buy cheap.

But he cautions against falling into a 'value trap', where an investment may look cheap but the price is low for a good reason.

Loss aversion

People have a deep-seated unwillingness to accept a loss, says Stevenson.


Monkeys hate to lose

In an experiment that illustrates loss aversion, monkeys were taught how to trade tokens for food.

One person would give the monkeys one slice of apple and then 50 per cent of the time a second slice as a bonus.

Another person would give them two slices of apple but 50 per cent of the time would then take one of the slices away.

The net result was the same but the monkeys didn't see it that way.

'The monkey traded 70 per cent of the time with the person who gave them another slice and only 30 per cent of the time with the person who took one away,' says Stevenson.

'Rationally it didn't make any difference, but a painful loss was associated with one of the people.'

This means that investors are disproportionately more unhappy about making a loss than they are happy about making a gain of an equal size.

Stevenson says this makes people too conservative about their investments.

'We know shares offer a higher reward over a given period than cash. But most people have far too much of their money tied up in cash,' he explains.

'They think they are being sensible and reducing risk but are taking a different kind of risk. If inflation kicks in it's a bigger risk to hold the cash.

'The way to avoid this is to assess risk in a rational way. Look at the long-term returns available from different asset classes and make a decision on that not an emotional response.'

Confirmation bias

This is the tendency to believe whatever confirms an existing opinion and disregard anything that contradicts it.

'If you basically think that emerging markets are where the growth is and they are therefore a better investment than the developed world, you will look at data released on high GDP and disregard reports about the Chinese property bubble,' says Stevenson.

'The danger is self-evident. You are not making a balanced decision. You are confirming what you want to believe.'

Instead of giving in to this bias, Stevenson suggests making a practice of analysing the reasons against making an investment, as well as those in favour.

'Argue the case against. By doing that you can reach a more balanced view,' he says.

Excessive passivity 

Many investors put far too little of their money to work, according to Greg Davies of Barclays.

He says that although we need to invest for the long term, we tend to make emotional decisions about it in the present.

'What makes us emotionally confident now is not what is right for us in the long run,' explains Davies.

This type of investing behaviour has been exacerbated by the financial crisis, followed by the eurozone crisis - on top of excessive passivity has come 'decision fatigue'.

'We are all just running out of the emotional reserves necessary,' says Davies. 'The irony is if investors sit out of the market for emotional and irrational reasons the market is likely to be oversold.

'Sooner or later that will reverse and it will tend to be quite fast. If you can overcome your emotions now is a good time to invest.'

And he stresses: 'If we don't need money for next three to five years we should put it to work.'

Action bias


Andrea Pirlo of Italy chips the ball in the penalty shootout past Joe Hart of England during Euro 2012

Rather like aggressive investors, goal keepers believe it is better to dive spectacularly rather than not to dive.

A survey of penalty shootouts published in 2007 showed that goal keepers dive left or right 94 per cent of the time. Yet the shot comes down the middle 29 per cent of the time.

'To stay in the middle feels like we are not trying hard enough. Investors are like this too,' says Davies.

Aggressive behaviour also creates problems. Some investors are constantly trying to look for the asset class that will do best and 'meddle incessantly', says Davies.

'At base this is costing them a lot in transaction fees. Plus they are making decisions they feel emotionally comfortable about - things that have been going up for a few years.'

The 'decision fatigue' described above also takes a toll on aggressive investors.

'There is a premium for taking risk when the rest of the market is anxious and fatigued,' says Davies.

He believes the answer is to invest more of our wealth but then to leave it alone.


Surveys about driving skills are revealing about the human tendency towards overconfidence.

When people are asked if they are an average or better than average driver, the vast majority say they are better than average - something that is mathematically impossible for them all to be right about.

In the financial world, people tend to be confident they can predict the future, yet forecasts of anything from company earnings to inflation are 'invariably wrong', claims Stevenson of Fidelity.

'The future is unpredictable but we have overconfidence in our ability to predict it,' he says. 'One of the ways to get around that is to accept we don't know what the future holds. Spread risks widely as it's impossible to know which will do best.'

He believes that since it's impossible to forecast the turning points in the market, it's better to drip-feed money into investments so as not to miss them. This also forces you to invest when it 'feels hardest'.

'Cut out emotion and accept we don't have the ability to predict the future,' warn Stevenson.

Investor fixation: It's common to anchor on the price you paid for a share



'What anchoring describes is the tendency to fixate on a certain piece of information rather than to consistently reevaluate the evidence based on all the information available at the time,' says Stevenson.

In finance, people might anchor on information like company earnings and project upwards from the most recent figures. And it's also common to anchor on the price you paid for a share.

'If you paid 100p and the share price falls to 80p, you hold onto it,' says Stevenson.

'You should be looking at the investment at 80p and asking yourself is it a good investment at 80p. If it's a bad investment at 80p then the fact you paid 100p is irrelevant.

'What people should do is cut losses and run profits, but they run losses and cash in profits too soon.'


Hindsight bias: Investors believe after the fact that an event could have been predicted. Bubbles are often regarded as obvious in retrospect.

Narrative fallacy: Creating a story or pattern to explain connected - or sometimes unconnected - events.

Representativeness: Classifying stocks in terms of supposedly shared qualities. Contrarian investors often look for stocks mistakenly pigeon-holed as bad investments by others.

Framing: Information is constructed or tailored in creative and erroneous ways.

Winner's curse: Overpaying for what is believed to be a winning investment - see Facebook shares for a recent example of the dangers.

Familiarity bias: Preferring what you know, often leading to investors sticking to industries they believe they understand and investments in their own country.

Endowment effect: Investors can become emotionally attached to things they have bought.

Fear of regret: Avoiding selling a bad investment due to fear of the pain - or sometimes just the embarrassment - involved in taking a loss.

The comments below have not been moderated.


We are no longer accepting comments on this article.