Tuesday, February 16, 2010

Snow Days and Human Nature

My daughter was very sad today because she had to go to school -- even though it was supposed to be the fourth day of a four-day weekend. We couldn't cheer her up even though she had two snow days OFF FROM school last week.

Last week, when we were getting pummeled by almost four feet of snow within four days (!!), we enjoyed some fun and happy family time on those extra two days off from school. BUT -- if you could measure the fun, it would go something like a "normal happiness level of a 7" up to, say, a "9." (So a decent jump in happiness; we all remember snow days, right?).

However, if we consider that today was supposed to be a day OFF from school, we can see why kids will be sort of bummed. Our daughter's happiness went from the "normal 7" all the way down to about a 2. A BIG disappointment. So -- even with two snow days last week, and today's make-up day, the net is a slight disappointment. People HATE losing something they thought they had!

There is a whole field of behavioral finance, but this morning's "off-to-school routine" made me think of some of the factors that help drive markets. In particular, we can try to use patterns of human nature to obtain an edge:
  • Most people are risk-averse
  • People often "compartmentalize" gains and losses
  • Contrarian methods
  • Fear versus greed
  • Climb wall of fear
We use systematic methods to invest and trade the markets to keep us disciplined -- the human element. We perform tons of research, but then use computerized and automated trading approaches.

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