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Matthew Chan

on 3 October 2012

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Transcript of Finance

Note on Cognitive
Overload in Trading By Elise Payzan-LeNestour Presented by Matthew, Nina, Alex,
Dickson, and Jenny (Group 1) Experiment 1. If you were given $20 and a choice of taking the money now or wait for another 20 minutes to receive another $20, which one would you choose? 2.The same scenario except this time, you are given a choice of taking the $20 now or wait for 20 minutes, but it is uncertain whether or not you will gain money. You might even lose the first $20. 3.Suppose you chose to wait 20 minutes last time you played this game and you end up gaining another $20. However you heard many people played this game recently had lost $20. What would you do this time? Deferred Gratification •Experiment 1 result –Deferred gratification- long run benefits
•Intensive activity in prefrontal cortex
•Problem with implication of deferred gratification
•Bird-in-hand theory, constant dividend payout ratio
•Experiment 2 result -Mid-brain wanting system Recommendation to Investors •Experienced investors are encouraged to look for better choices
•Paradox of choice
•Increase their decision making time and seek better investment opportunities
•“Gut Instinct”
•Experiment Result 3-average investors are not recommended to do so. Cognitive Overload and Market Volatility •Split attention effect (Sweller 1999)
•Excessive processing demand in the working memory
•Interesting but irrelevant information
•How information is presented
•Holding information in the working memory Recommendations cont. •Make no decision instead of bad decision when faced with cognitive overload
•Thaler, Tversky, Kahneman and Schwartz 1997 Thaler, Tversky, Kahneman and Schwartz 1997 Subjects were asked to allocate their portfolio between A (bond) and B (stock).
Three Groups:
•Group 1 reviews portfolio monthly
•Group 2 reviews it annually
•Group 3 reviews it every 5 years
Subjects in group 1 saw more frequent losses and were more wary of the stock Recommendations cont. •Avoid monitoring multiple streams of information.
The blending of information from multiple sources leads to poor decision making by investors (Hodge 2001). Lesson for investors Lesson for brokers (cc) image by anemoneprojectors on Flickr •Specialised brokers
•Consultants •Presentation of information
•Weeding & Highlighting information
•Segment bite size information sets easier to process •The reward system in our brains is triggered when we find new information
•This drives us to constantly look for more information


•Information overload
•Confirming initial beliefs The "New New Thing" The Reward System •Is constantly ‘hungry’
•Adapts to the environment Infobesity Human brains experience new information in much the same way they experience pleasurable foods, (Han, D.H 2007)

Infobesity (Pearrow, M. 2012)
•Reward system activation by food and information stimuli
•New information = red velvet cupcake? Implications and Recommendations Implications in modern society – age of digital mass production
•Reward system adapt s to become less sensitive to stimuli
•Require ever-increasing amounts of new information to satisfy our brain’s craving

Suggestions for investors:
•Reduce dependence on financial news – risk of excessive noise
•Refrain from distractions such as rumour THANKS FOR
Full transcript