72 episodes

All about your brain & obtaining real-world behavioral finance knowledge! Listeners have access to original and engaging discussion of behavioral finance and cognitive bias.

Mental Models Podcast It's not a brain in a jar, that's the gist‪!‬ Dr. Daniel Krawczyk & George Baxter, JD, CFA

    • Business
    • 5.0 • 17 Ratings

All about your brain & obtaining real-world behavioral finance knowledge! Listeners have access to original and engaging discussion of behavioral finance and cognitive bias.

    Mental Models: Game Stop Stock Unhinged: #72

    Mental Models: Game Stop Stock Unhinged: #72

    GameStop $GME shops mainly sold physical video games. They would also stock many resale items. The physical locations capitalized on the same type of business that comic book shops often had by selling collectibles as well. Many projected that Game Stop had a very limited future and had been cut out of the supply chain as many electronic games are simply sold online in recent years.

    Hedge funds had high interest in shorting GameStop at the end of 2020. In January 2021 a long position idea existed with the idea that a pivot to in-person gaming meetings could be a way forward. Michael Burry was featured in the Big Short and he had advocated for a potential bright future for GameStop lending credibility to the value position. Melvin Capital was known for this, and was pretty aggressive in advocating for the short position.

    “Deep F…ing Value” (aka “Roaring Kitty”) entered the scene with the WallStreetBets crowd and advocated for buying GameStop and driving up the price. Around GameStop there was herd mentality forming and a desire to squeeze the hedge funds. It was equivalent to an ‘occupy Wall Street movement’. Everyone online had to going to buy Game Stop stock and not sell it for the short squeeze to work. These are known as “diamond hands”, which also happens with cryptocurrency. It became the ‘Prisoners Dillema’, a trust game, where everyone has to stay the course and not sell. A religious fervor built up as online investors from Robinhood wished to take down hedge funds that were seen as greedy.

    We discuss the typical scenario around short selling and short squeezes. There is some value for markets to have short sellers as they act as a shock absorber. Contrarian short sellers are naturally unpopular due to the historical interest in companies continuing to succeed. A set of factors aligned in 2021: the bull case for the stock, an online sentiment to stick it to short sellers, and the natural appeal of using Robinhood to become wealthy from the comfort of one’s own home. Meteoric rises in the price continued until it had reached three hundred dollars per share. This scenario may serve as a sign that retain online investors are coming online. It’s a case where people with limited investing skills scored a victory in this risky scenario.

    Some people may have participated simply to experience the thrill of being part of this movement as entertainment for some people. It is not healthy for society overall to have people treating the stock market like a casino. It had a sports betting feel to it.

    AMC theaters was on the way to bankruptcy, but took advantage of a price rise to raise capital to help their business. GameStop might have done this same thing. Financial markets serve a purpose and this type of scenario goes against the natural functionality of markets. The risk levels always rise with betting on perception this way.

    Perhaps GameStop will act as a gateway stock for people to begin investing careers.
    $AMC

    • 29 min
    Mental Models: EV Bubble Bursting: #71

    Mental Models: EV Bubble Bursting: #71

    The Electric Vehicle (EV) Bubble is rising and appears to be starting to burst. Issuances continue to pick up. The entire basket of EV stocks that we discussed in Episode #68 of Mental Models Podcast is now DOWN 42 % (at the time of this recording). The market will fluctuate and we will likely experience a surge with the approval of the US government stimulus. At this point it’s fair to declare the EV bubble BURST!

    Observing the current market is analogous to being a sea captain in the 1700’s. One has to wonder whether there is really land up ahead, or is it an illusion? What type of winds are about to blow in? In early 2021 It is like being in an El Nino year in the 1700’s, and everything is shrouded in mist. There are many unknowns, and a matter of waiting to see what is coming.

    We focus on what cognitive biases can tell us about investing. People may become more tolerant of risk when they use their stimulus checks to invest in the stock market, because this feels like found money. When you didn’t directly earn money, you have less personal attachment to it, which makes it easier to lose and enhances the tendency to take risks. By contrast, when the stock is declining, loss aversion can take over. This occurs when an individual refuses to sell because they do not want to feel foolish, or have to reverse themselves publicly.

    Experience in watching the market has shown that when a bubble bursts, it continues to decline for the next two years. During the extended fall, prices will typically level out, and then fall again. Individuals involved in the bubble may be prone to undesirable anchoring bias as they continue to wait for the price to recover to a previous level and then sell. You are not alone if you experience this happening to you!

    The 2021 "Alice in Wonderland Market" with all of its twists, turns and volatility will continue. Keep you eyes on the horizon, there is no easy fix! Don’t fall down the rabbit hole of cognitive biases along the way.

    Links
    Play and Understand Stock Market Bubbles: #68 https://podcasts.apple.com/us/podcast/mental-models-play-and-understand-stock-market-bubbles-68/id1458795155?i=1000505145809

    #EV #electricVehicle #StockMarketBubble #EVBubble
    #Mentalmodelspodcast #cognitiveibias

    • 23 min
    Mental Models: Money, genetics and your brain, lessons from “Behave” by Robert Sapolsky: #70

    Mental Models: Money, genetics and your brain, lessons from “Behave” by Robert Sapolsky: #70

    Financial insecurity impacts our brain and body throughout human development. Stress is increased with more authority & responsibility.
    Lessons from of Robert Sapolsky’s book “Behave: The Biology of Humans at Our Best and Worst”
    For more on best investing strategies, avoiding bias and learning about your brain BUY 5 star reviewed book “Understanding Behavioral Bia$” on Amazon - link here: http://amzn.to/2XHtsOE Continue to listen to Mental Models Podcast to avoid the biases that are keeping you from making a profit in the market. Stay safe and healthy out there!

    Sapolsky's book provides a bird’s eye view on how our behavior evolves from seconds to months and years prior to the time that we act.

    It is well-stocked with excellent lessons about neuroscience, biology, genes, and culture. This lengthy book is engaging throughout and tackles complicated and controversial topics. Sapolsky provides an important biological link to explain the ways that we behave. He emphasizes that our biology is inextricably linked to our cultures and hierarchies. He takes on the challenges of social comparisons, wealth inequality, and systemic poverty. Relative positions in society link back to our mental health with implications for our health and biological function.

    Human happiness in the corporate world is discussed. It is impacted by A. Autonomy, B. Place in the hierarchy, and C. Number of direct supervised employees. A and B impact our well being in a positive way, while C increases our perceived stress.

    Three keys to lowering executive stress are noted:
    1. Maintain a strong place in a hierarchy
    2. Gain autonomy over your decisions
    3. Outsource much of the daily micro management

    Other critical drivers of behaviors are discussed related to market participation. These include economic exchange games including the ultimatum game. People who participate in high trade volume (whether it be in a financial market or a street market) tend toward making fair offers. This establishes trust and reputation which lead to human thriving and the development of productive civilizations. This has implications about need for autonomy and experience in growing your own success. Zero-sum thinking leads toward people avoiding you. There needs to be a healthy balance between cooperation and competition. You can go very far in life if you ensure that you maintain mutual benefit with any sort of deal you make.

    The book frames many sophisticated and complex behaviors in terms of evolutionary theory, genes, and neurobiology. Honor and revenge cultures lead to tremendous stress and unhappiness.

    Sapolsky reminds us that so many systems from culture down to genes is one of modulation.

    Links: Robert Sopolsky’s book “Behave: The Biology of Humans at Our Best and Worst”
    https://www.amazon.com/Behave-Biology-Humans-Best-Worst/dp/1594205078

    • 29 min
    Mental Models: Lessons for finance, economy, & human behavior. Book review of “Sapiens”: #69

    Mental Models: Lessons for finance, economy, & human behavior. Book review of “Sapiens”: #69

    Brain and Investing lessons that we took from the book Sapiens by Yuval Noah Harari (2017). An excellent read covering many surprising insights about human behavior from individuals to global institutions.
    From a scientific standpoint this book highlights the unique cognitive capacity of Homo sapiens. We can imagine theoretical constructs that cannot actually exist. This tendency gave rise to our ability to create other fictions that we live by. These include monetary systems, corporations, and law structures. Group behavior and trust underlie many phenomena that we take for granted in our lives.

    The book discusses the development of money, a powerful fictional construct that works because we all believe in the fiction and agree upon its value. Money can be viewed as a contract that enables us to transact on the fly. For more depth on this topic, please listen to Episode #2 of this podcast “Value drives our lives”

    Another remarkably important development the book covers is the willingness of people to admit that they do not know something. Professing uncertainty serves as a driver for human progress. Admitting ignorance gives us a reason to explore the world and run experiments so that we find better answers. Our quest for learning enables us to fill in the blindspots that exist within our mental models of the world.

    Another fascinating feature of our lives is that we now imagine a better future filled with dramatic progress. This is a new phenomena relative to many prior civilizations that did not have reasons for optimism, since they were much more subject to disease, lack of progress, and stagnation. Trust leads to cooperation which leads to growth. This leads to greater optimism and even more trust, which can transform a society for the better.

    Chapter 16, The Capitalist Creed is likely the most interesting chapter for our audience. The insight that trust underlies credit is fundamental to progress. With credit, growth is possible in a nearly magical way. Paying back loans led to further extension of investment and this drove history forward, rather than the dictator model where a monarch determines that land should be acquired by conquest.

    History is not predetermined. Rather, it is a dynamic series of complex interactions that can take unexpected turns and is often only predictable in retrospect. Please see our previous episode #13 on the Hindsight Bias if you find this topic compelling and want to hear more.

    A final interesting point about human progress is asking the question “are we happier?” after all of the progress that we have made. This remains open for debate and may inspire new research aimed at addressing our core needs as our lives become further enmeshed within technology and widespread information availability. We end by touching upon the intriguing topic of “brain hacking”.

    Links: Sapiens by Yuval Noah Harari (2017)
    Read more on Amazon https://www.amazon.com/Sapiens-Humankind-Yuval-Noah-Harari-ebook/dp/B00ICN066A/ref=as_li_ss_tl?pf_rd_m=ATVPDKIKX0DER&pf_rd_p=fcaa6d12-8b2b-4ad7-b277-864b2da79f6e&pf_rd_r=6FFDPEP8Z6AEX1RBSPTF&pd_rd_wg=Rl5OI&pf_rd_s=desktop-dp-sims&pf_rd_t=40701&pd_rd_w=T017i&pf_rd_i=desktop-dp-sims&pd_rd_r=3fdfa333-966e-11e8-a126-fd3c94bb211d&pd_rd_i=B00ICN066A&psc=1&refRID=6FFDPEP8Z6AEX1RBSPTF&linkCode=ll1&tag=natsite-20&linkId=42ececba032ff9e0d90705e1943bacac&language=en_US

    • 32 min
    Mental Models: Play and Understand Stock Market Bubbles: #68

    Mental Models: Play and Understand Stock Market Bubbles: #68

    Mental Models Podcasts predicts that this historic and unprecedented bubble will crash by the second quarter of 2021. Bubbles are driven by narratives. Bubbles have an end but timing the end of the bubble is unknown, which is the risky part, and very different than sports betting. Predictors are, volatility, age tilt, issuance, market cave, and acceleration.
    How do you understand bubbles...visiting with historical features of bubbles, academic literature, lessons learned from Saberpoint Capital’s review, biases, and looking forward into 2021. Robin Greenwood, Andrei Shleifer, and Yang You (2017) observed the period of 1926-2014 identified 40 different bubbles, suggesting bubbles are not that common. The four main findings are presented on pages 2-3 in Greenwood, et al, paper based on Eugene Fama’s work, see Link https://doi.org/10.1016/j.jfineco.2018.09.002. [Eugene Fama (academic papers listed below)]
    A SPAC investment is a Special Purpose Acquisition Company (SPAC)”created solely to merge or acquire another business and take it public”, this is often a cheaper option to a PO (public offering).
    Biases to be aware of are optimism and fear of missing out that could push your towards the bubble.
    For more on best investing strategies, avoiding bias and learning about your brain BUY 5 star reviewed book “Understanding Behavioral Bia$” on Amazon - link here: http://amzn.to/2XHtsOE Continue to listen to Mental Models Podcast to avoid the biases that are keeping you from making a profit in the market. Stay safe and healthy out there!

    Fama’s Academic papers:
    Fama, Eugene F., 1965, “The Behavior of Stock-Market Prices,” Journal of Business 38, 34-105.
    Fama, Eugene F, and Kenneth R. French, 1992, “The Cross-Section of Expected Stock Returns,”
    Journal of Finance 47, 427-465.
Fama, Eugene F, and Kenneth R. French, 1997, “Industry Costs of Equity,” Journal of Financial
    Economics 43, 153-193.
Fama, Eugene F., 2014, “Two Pillars of Asset Pricing,” American Economic Review 104, 1467-
    1485.

    • 42 min
    Mental Models: Stock Winners and Losers heading into 2021: #67

    Mental Models: Stock Winners and Losers heading into 2021: #67

    COVID-19 has created an unprecedented impact on the stock market. There have been clear wining and losing stocks in 2020, where will these stock go in 2021? We review the uncharted stock market ahead, stocks to consider travel, #RV, #technologies, & #paper products. So much more to think about with the change that the vaccines for COVID_19 will bring - #hope for a healthier economy. For more on best investing strategies, avoiding bias and learning about your brain BUY 5 star reviewed book “Understanding Behavioral Bia$” on Amazon - link here: http://amzn.to/2XHtsOE Continue to listen to Mental Models Podcast to avoid the biases that are keeping you from making a profit in the market. Stay safe and healthy out there!

    • 20 min

Customer Reviews

5.0 out of 5
17 Ratings

17 Ratings

Left Tail Hedge ,

Useful nuggets of insight

The fundamental role of the investor is to process information and make decisions. One of the big hurdles to overcome in making good decisions is cognitive bias. Even with good information, people make bad decisions. Why? Who better to explore this than a SCIENTIST at the forefront of brain research and FUND MANAGER in the trenches?! I’ve found these short conversations enlightening and relevant, and I think you will too. RECOMMENDED.

double down ace ,

Great strategies for investors bonus brain info

I really enjoy listening to this podcasts, as a value investor who is interested in the why and how of bias and decision making, this is my go to podcast. Looking forward to their upcoming book!

Dough_Roller ,

Great Points

I'm a (overly) seasoned institutional equity investor, and this podcast provides great points for improvement. I particularly liked discussion about avoiding "default decision" making, how to think about the value of an asset and the role group-think plays in decision making.

Delivery is style of the speakers is great, and the quick, to-the-point content is easy to consume.

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