This document discusses common investment mistakes and biases that can negatively impact investment decisions. It begins by outlining several cognitive biases like overconfidence, availability bias, and loss aversion that can lead investors to make poor choices. It then provides examples of how these biases might influence decisions around individual stocks. The document concludes by discussing lessons that can be learned from successful long-term investors like Warren Buffett, including the importance of patience, understanding investments, and having a consistent strategy.

1. Common Investment Mistakes
“The Psychology of Poor Investment Decisions and Active Trading”
Presented by:
Gerry O. Gatawa
Saint Louis University
Baguio City, Philippines

2. What investment is right for you?

3. What type of investor are you?
Some investors listen to RUMORS/ GOSSIPS

5. Why Do Prices
Fluctuate?

6. MARKET PSYCHOLOGY
Each investors would have
his or her own opinion about
a certain security.

8. The Psychology of Poor Investment
Decisions

9. Rationale of Investment Biases
• Activity #1
– You go to the grocery store and you need to purchase
paper towels.
• You find they are on sale at 10% below their normal price.
– What do you do?
• You buy a case of paper towels because you know this is a
good price
• Activity #2
– You invest in the stock market. You own 100 shares of
San Miguel Corporation stock
• More news comes out, and San Miguel Corporation stock
drops 20%.
– What do you do?
• Instead of buying more, like the paper towels, you
immediately think about selling the stock
– Likewise, if the stock starts to appreciate in value, you think to buy
more, rather than sell

10. Overconfidence and Over-optimism
• Investors overestimate their ability and the accuracy
of the information they have.
• Example:
KUYA J owners lead Pacifica Takeover
Newspaper: Philippine Daily Inquirer (2017, January 10)
“…Kuya J took over the board and management of a
dormant mining firm…instead of having an IPO for
public listing, PACIFICA was used for backdoor listing of
the fast growing restaurant in the country…”

11. PA: Pacifica Inc.
Source: The Wall Street Journal (2017). Accessed from
http://quotes.wsj.com/PH/PA
March15, 2017
Opening Price 0.068
Decision: Are you going to
buy more or sell?
February 6, 2017
Opening Price 0.044
News: Confirmed
Decision: Are you going to
buy considering the News?
January 10, 2017
Opening Price 0.045
Decision: Are you going to buy
considering the News?

12. Representativeness
• Investors assess situations based on superficial
characteristics rather than underlying probabilities.

13. BSC:PH Basic Energy Corporation
News: Basic Energy Corp. is set to start drilling a geothermal well in
Batangas province in the first half, a company official said.
Rumor: Result will come out end of 1st quarter, result seems to be positive
Source: Manila Standard (2016, January 5)

14. Conservatism
• Forecasters cling to prior beliefs in the face of new
information.

15. FNI: PH Global Ferronickel Holdings Inc
• Business News: Global Ferronickel, Chinese firm
tie up for $700-M steel plant in the Philippines
• Source: Philstar Global (2016, October 24)
Investors cling to prior belief
despite of decrease in price
and closure of mining firms
under Secretary Gina Lopez.

16. Availability Bias
• Investors overstate the probabilities of recently
observed or experienced events because the memory is
fresh.

17. WEB:PH Philweb Corporation
• Duterte ordered its closure calling
Roberto Ongpin as oligarch

18. Anchoring and Frame Dependence
• The form of presentation of information can affect the
decision made.
• Perception and memory are influenced by context, or the
frame.
• The frame that a decision maker adopts is controlled partly
by the formulation of the problem and partly by the norms,
habits, and personal characteristics of the decision maker.
• People generally evaluate acts based on the direct
consequences of the act, such as the money lost or gained.
• People adopt mental accounts due to this mode of framing:
(1) simplifies evaluation and reduces cognitive strain; (2)
reflects the intuition that consequences should be causally
linked to acts; (3) matches the properties of hedonic
experience, which is more sensitive to desirable and
undesirable changes than to steady states.

19. Anchoring and Frame Dependence
(example)
Example 1: A sweater is currently priced as Php. 500
and another sweater is on sale for Php. 500 which is
regularly priced at Php. 750. Which would you buy?

20. TEL:PH Philippine Long Distance Corporation
PLDT’s price declined due to PSEi and
S&P 500

21. Mental Accounting
• Individuals allocate wealth to separate mental
compartments and ignore correlation effects.
• Example:
• Assume you are given an investment with a return of
10% per annum that is guaranteed and analysts
suggest that it is a good investment. How much
would be the maximum amount you would be willing
to invest given your cash is distributed as follows?
Nature Amount
Cash 250,000
Ordinary Savings (2% per annum) 250,000
Precautionary or Emergency Fund (0%) 250,000
Educational Fund (for family or children) 250,000

22. Regret Aversion
• Individuals make decisions in a way that allows them
to avoid feeling emotional pain in the event of an
adverse outcome.

23. DNA: PHILAB Holdings Corporation
• Because of experienced long emotional pain, there
is already a feeling regret aversion.

24. Prospect Theory
• Individual investors are both risk-seekers and risk
averters at the same time. This is exhibited by their
investing behavior, where they buy not only bonds,
mutual funds, and insurance policies (acting as if they
are risk averse), but also where they buy individual
stocks, options, and lotteries (acting as if they are risk
seeking).
• Both professionals and individuals sell winners too
early and hold losers too long, attributed to “loss
aversion” behavior. Losses cause more severe pains
(almost twice as much) than pleasure resulting from a
gain of the same magnitude. This is also known as
“disposition effect.”
• Prospect’s theory’s loss aversion also explains why
equities have outperformed bonds.

25. Prospect Theory (Disposition Effect)

26. EDC:PH Energy Development Corporation
Sell
Hold

27. Heuristics and Biases Framework
• They are information processing shortcuts that mainly
result from one’s experiences in a field of work. By
nature, heuristics are imperfect and consequently will
result in biases and errors.

28. Heuristics and Biases (Example)
Answer the questions so you are 90% sure the answer is between
your minimum and maximum guess. You can guess any number or
range, but you must be 90% sure you are right.
• 1. What is the average weight of an adult blue whale in pounds?
• 2. What year was the Mona Lisa was painted?
• 3. What is the number of independent countries in the world in
the year 2000?
• 4. How many bones are in the human body?
• 5. How many total combatants were killed in WW1 from all sides?
• 6. How fast does the earth spin at the equator in miles per hour?

29. Answers
Take note that you were 90% sure.
• 1.Weight of adult blue whale:
– 250,000 pounds
• 2. Year the Mona Lisa was painted:
– 1513
• 3. Independent countries in the world in 2000:
– 191
• 4. Number of bones in the human body:
– 206
• 5. Combatants killed in WW1:
– 8.3 million
• 6. Speed of the earth at the equator (how fast does it spin):
– 1,044 mph

30. Cooperation and Altruism
• Cooperation may be viable investment strategy.
• People’s motives may lead to actions different than
conventional rationality.
• What to do?
 Think about other alternatives, other perspectives
on investing.
 Learn to think “outside the box”

31. Bidding and the Winner’s Curse
• Bidding may lead to a suboptimal result when you bid
your fair value.
• Assuming everyone else has the correct value, if you
won you overpaid!
• What to do?
 Be careful in setting you bid prices
 Generally, don’t bid your fair value—bid lower.
 Don’t get emotional in your bid prices for financial
assets. You don’t have to buy it at this price.

32. Endowment Effect
• Sometimes we perceive that an asset’s value increases
by virtue of our ownership.
• Once you own something, its value hasn’t increased or
changed.
• What to do?
 Realize that just because you own something does
not increase the value of the asset.
 Do not get too emotionally attached to a financial
or other asset that you own.

33. Status Quo Bias
• Sometimes individuals prefer the status quo over a
new, more preferable position
• There is an aversion to change, even if the change is
for the better
• Change may actually be good.
• What to do?
 Try to be open minded with new ideas
 Be open to new ideas as long as they follow the
principles of successful investing and your
investment plan that you put together

34. Loss Aversion
• Often losses are given more weight in our minds that
potential gains in any position.
• These weights are more than utility theory would
suggest
• What to do?
 Give gains and losses equal weight in you analysis
 It is gains and losses of the overall portfolio that
are important, not individual securities.

35. Mental Accounts
• Often investors keep mental accounts rather than
viewing individual assets as part of a total portfolio
• We try to save ourselves from ourselves
• We borrow 12% for a car versus taking the money
from our investment account for the kids college
savings (which are earning 2% annually)
• We know we may not pay it back if we do not borrow
from the bank.
• What to do?
 Set up separate accounts for each separate goals

36. Winning by Losing
• Sometimes we actively trade stock instead of buying
ETFs which we know are lower cost and take a lot less
time to invest
• We know index funds generally outperform the
actively managed funds
• And we do not have time, energy, or the money to try
to beat the market
• What to do?
 If you do not have the time, energy, and money,
invest in “sleep-well” portfolios of index funds.
 You will at least get market returns and will
generally beat most actively managed funds

37. Seeking Solace (Abdicating Responsibility)
• Sometimes we follow newspaper/ newsletter advice
which we know has been shown to under-perform.
• We prefer to take other’s advice rather than doing our
own homework.
• If the performance goes bad, we can blame others (we
don’t have to take responsibility)
• What to do?
 Realize the limitations of these recommendations
 If you have no better knowledge, invest in index
funds/ ETFs/ Mutual Fund which are possibly
managed.

38. VITA: PH Vitarich Corporation
• News: Vitarich is making a big comeback in
agribusiness
Paid their debt and infused fund on working
capital
Corporate rehabilitation is done
• News Source: ABS-CBN (2016, September 19)

39. Fun
• Sometimes we trade for fun and entertainment instead
of financial performance
• This is OK, but make sure your fun money is no more
than 5% of the value of your portfolio—that way you
don’t lose too much
• What to do?
 If you want “fun” money, set up a trading account
in a retirement vehicle (so you don’t have to pay
taxes until later).
 Trade until the money is gone—then stop

40. Overreaction
• Many investors assign a probability to asset returns
based on past theory
• Appropriate reaction to negative event is to update to
the most recent event
• Overreaction happens when investors assign a high
value on a financial investment
• What to do?
 Stay diversified, true to your Investment Plan and
don’t invest on rumors
 Invest for the long-term, not on rumors

41. Mean Reversion
• Prices tend to correct themselves as investors correct
for overreaction
• Long-term prices tend to revert to the mean
• What to do?
 Realize that the best performing stock or mutual
fund last year will not be the best performer this
year.
 Winners revert to average performers over time
 Don’t buy last year’s best performers
 Invest for the future—not from the past

42. Active Trading
• The buying and selling of securities with the
intention of holding the securities for a short
duration, typically for no more that one day.
• It is an investment strategy that seeks to take
advantage of short-term movements in price, and
often focuses on financial instruments in higher
demand such as stocks, currencies, options, and
derivatives.
• Active trading is considered one of the most
speculative trading strategies.
• Worst, some quit their jobs to be professional
traders. Many of them were headed for disaster!

43. Morning activity
6:00 – 7:00: Read business news.
8:00 – 9:00: Check stock prices
9:00 — 9:15 Contact your broker

44. Start of trading day
Buy shares and wait.

45. “Patience is a Virtue”
• I was so sad when I only
gained Php. 15,000 for 1 hour.
• Wait until 11:30 before selling

46. The Psychology of Investment Scam

47. Examples
• Old 1 Peso Coin scams
• Tuko Gecko Scam
• Text Scams “You won 1 million pesos”
• Ponzi Scheme “promising high returns”
• Pyramiding scam “recruitment”
• and a lot…

48. Lessons from Successful Investors
• Warren Buffet
A Famous American investor know as “the Oracle of Omaha” for his market foresight and
oracular pronouncements on value investing. He is the Chairman of Berkshire Hathaway
(BRK.A) a holding company for a diverse set of businesses, which he developed from an
unprofitable textile manufacturing operation. His wealth fluctuates with the performance of
the market, but for the past decade he has been consistently ranked as one of the world’s
richest men.
Lessons from Warren Buffet:
 Reinvest your profits
 Be willing to be different
 Never suck your thumb—unnecessary sitting and thinking
 Spell out the deal before you start
 Watch small expenses
 Limit what you borrow
 Be persistent
 Know when to quit
 Assess the risk
 Know what success really means

49. Lessons from Successful Investors
• PETER LYNCH
An accomplished Wall Street stock investor, is often said to be one of the best stock-pickers
in the world. At present, he is a research consultant at Fidelity Investments.
Lessons from Bob Farrell:
 Only buy what you understand
 Always do your homework
 Invest for the long run

50. The Intelligent Investor
Know the business
Know who runs the business
Invest for profit
Have confidence

51. List of Investment Rules
• To be consistently profitable
• To be disciplined
• To focus on opportunities
• To catch market breakouts and take all my signals
• To have control over my investments
• To have a high level of self-esteem when I trade
• To have more confidence in myself after taking a loss or experiencing a drawdown in my
account
• To have a better understanding of my emotions when I trade
• To develop an approach that I can trust and apply effortlessly
• To define my losses and not dwell on them
• To trade from the perspective that trading is a process and not merely a series of
independent trades
• To establish limited risk and limitless profit potential
• To become a better investor by constantly learning more about myself
• To operate completely in the here and now

52. Money Toss
Empty the change from
your pocket or wallet
every night and throw it
into a jar. At the end of
each month, deposit all
you “throwaway” money
in your savings account.
That loose change can
really add up.

53. Money Toss
Your financial life is like
a garden. If you tend a
garden carefully,
nourishing the flowers,
pruning, and weeding,
it’s going to be a lot
more beautiful than if
you just water half-
heartedly now and then

54. Money Toss
Lack of contentment—
which really comes down to
greed—sows the seed of
envy and aggressive
competitiveness, and leads
to a culture of excessive
materialism. The negative
atmosphere this becomes
the context of all kinds of
social ills which brings
sufferings to all.

55. Money Toss
“The only person
responsible in taking care
of you when you retire
should be the strong
person you are now”

56. Money Toss
“The investor’s chief
problem, and even his
worst enemy, is likely to
be himself”

57. Money Toss
“There are three factors
that influence the
market—Fear, Greed, and
Greed”

58. Money Toss
“Why do we need to make
a financial plan? Because
it is easier to spend than
to save”

59. Money Toss
He who does not change
his mind is like stagnant
water, he breeds
REPTILES of the mind.

60. Money Toss
Money is the best servant
but the worst employer.
Make money your servant
and not your employer.

61. Money Toss
There are two rules in the
Stock Market:
Rule#1: Don’t lose money
Rule#2: Refer to Rule#1

62. Final Remarks
Your future depends on
YOU not your employer.
Manage your finances
well and INVEST WISELY

63. Bibliographies
Bernartzi, S. (2012). Behavioral Finance in Action: Psychological challenges in the financial
advisor/client relationship, and strategies to solve them. Global Alliance Investor
Byrne, A. and Brooks, M. (2008).Behavioral Finance: Theories and Evidence.The Research
Foundation of CFA Institute
Byrne, A. and Utkus, S. (2013). Behavioral Finance: Understanding how the mind can help or
hinder investment success.UK: Vanguard Asset Management
Ilia D. Dichev, “What Are Stock Investors’ Actual Historical Returns?” The American
Economic Review, vol 97, no. 1, pp 386 – 401 (2007).
A. Edmans et al., “Sports Sentiment and Stock Returns,” Journal of Finance, vol 62, pp
1967 - 1998 (2007).
John Galbraith, A Short History of Financial Euphoria, Whittle Books in association with
Viking, New York, 1993.
Xavier Giné et al., “Put Your Money Where Your Butt Is: A commitment savings account for
smoking cessation,” American Economics Journal, vol 2, no. 4, pp 213 – 235 (2010).
David Hirshleifer and Tyler Shumway, “Good Day Sunshine: Stock returns and the
weather,” The Journal of Finance,
Daniel Kahneman and Amos Tversky, “Prospect Theory: An Analysis of Decisions Under
Risk,” Econometrica, vol 47, no. 2, pp 263 – 291 (1979).
Investopedia http://www.investopedia.com/terms/a/active-trading.asp#ixzz4jl6vLYwU