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04/24/02Psychological Studies of Risk Seeking #

Sean Phelan


Interesting column:

PSYCHOLOGICAL STUDIES OF RISK SEEKING

Psychologists have been studying the conditions under which people seek out risk. You may have seen a classic set of questions that has been used by psychologists to study risk:

In which stock would you prefer to invest?
(A) Stock A will produce a sure profit of $250
(B) Stock B has a 25% chance of producing a profit of $1000, but there is a 75% chance the stock will produce no profit.

About 70-80% of the people asked such questions choose option A. They prefer a sure profit of $250, even though there is a chance they can earn four times that amount by purchasing Stock B. In other words, they avoid risk when they think an investment will produce a gain.

People think differently when they consider taking a loss, however. Consider a similar question that is "framed" in terms of losses rather than profits:

In which stock would you prefer to invest?
(A) Stock A will produce a sure loss of $750
(B) Stock B has a 25% chance of losing nothing, but a 75% chance of losing $1000

When asked this question, presented in terms of losses, people tend to choose Option B. When it comes to considering a loss, they are willing to take a chance on preserving their investment. But, they also accept the possibility of losing the entire investment, rather than taking a sure loss. In summary, responses to these questions show that people are risk averse when they believe they are about to make a profit, but risk seeking when they think they are on the verge of taking a loss. This is a seminal finding in investment psychology.

A recent scientific study by Drs. Lerner and Keltner reveals that this traditional understanding of risk and decision-making is not shown by everyone all of the time. One factor that predicts risk aversiveness is the tendency to believe that the outcomes of events, such as future stock prices, are easily predictable, in contrast to viewing outcomes as difficult to predict. In addition to measuring the tendency to view outcomes as easily predictable, Drs. Learner and Keltner asked participants to make choices similar to the ones outlined above.

They found that participants who tended to believe that outcomes are easy to predict tend to seek out risks. They are willing to take a gamble if there is a chance they can make a big win. In contrast, people who tend to believe that outcomes of events are often uncertain and difficult to predict, tend to take the sure thing. They don't like taking chances.

Where do you lie on this continuum? Do you tend to think that one can easily predict the future price of stocks and commodities? Do you have high expectations that prices should move in your favor? Are you often disappointed when price action is not consistent with your expectations? If you tend to agree with these questions, you may tend to seek out and take unnecessary risks. You may want to look out for this tendency. Make sure that when you make an investment, your predictions are based on solid evidence, rather than on your gut instinct. Be aware that you may tend to be a little too sure about your ability to predict events and this will make you want to take unnecessary risks.

Remember the old adage "cut your losses short." It's probably beneficial to show caution and be appropriately risk averse. Take a sure loss, rather than take an unnecessary risk that could result in the loss of your entire investment.

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04/23/02Recommended reading #

Sean Phelan


Highly recommend the following books:

1) Market Wizards by Jack Schwager
2) The New Market Wizards by Jack Schwager
3) Trading in the Zone by Mark Douglas


The first two books are interviews of some of the best securities traders of their day. Very easy entertaining reading containing a cornucopia of insights.

The third book is necessary information on what a successful trading model looks like and how to handle the inevitable psychological issues that result from market participation.

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04/15/02Venture Capital & Angels in the Sierra Nevada's.. #

Joseph Arthur


I will be posting more information about an invite only meeting with VC,IB,Angel info soon. The meeting will be held in Lake Tahoe, Nevada.

Many folks from Ryze will be sure to be interested. If you are in the area, Ill be sure to keep those peeked "ApRYZED" of the scenario.

(This will happen at the end of next week, if you need a place to come have fun and business, Tahoe is it) - I also will have room in one of the houses if you are thinking of being around.

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04/13/02Monkeybusiness #

Fabian Wasmus


Hi - does anyone know the book "Monkeybusiness" ... well it is about the "mystery" of investmentbanking and gives you a great inside look into the day to day STRESS! - Very recomendable! .......... by the way ... I have just joined the investmentbanking department of a consultancy ... so I know what the authors are talking about :-)

Have a great day

Fabian

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04/13/02great book: "The Mystery of Capital" / de Soto #

Dave McClure


Just finished reading this terrific book:
http://www.amazon.com/exec/obidos/ASIN/0465016146/

Really amazing ideas on legal reform of property rights, how this relates to capital formation and potential for improving opportunities for developing economies.

Author is Hernando de Soto, also influential in Peruvian economic reforms in the late 80's and early 90's. Founder of an organization called ILD; info on him and here:
http://www.ild.org.pe/hernandodesoto.htm
http://www.ild.org.pe/

anyone else familiar with his work? probably the most influential ideas i've come across since reading Guns Germs & Steel (Diamond) a year ago...

- dmc

ps - extra double bonus: just found out this dude and Jared Diamond are *BOTH* speaking on the same panel at the Milken conference:
http://www.milkeninstitute.org/gc2002/prog_detail.cfm?ID=61

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04/04/02Milken Institute conference -- anyone going? (April 22-24) #

Dave McClure


I'm going down to the Milken Institute Conference in LA on April 22-24... anyone else going?

If so, lemme know:
http://www.ryze.org/eventdisplay.php?eventid=149

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04/03/02re: INTECH investments- anyone know them? #

Hans Chung


Ken,

That sounds like Monte Carlo. I think the founder of a company called "financial engines" received a nobel prize for similar tech/math. I think they are still around.

I think this brings up a fundamental question about stock market modelling. If math is based in logical reasoning and rational behaviour assumptions, then is it truly possible to model the stock market that has irrational behaviour?

On the other hand, we also have the discussion of
using historical performance as an indicator of variables related to future performance. Is this valid? Maybe partially in that the buyers and sellers of a given stock usually track just a few stocks and those buyers and sellers are likely to have consistent buying patterns.

This still begs the question of whether stocks truly behave randomly, or similar enough to random motion/evolution that they can be modeled as random (in a rational amount of time for a regular investor)

Just a few thoughts. Fire away at me now.


> Ken Berger wrote:
> This company has supposedly had great success applying math models to trading systems, something I'm keen on exploring more. They were recently bought by Berger Financial (no I'm not related).
>
>"INTECH's system capitalizes on the random nature of stock price movement rather than relying on estimates of future stock performance".

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03/29/02Tips from a VC (in French) at www.dbf.net #

Vincent Amiot


This coming April 1. in Atherton:
Holbrook Palmer Park
150 Watkins Avenue
Atherton

Pour vous y rendre
De 101:
- sortie Marsh Road.
- à gauche sur Middlefield Road.
- premiere à droite sur Watkins Avenue
Regards
V.
==================================================
La prochaine réunion DBF aura lieu le 01-04-2002 notre invité sera :

Jacques Lagarde
Administrateur du Groupe Suez -
Groupe Suez

Jacques Lagarde, Administrateur du Groupe Suez (France), de Braun GMBH(Allemagne) et d'Eukarion (USA). Diplome d'HEC et d'Harvard Business School, Jacques Lagarde est un des rares Francais a avoir ete successivement PDG en France, en Allemagne et aux USA, et a avoir reussi un aller et retour entre l'enseignement et l'entreprise. Apres 9 annees au sein du groupe Gillette en France et en Allemagne, il decide de prendre la direction de l'Ecole Superieure de Commerce de Lyon et 9 ans apres, rejoint le meme groupe qu'il quitte en 1998 en tant qu'Executive Vice President pour s'installer a Berkeley et devenir business angel. Jacques Lagarde est passionne de montagne et a grimpe une quarantaine de sommets de plus de plus de 4000m en Europe, Afrique, Asie et dans les Ameriques.


Les réunions ont lieu de 17h30 à 20h00.

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03/23/02re: re: re: List of venture capitalist in the bay area. #

Punita Patel


Shannon I would have to agree with you, a personal reference means that the idea is at least reviewed. Here are a couple of references to venture capital lists. I have used the Pratt's Guide to Venture Capital Sources and found it to be a good source, the website is www.ventureeconomics.com, the other site is new to me, but seems cheaper to use http://www.vfinance.com

> Shannon Clark wrote:
> Me to! Me to!
>
>Well - more seriously - such a list is useful but always changing - there are online lists that curent exist (the Red Herring used to have a great one) - however they are only useful if by looking through it you find a connection to use to contact the VCs.
>
>i.e. every vc I have ever spoken with admits that one of the major criteria they use in looking at plans is the referral that was used to get the plan over the transom - no referral and you go to the bottom of the pile read by the junior associates - a quality referral gets you the time of a partner to look over your plan (at least skim it with an initial favorable eye)
>
>Shannon
>
>> Moses Ma wrote:
>> I would! I would!
>>
>>
>>> Wayne Lambright wrote:
>>> Who would like a list of bay area Venture Capital companies with a history of what and when they finance? Contact information included.
>>
>>
>
>

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03/22/02master trader Ed Seykota's new firm #

Adrian Scott


http://galtcapital.com/index.html

interesting :)

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03/21/02re: re: List of venture capitalist in the bay area. #

Shannon Clark


Me to! Me to!

Well - more seriously - such a list is useful but always changing - there are online lists that curent exist (the Red Herring used to have a great one) - however they are only useful if by looking through it you find a connection to use to contact the VCs.

i.e. every vc I have ever spoken with admits that one of the major criteria they use in looking at plans is the referral that was used to get the plan over the transom - no referral and you go to the bottom of the pile read by the junior associates - a quality referral gets you the time of a partner to look over your plan (at least skim it with an initial favorable eye)

Shannon

> Moses Ma wrote:
> I would! I would!
>
>
>> Wayne Lambright wrote:
>> Who would like a list of bay area Venture Capital companies with a history of what and when they finance? Contact information included.
>
>

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03/21/02INTECH investments- anyone know them? #

Ken Berger


This company has supposedly had great success applying math models to trading systems, something I'm keen on exploring more. They were recently bought by Berger Financial (no I'm not related).

"INTECH's system capitalizes on the random nature of stock price movement rather than relying on estimates of future stock performance".

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03/21/02re: List of venture capitalist in the bay area. #

Moses Ma


I would! I would!


> Wayne Lambright wrote:
> Who would like a list of bay area Venture Capital companies with a history of what and when they finance? Contact information included.

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03/19/02re: re: List of venture capitalist in the bay area. #

Joseph Arthur


Yes wayne, it would be interesting to see the list.. is it posted on one of your sites?

> Adrian Scott wrote:
> or maybe who wouldn't? :^)
>
>tell us more :^)
>
>> Wayne Lambright wrote:
>> Who would like a list of bay area Venture Capital companies with a history of what and when they finance? Contact information included.
>
>

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03/19/02re: List of venture capitalist in the bay area. #

Adrian Scott


or maybe who wouldn't? :^)

tell us more :^)

> Wayne Lambright wrote:
> Who would like a list of bay area Venture Capital companies with a history of what and when they finance? Contact information included.

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03/19/02List of venture capitalist in the bay area. #

Wayne Lambright


Who would like a list of bay area Venture Capital companies with a history of what and when they finance? Contact information included.

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03/19/02tribes of interests -- tagging, etc #

Dave McClure


would be nice to have groups of "interests" be able to turn into tribes, and then have posting areas for messages, events, URLs related to the interest area.

for example: after a while, about 20 people have listed "jazz" as an interest. this could then automatically become a tribe, and members could post info about jazz sites, performances, and new recordings.

probably helpful for very specific startup business niche areas as well...

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03/19/02Tribe huh? #

Ken Berger


How about 'flock'? As in 'birds of a feather'?
Or if it's for finance-aspiring folks- wouldn't it be more like 'suburb'?
:)

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03/18/02re: Welcome to the new Web of Finance :) #

Joseph Arthur


How do we create new tribes? I was thinking about a Art/3D Animation Tribe

> Adrian Scott wrote:
> hi - here's a place for all of you who've been in my Web of Finance community in the past. I'm working to give us functionality to connect through Ryze...
>
>if you have some finance ideas you'd like to share with others, this would be a great place to post them.

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03/18/02Welcome to the new Web of Finance :) #

Adrian Scott


hi - here's a place for all of you who've been in my Web of Finance community in the past. I'm working to give us functionality to connect through Ryze...

if you have some finance ideas you'd like to share with others, this would be a great place to post them.

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