Lots of buzz about a new study involving the brain and losing $. We have been chatting about that on WB for a long time, and it is one of the reasons vol explodes when markets are declining. Stats from my paper:
| Asset Class | Market > 10 month SMA | Market < 10 month SMA | Difference |
| US Stocks | |||
| % of time | 72.92% | 27.08% | |
| Annualized Return | 13.49% | 3.04% | -77.45% |
| Annualized Volatility | 13.89% | 19.23% | 38.40% |
| Foreign Stocks | |||
| % of time | 69.91% | 30.09% | |
| Annualized Return | 14.57% | 1.94% | -86.71% |
| Annualized Volatility | 14.86% | 21.51% | 44.76% |
| Bonds | |||
| % of time | 76.16% | 23.84% | |
| Annualized Return | 10.03% | 6.29% | -37.27% |
| Annualized Volatility | 8.69% | 10.15% | 16.73% |
| Commodities | |||
| % of time | 66.90% | 33.10% | |
| Annualized Return | 16.21% | 1.09% | -93.31% |
| Annualized Volatility | 20.78% | 19.64% | -5.50% |
| Real Estate | |||
| % of time | 72.45% | 27.55% | |
| Annualized Return | 14.84% | -1.43% | -109.64% |
| Annualized Volatility | 13.51% | 23.76% | 75.90% |
| AVERAGE | |||
| % of time | 71.67% | 28.33% | |
| Annualized Return | 13.83% | 2.19% | -84.20% |
| Annualized Volatility | 14.35% | 18.86% | 31.43% |
| US Stocks 1901-2008 | |||
| % of time | 69.88% | 30.12% | |
| Annualized Return | 14.42% | 3.03% | -78.98% |
| Annualized Volatility | 14.30% | 24.18% | 69.06% |
Volatility explodes when markets are declining, and vol explodes because people get fearful and they are uncertain what to do. Happens over and over again (the one exception is commodities which tend to be supply/demand driven based on shocks that often result in price spikes).
Some more old posts below:
Here is some other interesting research on neruroeconomics:
One of his findings was that brain images of drug addicts who are about to take another hit are indistinguishable from those of traders who are making money and about to place another trade. “That tells us pretty confidently that if you make money and make money again,” Mr. Zweig said, “it is very similar to a chemical addiction and it becomes very hard to let go.
A nice paper, “Neuroeconomics” by Cramerer and Lowenstein. Also “Neuroscience and Economic Behavior” by Glimcher
A couple great quotes from Zweig’s excellent book “Your Money and Your Brain“:
“The neural activity of someone whose investments are making money is indistinguishable from that of someone who is high on cocaine or morphine.”
“Financial losses are processed in the same areas of the brain that respond to mortal danger.”
Jason Zweig, author of Your Money and Your Brain , has a good interview in Research magazine here.
Zweig article
Kahneman article
Meb, do you think the difference would increase if the SMA was changed to 6 instead of 10? Out of curiosity why did you pick 10SMA?
http://www.mebanefaber.com/faq/
Cocaine Survivors Losing London Bonus See End to Bubble’s Binge
http://www.bloomberg.com/apps/news?pid=20601109...
Meb,
If you have time and it is not too much of an effort, do you happen to know what the correlation between those asset classes are above and below the 10 month moving average? Can we safely assume there is an increase in correlation between the classes below the 200 day MA and if so , isn't this one more reason for some kind of tactical timing model??
Thanks
You may want to clean up your table above: in your column: Market < 10 month SMA, your entry for % of time (27.08) seems accurate for US stocks, and then gets repeated for each asset class, while the “% above” varies. I know that's not your main point, but I thought you'd prefer to have it right.
Is there an example you could share of something that works significantly better than the 10 Month SMA?
Fixed thanks.
Fixed thanks.