Comment by rossdavidh | Hacker News Reader

Comment by rossdavidh | Hacker News Reader

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"Investors who are male, or above the age of 45, or married, or have more dependents, or who self-identify as having excellent investment experience or knowledge tend to freak out with greater frequency."

In other words, investors more worried about avoiding huge losses than they are about missing out, are more skittish. Potentially rational behavior, if your particular situation puts more emphasis on avoiding catastrophe, than on maximizing your chance of hitting it big long-term.

Not saying every instance of "freaking out" is rational, just pointing out that if you believe there's a 5% chance of losing almost everything, and a 95% chance of it being a buying opportunity, for some people that is a good reason to sell everything quick. Not everyone is in it for the long term, or most interested in maximizing their upside (rather than minimizing their downside risk). Age and dependents both point at investors who place greater emphasis on avoiding big losses than they do on attempting big wins, and they may be doing so for rational reasons.

They are also selecting for 90% drops in equity (why 90%? what were the results when different numbers were selected?).

In these cases, someone has lost most of their net worth and so they may find the rest of their assets are being liquidated, and they need to empty their account to discharge other liabilities. The reason why market downturns are correlated with panic selling is because market downturns are correlated with other things. The reason market cycles happen is largely because of the changing value that people place on cash...in 2008, lots of people needed cash.

And 90% is a very large number, the max drawdown on the S&P in crashes is usually less than half this number...so I am not quite sure why they are looking at this number when it doesn't really reflect a realistic scenario for most people. Losing 90% is inherently extreme, I worked in finance, I am relatively good at investing...if I lost 90% of my money, I would time myself out. I know of no investment business in the world that would keep someone on after a 90% loss...zero. Some multi-strategy firms will fire you if you lose 5%.

Additionally, as you say, people who have money tend to protect their downside. If you have $1m, and you lose 90%...you still have $100k. This tends to be particularly misleading when you look at a sample in which the market has always gone up and recovered...because it always looks like there was an opportunity cost from exiting (and if there wasn't, these papers don't get written). The paper is inferring reason to a decision that they don't really know the reason of. I 100% agree that "freaking out" can be (and often is) a rational choice.

Ask someone who "freaked out" in 1991 when Japan tanked. I actually know a firm that didn't "freak out", they were strong investors...firm nearly died, they lost pretty much all their client's money, and the Japan business effectively folded...but yes, those idiots who "freaked out"...rakakakaka.

I read it differently: "a decline of 90% of ... equity assets ... of which 50% or more is due to trades."

This means that 45%-90% of equity was sold off ... they identifying the large sell-offs moreso than just equity drops.

I thought I understood briefly...I don't anymore. I think the part that is confusing is the 50% part...50% of what? But I am right in saying that the drop in assets has to be at least 90%?

There is not measurement of a "market drop," only a decrease in the equities in the account - this includes BOTH the sale and the market loss.

Here is an example:

Month 0

STOCKS: $100

CASH: $0

Month 1

STOCKS $10

CASH $65

The account holder had their equity holding decrease by 90%. But that is composed of a market loss of $35 and their sale proceeds of $65.

65 / 90 = 72% (which is greater than 50% of the total decrease).

The 50% filter explicitly excludes those that just have market losses, the trader needs to have actively sold between 45-100% of their account value, combined with market losses between 0-45% for a total decrease of 90-100% between both factors.

Ah, that makes sense. So it is any decline in equity assets through which the rate of selling is faster than the decline in the underlying assets (presumably...if the rate of selling was slower then the ratio would be less than 50%?).

I still have the same problem. The reason cycles cycle is because of the movement in money demand...which tend to be correlated to everything else. Being able to predict who will panic-sell could be correlated to other things (always a problem in financial economics).

I will need the read paper properly but would be interested to see how they deal with cash coming into and out of the account.

Holding beats timing in nearly all investable asset classes. If it's not FOMO, then what's stopping people in these risk-averse demographics from investing in bonds instead? Or some other asset with low volatility and positive expected returns?

What timing? There are plenty of market timing strategies that will beat holding (the market is more volatile than underlying values so this is a natural certainty)...but it depends what you mean by timing.

Most of the conventional things that people understand about holding are wrong though...unsurprisingly, given that most of these conventions are produced by people trying to sell you something (I know this, because I worked in financial services, and used some of these conventions to sell things...it makes sense because individuals are stupid enough to do themselves real harm by trying to be clever...but this does not mean that being clever doesn't work, it just means you are stupid).

> the market is more volatile than underlying values so this is a natural certainty

What do you mean?

There is always going to be some timing strategy which beats holding.

If we flip this and imagine that everyone knew with certainty what the underlying values (earnings, dividends, etc.) should be then the return on stocks would always just be the return on the underlying values (it is a bit more complex than this, in reality the cost of capital differs between individuals so you are always going to get volatility...but the point is that because people are trade their portfolios faster than fundamentals change, then there is always going to be a timing strategy that works...that is how HFTs make money most days over decades).

Thanks, I definitely don't understand the argument.

Example how you can be wrong: Holding beats timing unless you only have 1 year left to live.

Young single childfree women are freaking out less because they have more lucrative choices than advertised?

Someone should study that!

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