MarketPsych: Profiting from investor pychology — with Dr. Richard Peterson (transcript)

This is a transcript of our interview with Dr. Richard Peterson, author of MarketPsych: How to Manage Fear and Build Your Investor Identity, which came out this year. Check out the archives of our show. Subscribe on iTunes.

Peterson:   There’s a lot of literature in behavioral economies and behavioral finance about the mistakes that people make, like holding their losers too long, or impulsively chasing after stocks. But there isn’t much work about how do you help people to not make those mistakes. So, we’ve really got interested in how do we change people’s decision-making for the better. Continue reading “MarketPsych: Profiting from investor pychology — with Dr. Richard Peterson (transcript)”

MarketPysch: Profiting from investor psychology and the Internet (podcast)

On Tradestreaming Radio, we’re interviewing lots of innovative entrepreneurs, investors, and researchers all trying to make investors better at what they do.  Check out our archives.  Subscribe on iTunes.

From this perch, it seems like investors are witnessing a Renaissance of tools, data, and research that overlays investor psychology on 24/7 streaming content of the Internet.

The magic bullet for individual investors and hedge funds alike is to use this data to create profitable trading strategies.  Previous podcasts have looked at using Google search data to find rising stocks.  Other tradestreaming techniques have centered around creating forecasts of future events using online media.

This week’s guest on Tradestreaming Radio is Richard Peterson, MD (yes, that kind of doctor).  He’s also an RIA and his firm, MarketPsych LLC helps to coach investors and their advisors into making better investment decisions.  More interesting, the firm has developed a sentiment analysis engine from its own experience trading quantitative strategies in an in-house hedge fund.

Dr. Peterson’s new book, MarketPsych: How to Manage Fear and Build Your Investor Identity (Amazon link) is an amazingly refreshing read.  All investors struggle with assessing their risk tolerance, performance and decision making.  While behavioral economics/finance has helped us understand what problems we face, it hasn’t helped a whole lot in truly helping us change our investing behavior. MarketPsych provides a clear overview of the problems and gets its hands dirty helping us investors help ourselves.

In the podcast, we talk about:

  • how investors make decisions
  • how investors can use changes in sentiment to forecast stock price movements
  • how hedge funds use investor psychology and Internet content/social media to profit
  • how technology innovation leads to higher stock prices.

Listen to the whole program

More Resources


Tradestreaming Cascade (Week ending 3/26/2011)

A new addition to Tradestreaming, the Tradestreaming Cascade is a highlight reel of some of the past week’s most interesting information.  Much of this comes from my Twitter feed, @newrulesinvest.

How financial blogging landed me a book deal (New Rules of Investing): Blogging is hard to monetize.  Here’s one way financial bloggers can begin to build businesses off their work.

Why investors overpay for certain investments (The Economist): Liquidity and lottery tickets and why the carry trade fails at the wrong time and just below investment grade corporate bonds perform best. From Expected Returns: An investor’s guide to harvesting market rewards.

Trades busted in new FocusShares ETFs (ETF Trends): Scottrade’s new ETF line, Focus Shares, had multiple trades busted.  Some shares saw a 98% drop as Nasdaq canceled them.

Wealth managers refine niche marketing techniques (Registered Rep) : Growing reliance on segmentation of new business development by wealth managers.  This time, Indian Americans.

Investing as a form of peer pressure: teaching kids to invest young (MarketPsych): In an interview with Tile Financial, this money manager/sentiment data player digs deeper to help understand kids’ motivation to invest.

10 most tracked funds, fund groups and stocks (AlphaClone): Most popularly followed hedge funds and stocks held by these hedge funds as tracked by piggyback investment research powerhouse, AlphaClone.

Signup here to receive real-time updates from Tradestreaming.


Playing not to lose sometimes means you lose

Everyone has seen pro basketball players commit fouls early in a game. The coach faces a conundrum. Does he

  1. Leave the player in the game: he may play to full potential and contribute
  2. Yank him: scared of fouling out of the game, he may play sub-optimally

This decision making process has always been kind of locker room chatter.  Until recently.  Earlier this month, 2 researchers from goliath asset manager AllianceBernstein and an academic from NYU Poly addressed solving this issue using financial research in a paper entitled, How much trouble is early foul trouble?

The researchers actually came up with a formula that’s so important, failure to heed it — a single incorrect decision — could decide the game.  The research shows that it is optimal to yank starting players on a “Q+1 basis” (when they commit one more foul than the current quarter.

For example

on January 20, 2007, the Cleveland Cavaliers visited the Golden State Warriors. With 4:45 left in the third quarter, Golden State starter Andris Biedrins  committed a personal  foul. After the free throw to complete the
three point play caused by his foul, the Warriors were leading by two points. This was Biedrins’s fourth foul and he was  therefore in “Q+1” foul trouble and should have been yanked, but Don Nelson decided to keep Biedrins in the game for more than four minutes, only substituting him out with 36 seconds left in the quarter.

Was the coach’s decision to leave the foul-laden player in the game correct?

During that time, Biedrins did not pick up another foul. Biedrins  re-entered the game with 8:20 left in the fourth quarter and the Warriors up 5. Then at the 5:46 mark, he picked up his fifth foul of the game. Again, Don Nelson again kept Biedrins in the game. Finally, with 1:06 left in the fourth quarter and a tie game, Biedrins fouled out.

Cleveland eventually won the game in overtime. And the researchers question Nelson’s decision to leave his player in the game:

Nelson had two chances to  yank  Biedrins when he was in foul trouble but chose not to. As we will see, Nelson’s decision was not an aberration for him;  that year, he rarely yanked foul troubled starters even though they were in foul trouble more  than any other team. But perhaps Nelson’s entire strategic approach was wrong.

Parallels to investing

If early foul trouble means that pro ball players should sit things out for the sake of the team, I think you could draw some parallels to investors running money.

  • periodic performance review: like athletes, investors of all sizes can judge performance at any time (returns, to some extent, are the ultimate performance metric)
  • high stakes, high stress: everyone in this game is playing f’real
  • decision making appears to be serially related: investors behave differently when they’re winning versus when they’re losing.  I remember walking into my portfolio manager’s trading floor to interview.  I waited patiently while he was on a call — after he hung up, he said, “&*(@!”.  I asked what had happened and he said dispassionately that he had lost $6M on a trade.  When I asked what he was doing with it, he said simply that he is selling it and moving on.

Clearly some investors — more traders than buy-and-holders — strike certain rhythmic patterns in their investing.  You have to behave differently when suffering big losses than you would when up big on a year.  The great ones know how to optimize this tradeoff and not simply double-down just to salvage a trade-gone-bad.

Has Harbinger’s Phil Falcone lost his touch?  He’s suffered redemptions, poor performance, trader exodus.  Amidst all this, he has made a career-impacting decision to invest heavily in a huge bet on a private wireless firm.  Is he playing with too-many fouls or is this the master’s equivalent of bench time?  History will certainly be the judge.


Maymin, Allan, Maymin, Philip and Shen, Eugene, How Much Trouble is Early Foul Trouble? (January 7, 2011). Available at SSRN: