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    Shares for Beginners Podcast | behavioural finance

    What behaviours and beliefs motivate our investment decision? Am I being rational when buying or selling an ETF, or am I making decisions based on emotion or gut? What biases could I bringing to my investing. These questions relate to behavioural finance.

    Our very own Zaffar Subedar answers these questions and more in his interview with Phil Muscatello of Shares for Beginners podcast.

    What inspired this podcast episode? This article! 

    Additional Reading

    What is heuristics?

    6 cognitive biases in behavioural finance 


    “If you’ve got a chocolate that’s right next to you on the desk, you’ll grab it. Now, if it’s in the kitchen, are you going to walk over there and get it? You’re probably not as likely to do that. How does this make any sense to investments? If you monitor your investments frequently, you’re more likely to make a decision. And whether that decision’s good or bad, most times it’s usually bad. That shows us that constantly looking at something isn’t good. So, in real life, we know if you look at something, if you’re trying to lose weight, you weigh yourself every day, you’ll get frustrated, go off track early. It’s the same thing with investment decision-making. If you keep looking at something frequently, you will more likely make a poor decision. So, these are common things that happened in real life in other domains that can also happen in the investment world as well.” – Zaff


    Disclaimer: Please note that these are the views of the writer, Zaffar Subedar, of eInvest and is not financial advice. To find out how to invest in our active ETFs, visit here. The product disclosure statement and more can be found at

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    Podcast Transcript


    Phil Muscatello: Welcome back to Shares For Beginners. I’m Phil Muscatello. How many of our investing mistakes come from emotions and psychological biases? Warren Buffett said that the biggest obstacles to investment returns are fees and emotions. My guest today is here to rifle through the dark passages of the soul and hopefully show us how to become better investors. Hello, Zaffar


    Zaffar Subedar: I feel great to be here.


    Phil Muscatello: Great to have you. I’m looking forward to going through all the psychological undergrowth today.


    Zaffar Subedar: Looking forward.


    Phil Muscatello: To it. Zaffar Subedar  has over 15 years of experience in the financial services industry and academia. He’s currently with Ian Vest, where he works with advisors and researchers in his spare time. Zaffar enjoys furthering his knowledge of behavioral finance. Which was your PhD subject area?


    Zaffar Subedar: That’s right, a very long time ago. But in a subject area that I thoroughly enjoyed and I can continually enjoy to this day, and I think I’m very fortunate to observe a lot of behaviors that.


    Phil Muscatello: In real time.


    Zaffar Subedar: Yeah, that literally came out of the the lab, so to speak, and they’re happening on a daily basis.


    Phil Muscatello: So is it like that? Is it something that you work on theoretically and you’re actually seeing things playing out now that, as you say, were investigated in the lab?


    Zaffar Subedar: Yeah, almost definitely if I take a step back. So when I was at uni and beginning the PhD a very long time ago, now shares my age. But a lot of the studies initially started with university students by psychology professors. So there were natural experiments that.


    Phil Muscatello: Were the guinea pigs.


    Zaffar Subedar: Yeah, that were the guinea pigs. But effectively these professors predominately in the US, they examined how people made decisions and uncertainty, which is what we do when we’re investing. We’re investing where there’s uncertain outcomes. And they eventually found that people weren’t behaving in line with what traditional economic models were built on. So that created this whole field of behavioral finance that examined in particular how people made decisions. Whereas traditional theory, which a lot of the financial and economic models are built on, they’re very prescriptive in how people should be valuing assets, how people should make decisions based on this information set. So it was a really revolutionary field, and the field is spawned into marketing. It’s born into government policy. And a lot of your listeners no doubt probably read a lot themselves and are probably doing some nasty things. But hey, we’re all investors and that’s the beauty of behavioral finance, that it applies to everyone, professionals and individuals.


    Phil Muscatello: They kind of emotions. We’re all emotional creatures, aren’t we?


    Zaffar Subedar: Yeah, no, we’re definitely emotional creatures. But it’s really how we make decisions and how we can better ourselves, which is an outcome of these emotions. These emotions trigger us, particularly in uncertain environments, probably to do things that that aren’t good for us from an investment standpoint.


    Phil Muscatello: So what’s the the definition of behavioral finance? What’s the laboratory definition of behavioral finance?


    Zaffar Subedar: Well, in short, the simple definition is it’s a application of psychology to investment decision making so very, very short. And that’s really the short line definition.


    Phil Muscatello: So investing over the last two years has been extremely difficult. We’ve all been inundated with negative news, case numbers, worst case scenarios for outbreaks, lockdowns and now war. How does this affect our ability to make optimal investment decisions?


    Zaffar Subedar: That’s a great question, Phil. And what really makes investment decision making difficult in these types of environment is the volume of information and what type of information that comes to mind. So, yes, you’ve got a lot of economic commentators, you’ve got a lot of reports, if you’re an investment decision maker to consider, you’ve got a lot of economic data. But amongst all that, you’ve obviously got the usual headlines, the usual fake news, clickbait type of headlines that grab a lot of attention and that clouds our ability to make a decision. And when you’re in this type of environment, instead of sitting back and making an investment decision over a medium or longer term horizon, we tend to use shortcuts. And it’s these shortcuts that really cloud our decision making. And, you know, a lot of people may suffer with their wealth by making a decision that’s not in their best interest. So it’s really that clouding around the volume of information and how we use it.


    Phil Muscatello: It was interesting reading your article actually, because I’ve only just recently learnt the word heuristic, what he ristic means. And it’s really, it’s a shortcut, isn’t it. A shortcut in thinking.


    Zaffar Subedar: That’s right. They just simple rules of thumbs to make decisions. And I guess an example of non investment making heuristics is the. Chocolate example. So I think about if you’ve got chocolate that’s right next to you on the desk, you’ll grab it. Now, if it’s in the kitchen and you’re going to walk over there and get it, you’re probably not as likely to do that. Now you’re thinking, well, how does this make any sense to investments? Well, it does. If you monitor your investments frequently, you’re more likely to make a decision. And whether that decision is good or bad, most times it’s usually bad. That shows us that constantly looking at something isn’t good. So in real life, we know if you look at something, if you’re trying to lose weight, you waste up every day, you’ll get frustrated, go off track early. The same thing with investment decision making. If you keep looking at something frequently, you will more likely make a poor decision. So these are sort of common things that happen in real life, in other domains that can also happen in the investment world as well.


    Phil Muscatello: Hmm. There’s an article that we’ll link to that listeners can read where you talk about the decisions that Australians were making in their superannuation funds during the COVID pandemic and how many negative impacts occurred with their investments by the decisions that they made due to fear. Tell us about that.


    Zaffar Subedar: Yeah, there was a good study feel, I think, especially given what time period I looked at, which was during the first initial bout of COVID in early 2020. But really the main two studies that they found which may be relevant to our topic was that they found that the superannuation members, they switched between investment options. But what was important was with this switch, over 70% of people in the study had a negative outcome. So if we remember, the market tanked and then there was a recovery. So they switched as the market tanked and kept tanking. And then obviously there was that recovery. By taking that course of action, by monitoring their investments very frequently, they did something that which was quite adverse to them.


    Phil Muscatello: So is this in your superannuation options you get like conservative or aggressive and various ranges along that spectrum, these people moving from aggressive to conservative, is that the kind of actions that they were taking?


    Zaffar Subedar: Yeah. So they could have moved from those type of options, whether it could be diversified funds or they may have gone from equities back into cash, change their investment options like that. So that was along those lines there where they looked at transaction.


    Phil Muscatello: Data and that’s what people do is as soon as there’s any fear, they start selling and trying to get into some form of safety. But this is not necessarily going to be great for their investment decisions in the long term, is it?


    Zaffar Subedar: Now exactly. And there was earlier studies back in the US, I think just before the tech wreck the late nineties. So if we all remember back many years ago when retail broking started, so when retail investors could go online and buy and sell quite easily, they found in the US late nineties that there was a study by an academic and he found that the retail investors tended to sell their better performing stocks in their portfolio and they would hold on to their losers. And they found over a 12 month period the ones they sold early went on average to return another sort of 3 to 4%. Yeah. And again that’s this whole basis of let’s look at this, we’ve made a profit, let’s try it, really get that gain. But then hang on. When the opposite happens, we’ll hold it. So this whole again, this whole use of information looking at something too frequently, particularly if you’re trying to create some medium to long term wealth, it’s very hard to be immune from, particularly as a retail or self-directed investor.


    Phil Muscatello: I think there’s also another study that shows that the best performing portfolios at that time were people who’d actually passed away. No one was doing anything with these portfolios and they were actually performing better than most other more active portfolios.


    Zaffar Subedar: Yeah, that’s right. There’s again, numerous studies that have shown some buy and hold or strategies with less turnover tend to do better over time. And probably again, if you think about it, you like an investment. If it’s an equity investment, you do need time for that thesis to hold. And those portfolios definitely that have lower turnover will show those factors.


    Phil Muscatello: Okay. So let’s go through the list of self sabotaging behaviours and there’s a couple of biases that you refer to and one is representativeness. Tell us about representativeness.


    Zaffar Subedar: Yeah. And these self-sabotaging behaviours, they are heuristics. So essentially they’re also heuristics which we discussed earlier.


    Phil Muscatello: Shortcuts. Heuristic shortcuts.


    Zaffar Subedar: Yeah, that’s right. So representativeness is the tendency for investors to make decisions based on stereotypes where perhaps none exist. So it really is looking at information and making decisions, assuming that what’s happened in the past, whether this trend, whether it’s a short term trend, persists for a longer period of time. And what we do find over time is that using this type of heuristic. There’s actually no trend. And they are basically chances or random chances of fact that lead to poor decisions. So if I give you an example, let’s look at earnings of a recently listed company. So if you think about IPOs or companies with limited public history, they might show histories of high earnings growth. Or if it’s an IPO, they might have forecast for definitely high earnings growth. Now, as an investor, if we think this trend will continue, even though there might only be a couple of quarters of publicly available information, then we could be hit for a rude surprise when in fact, the company’s earnings don’t grow to anywhere near that level because we would have gone in and paid a high value for that particular stock and the earnings don’t eventuate and we get hit. That’s probably a common one that’s out there as well.


    Phil Muscatello: And another bias is the availability bias. Tell us about that one.


    Zaffar Subedar: Yeah. No, this is a very interesting one. And again, these are all based on how we make decisions based on information that we have. But essentially, the availability bias occurs when we make a decision based on recent experience or information that is readily available to you. And that’s the key, what’s readily available to you. So if you consider you watch the the news, 6:00 news or whatever time you watch the news, if a particular stock or particular market gets quoted in the news, then that’s what you will base your decision on. So yeah, the ASX was down today, therefore I’m not going to invest tomorrow or the ASX has been down all week. I’m not going to invest now because I’m worried about the outlook. So where you get your information from and how frequently you source that information from does affect your decision. Conversely, other studies have found if we use availability bias, particularly at a high level, such as looking at market data, as I just gave an example of, we tend to overreact more because we think and we overestimate that these bad events will continually occur and either we don’t invest or we make a decision of like, let’s cut out and get out of here. So so it’s a very crucial bias that we need to keep an eye on of where we source our information from and how we use that information to make a decision.


    Phil Muscatello: In preparing this interview, I recently interviewed a psychologist about the emotions that sabotage good investment decisions. And this was his list greed, fear, euphoria, despair, overconfidence and strangely enough, regret. Do you have any comments on that list?


    Zaffar Subedar: You look, I think that’s a great list. And if you read the literature, not just the academic one, but a lot of the investing literature that’s out there, these emotions that the psychologists mentioned, they hit all the relevant characteristics. But the only one I would probably add to that list is really myopia. And that’s that being short sightedness that’s really detrimental to wealth creation. Again, if you are so short sighted and you try and identify patterns based on information that’s readily available, and particularly if it’s not thorough or accurate information, then this is the most critical behaviour that you would have to your long term wealth creation. Being short sighted. It’s very hard to avoid, it’s very hard to avoid in other parts of life. But investing to create wealth is absolutely devastating, like we’ve quoted earlier a couple of studies, but all your listeners out there, I know myself, I when I initially started investing myself directly, I was myopic, maybe being younger and being a bit more bravo. It’s definitely something you want to avoid some myopia. Just next time you think about doing something, head over to Specsavers.


    Phil Muscatello: We are pattern recognition creatures, aren’t we? I mean, we’re actually built to recognise patterns, but sometimes we can just make up patterns out of thin air almost, can’t we?


    Zaffar Subedar: Well, we look for patterns where.


    Phil Muscatello: Exist might exist.


    Zaffar Subedar: Yeah. And that’s the crucial piece there that when you look for these patterns, do they happen over time? And when these patterns occurred? What are the drivers of these patterns? Hmm. So if you’re looking at a company’s price chart. Well, what’s been driving this price movement either up or down, what’s happening on the fundamentals, what’s happening to that investment relative to its peers? You need to consider more than that just one piece of information. You need to look at the information in totality.


    Phil Muscatello: Another thing that I’ve been really interested in thinking about lately is about the idea of shame. I mean, it’s not just regret. You can make an investment decision. It goes bad and you feel shame, you feel like a loser. And that’s a really powerful emotion. Is that something that you’ve seen or. Academic study that.


    Zaffar Subedar: Yeah. So there’s a couple of ways you can look at shame and from the behavioral finance literature. The item I think that really summarizes shame is loss aversion. So loss aversion, loss of version is probably something that really relates to shame. And the piece that loss aversion really summarizes is that it describes the pain of losing on an investment and what the psychologists and what the behavioral finance academics have found is that the pain of losing is two and a half times more than an equivalent gain.


    Phil Muscatello: How do they measure that? I’ve heard that statistic. How do they measure that?


    Zaffar Subedar: Oh, they’ve measured that through a number of studies around questionnaires. Yeah. Yeah, well, experiments that have been the predominant way of doing that. And this two and a half times. It’s not just with university students, it’s with individual investors. I think I did a study a long time ago with finance professionals. This was just after the GFC and I think they viewed the loss about 40 times more than an equivalent gain. So if you think about it.


    Phil Muscatello: They had professional skin in the game, didn’t.


    Zaffar Subedar: That’s right. And I think the way to interpret it is like if I’ve gained 10%, I feel good. But if I lose 10%, I feel very, very bad. That’s the sort of qualitative summary of it. But I think the other point around loss of version and shame, there’s a couple of points. The reason why we hold on to our investments, so go back to that loss aversion. You’ve lost five, 10%, but it feels two and a half times more than that actual loss. The piece is we now feel that, hang on, I like this investment. I’ve liked it for a number of reasons, but I think it’s going to rebound. So this is where we are letting the losers ride because we are in the hope that this investment will rebound. The second point is it’s also that attachment. You’ve done so much work on this investment. You spend a lot of hours sourcing information, making the decision. And probably thirdly, you’ve gone out and told other people, so you’ve got that shame or hang on, I’m going to end up here with egg on my face because I spent so much time looking at this investment and now it’s underwater by ten, 15%. I need to hold onto it because it’s going to come good. So this is a challenge, this shame or this loss aversion. That is something that explains why we write loses in the hope of our investments to recover. But if we go back to this earlier studies, we tend to do the opposite and cap out our winners and write those losers. Hmm. And also, the other thing I should say is someone will say, what about tax and those sort of things? Well, yes, it could be some tax advantages there with writing some of the losers. But, you know, that’s the area where I recommend you talk to your tax agent on.


    Phil Muscatello: That’s right. It’s not about tax. It’s about making money in the end, isn’t it?


    Zaffar Subedar: Well, that’s the old saying, isn’t if you’re paying tax, you’re making money.


    Phil Muscatello: What about searching for gurus? I think there’s a lot of people who want a guru as well.


    Zaffar Subedar: Yeah. And this is there was a very, very peculiar study. It was actually done by some New Zealand academics, probably mid 2000s, and they call this the socialisation effect. So if you think about it, you’re going into new environment, think about your going into a new workplace or you’re going into a new school. If you’re a child or you’re going into some sort of professional environment, when you walk into that environment, you from a previous experience, what your average was, your average, you know, are these people really good to work with? Yeah, they’re pretty good. They’re average compared to what I’ve experienced in the past. So all of a sudden, if you were at a previous workplace and your average might have been seven for your previous employees in terms of how to work with and all that sort of jazz, now you get a new workplace and all of a sudden it’s a new environment and that average might be six or it might be five or whatever it is, it’s declining or it could go the other way. So by going into a new environment, you start to change your mean. Now what does that mean for investing? Back to your point about gurus. You will start sourcing people at the barbeque. You will start following other investment commentators that are out there and that now frames your environment to make a decision. So if they’re a good stock picker or their average stock picker, do you measure that? And if they’re not a good stock picker, if you haven’t objectively measured that, guess what? Your new average is going to be a lot lower than perhaps what it was before. So it’s very, very crucial what environment you’re in and where you source information from to help you with, again, your long term wealth.


    Phil Muscatello: And it’s also worth knowing that gurus are fallible as well. Maybe don’t even have any better idea of investing that you do.


    Zaffar Subedar: Well, that’s right. And we’ve seen the 10/2 investment updates you get on TikTok. So the world is getting a lot more complex than what it was probably just two years ago.


    Phil Muscatello: Yeah, no, I wouldn’t have made any money without those joke listeners. Yeah. So the gurus that are setting themselves up on YouTube and Tik Tok and all over the social media now they’re not going through the rigorous process that many professionals in the financial industry have to do to justify their purchases and buying and selling decisions. What’s something to watch out for and how can people think about these supposed gurus?


    Zaffar Subedar: So I think one way to look at gurus and anyone that you use to influence your decision making process is to consider their track record. So it’s not just buy a particular investment, it’s like, well, overall, how is their portfolio? Do they even have a portfolio? Do they show their holdings? Do they show what their investment mandate is? So, for example, some people might be high risk versus someone that’s low risk. So how do you compare the pair, so to speak? So that’s why probably have a look at the institutional investors or the professional investors. So if you look at particularly active ETF providers, they’ve got all their holdings on there. They have a.


    Phil Muscatello: They have a process and they tell you exactly what they’re doing, how they’re investing in their reasons for investing. As.


    Zaffar Subedar: That’s right. They’re very transparent. They’ve got a monthly update where they talk about what they’ve done with the portfolio, what the outlook is, what are and what were the major drivers and contributors to the performance over the last month. So you’ve got a transparent record there and obviously you can go through and see their investment processes as well. And that’s a bare minimum amount of verification you should be using to look at investment recommendations or obviously the performance of that type of investment you’re considering. So there’s a difference there between gurus and professionals. And again, looking at track records and making sure the results are actually valid is important.


    Phil Muscatello: Yep. For me as well. It’s the idea that you’ve got to understand that there is a process. You don’t get tickers served you on a plate. A lot of people will come in and they want they want to be told what to buy and sell. And that’s no way of achieving commitment to a company or a portfolio that you’re putting together.


    Zaffar Subedar: Yeah, that’s right. And usually someone that’s doing a recommendation has got a different incentivisation, whereas an active manager or a professional manager, they are managing to a mandate and you need to consider if that investment will have a role in your portfolio.


    Phil Muscatello: Okay. So we’ve heard about these biases. What are the shortcuts that we can take to become aware of them and be able to basically put these biases back in the place where they should be, which is not affecting our investing decisions?


    Zaffar Subedar: Yeah, and this is a it’s a great question. I struggled with myself for a long time. And look, I studied this for a period of time. It’s very difficult to do, first of all. And if you commit to this journey, there’s no doubt you will be a better investor. And I think the key thing is, if you can identify some of these biases, you won’t feel as ruffled definitely as much during some of these panic moments or the moments of volatility that we’ve been going through. So it’s definitely an exercise worth doing. I guess one of them, and we just discussed it, was really keeping a record of your investment decisions and particularly where you were really confident with the decision. How did that go? It’s a track that, you know, that’s probably the first key point. So where you were feeling overconfident, very high conviction call, how did that investment decision go? And also what sources of information do you use? You must be consistent. So if you’re looking at Australian shares or looking at global shares, what sources of information, who else were you listening to ensure that you are consistent? Because whenever you’re buying or selling it becomes a relative decision and you want to ensure that you use the same sources of information to come to that conclusion. Thirdly, obviously don’t monitor results too frequently whenever you purchase something, particularly if it’s a risky investment, there will be volatility. Use that time, use that volatility to ride out your decision, give it time.


    Zaffar Subedar: So that’s also important. Again, don’t be myopic. Let your investment thesis mature. Another one and probably a little bit more qualitative is is an investment out of character. So if you’ve historically been someone that’s invested in listed investments and now you’re considering something that’s not as illiquid, such is venture capital or private equity, private debt. Why are you going down that path and what prism are you going to look through to evaluate this investment? So that’s something you should look at, particularly, I think, with the new sorts of investment offerings that are out there, new asset classes, be it cryptocurrency or more sophisticated type investments. I also think you need to consider. The multidimensional nature of risk. So it’s not a particular risk to an investment. But what about things such as credit, particularly relationships? We know what’s happening if you’ve invested with anything linked to Russia. Think about those things when you’re investing in something peculiar or something that’s higher risk. Is there one or two other qualitative risks that may affect that type of business that you can’t see in the financial statements? That’s something probably you have to keep an eye on. And finally, think about your information. Sources is using the street research. They’re using that traditional broker research. You may be getting off your retail trading site, giving you a competitive advantage. If you’re looking at large cap stocks, it’s probably difficult to get that competitive advantage by just using broker research. You need to.


    Phil Muscatello: Consider they’re all doing it, aren’t they? There’s so many people researching.


    Zaffar Subedar: You probably need to do a bit more work around those aspects there. And I think finally the other piece is just be careful with how you socialize your investment decision. So whether you’re at a barbecue, whether you’re at a pub or any sort of social settings, it’s just human nature to hear the good stories. But it’s that one bad story that may give you second thoughts when you’re looking at a particular decision. So, you know, always consider the old anecdotes that are out there with a grain of salt, because as we know with human networks, we do like to show ourselves in the best light.


    Phil Muscatello: It sounds to me it’s all about having a process, isn’t it?


    Zaffar Subedar: That’s right. Feel and look at einvest. We’ve got professional teams across Aussie equities and fixed income and those specialists, yes, they invest according to their mandates, but they’ve got deep teams, teams of professionals that only focus on investment decisions day in and day out. And they challenge each other, they challenge each other where they get information from. Are they consistent with their calls and how they measure up on a frequent basis? And also importantly, in these sort of environments, where are the opportunities? So for a professional, it’s just as important to look at your information sources, but you’ve got the extra layer of having transparency with your investors, and that’s why it’s fantastic. At eInvest. We’ve got some great teams that look right under the hood for opportunities, whether it’s in Australia or in fixed income globally as well. And they’ve been quite robust in these times of volatility.


    Phil Muscatello: If people want to find out more information, they can go to the website which is a invest forward slash BF for behavioural finance of course, and you can ask questions, get some more information and links to Jeff’s articles about this as well. Zaf Zubeida, thank you very much for joining me today.


    Zaffar Subedar: Thanks, Phil. It’s great to be here.