Tristan de Gouvion Saint Cyr Behavioral Finance

7/29/2019 Tristan de Gouvion Saint Cyr Behavioral Finance

1/9

Tristan de Gouvion Saint Cyr

Tristan de Gouvion Saint Cyr on

Behavioral Finance


2/9


Tristan de Gouvion Saint Cyr quotes wikipedia about aphenomenon that plays an important part in trading, calledbehavioral finance.

This field studies the effects of social, cognitive, and

emotional factors on the economic decisions of individualsand institutions and the consequences for marketprices, returns, and the resource allocation. The fields areprimarily concerned withthe bounds of rationality of economic agents. Behavioralmodels typically integrate insightsfrom psychology with neo-classical economic theory.

Tristan de Gouvion Saint Cyr gives this video fromInvestpodia to illustrate the point:


3/9


As the pendulum swings between greed andfear, investors typically become over-enthusiastic during bull markets and over-

despondent as the bears growl grows louder. It stands to reason that in order to be a

successful investor, it is important to distanceyourself from the herd mentality and to takeobjective decisions based on fundamentalreasons


4/9

Cont..


5/9


The typical behaviour of investors is linked to

the so-called investor psychology cycle

(courtesy RMB Unit Trusts), as illustrated

below.


6/9

Cont..

Before seeking to apply the cycle to the present stockmarket situation, lets consider a short definition of each ofthe stages.

Contempt: According to the cycle, a bull market typically

starts when a market is at a low and investors scorn stocks. Doubt and suspicion: They try to decide whether what they

have left should be invested in a safe haven such as amoney market fund. They have burnt their fingers withstocks and vow never to invest again.

Caution: The market then gradually starts showing signs ofrecovery. Most investors remain cautious, but prudentinvestors are already drooling at the possibility of profit.


7/9

Cont..

Confidence: As stock prices rise, investors feeling of mistrustchanges to confidence and ultimately to enthusiasm. Most investorsstart buying their stocks at this stage.

Enthusiasm: During the enthusiasm stage, prudent investors arealready starting to take profits and get out of the stock market,

because they realise that the bull market is coming to an end. Greed and conviction: Investors enthusiasm is followed by greed,

which is often accompanied by numerous IPOs on the stock market.

Indifference: Investors look beyond unsustainably high price-earnings ratios.

Dismissal: As the market declines, investors show a lack or interestthat quickly turns to dismissal.


8/9

Cont

Denial: Then they reach the denial stage where theyregularly affirm their belief that the market definitelycannot fall any further.

Fear, panic and contempt: Concern starts to take ahold and fear, panic and despair soon follow. Investorsagain start scorning the market and once again theyvow never to invest in stocks again.

In order to determine where in the stock market cyclewe find ourselves, the challenge is to identify theprevalent stage of the psychological cycle.


9/9

Cont..

I would, for starters, argue that we are on the right-hand side of thecurve, but how far down the slippery slope sentiment has declinedis less clear. It would seem that we are possibly in the region of thedenial/fear/panic phases. Although enduring investor panicand fear have not really set in, the January, March and July sell-offs

did witness climatic, albeit short-lived, bouts of despair. Time will tell whether we are dealing with a typical investor

psychology cycle and how it will play itself out. It does, however,seem that we are at not at the contempt stage yet, i.e. wheninvestors scorn shares en masse and a bull market typically starts.

Realizing this mental process is the first step towards becoming a

smarter, more rational investor.

Tristan de Gouvion Saint Cyr Behavioral Finance

Documents

Transcript of Tristan de Gouvion Saint Cyr Behavioral Finance