Thursday, November 11, 2010

Exclusive Interview with Ken Fisher Part 4 - Behavior Finance

Ken Fisher is a money manager, and on the list of the Forbes 400 Richest Americans. He is also a Forbes columnist, where he recently recommended several income stocks, such as TransCanada (TRP), Repsol (REP), and Sanofi-Aventis (SNY). His latest book, Debunkery: Learn It, Do It, and Profit from It-Seeing Through Wall Street's Money-Killing Myths was just published. He is also author of several other books, including The Ten Roads to Riches: The Ways the Wealthy Got There (And How You Can Too!) and How to Smell a Rat: The Five Signs of Financial Fraud

Ken Fisher Interview Part 4
Please note: Interview took place on Wednesday, October 27, 2010

You discuss in your new book the new term, or relatively new term, 'behavior finance,' and how the brain works. Can you just describe what behavior finance is and how it applies to investing?

Effectively, are brains are hardwired to engage in certain activities that are based on evolution. The people that exist today are descendants of those who were successful in that environment, and the people who weren't successful in that environment didn't have descendants. We have are brains programmed to deal with certain kinds of things, but capital markets are very different compared to those types of things, and are brains aren't really set up to deal with that. So there are all kinds of things we do naturally that work really well in either or both of the hunter / gatherer world or more primitive agricultural world, but don't relate to capital markets.

So for example, a standard feature, if you are out in the woods by a campfire, and you hear a loud noise, you turn and focus on the noise. But the way capital markets work, when you turn and focus on something, something hits you in the back of the head. The best procedure when you hear a loud noise in capital markets is to turn around and look away from it and see what's coming at you, because the thing that's coming at you is always a negative activity. That's counter-intuitive to the way our minds work.

The brain has standard features that I talk about including confirmation bias, which is terribly basic to human tendency. You see evidence of things that confirm our prior biases, while not seeing or trying not to see the branching off things that contradict our prior biases. In that prior world that we evolved from, this was terribly important because it reinforced our propensity to keep trying. One of the things that's unique about humans as animals, is our 'trying' function relative to what other animals do. We are tryers, tryers from the get-go. That's partly because confirmation bias makes us see the evidence of things that confirm our prior biases and contradict the ones that don't.

So when we have a mistake, we look at our mistake and think it is bad luck, and we keep going. The effect of that is it feeds ironically into the propensity to hang onto myths. Once a cultural myth evolves, that fit our prior bias, we look for evidence that confirms it and deny evidence that denies it and we keep hanging on to it. The whole book Debunkery has a foundation of confirmation bias under it.

There are all kings of other tendencies people have that are out of behavioral finance, that in the last thirty years, behavioral finance has uncovered, which is the tendency to move and react to new things and stimulus and forgot about longer term things. Anything that happens recently you think of as massively more important than anything that happened five or ten years ago, even though they all happened in the past.

So for example, this is the tendency that you see in investors right here who are trying to fight the last war, even though almost always the last war has come back or something else comes back to you again. In fact, the nature of markets is that when everybody tries to fight the last war, it's not 100% true but it pretty much guarantees that the last war will come back on you. But with every darn cycle, people keep looking backward. It's just natural. So behavioral finance is really just this process that looks through 'where do our brains blindside us,' and how are we not set up, tied to where are brains were wired for a different purpose once upon a time, and how are brains are not set up to deal with capital markets.

End of Part 4

Part five will cover Fisher's opinion pf presidential and congressional term cycles on the stock market. Stay tuned.

The Debunkery book is available at Amazon.

Ken Fisher obviously doesn't give individual stock recommendations in his interviews, but some stocks he likes that were mentioned in his recent Forbes columns, including high dividend stocks, are available in the form of a free Excel list at

Part 1 of this interview is available HERE.

Part 2 of this interview is available HERE.

Part 3 of this interview is available HERE.

By Fred Fuld at

Disclosure: Interviewer doesn't own any of the stocks mentioned in this interview series at the time the article was written.

Copyright 2010. All rights reserved. Reproduction of this interview prohibited without permission. All opinions are those of Ken Fisher, and do not represent the opinions of or the interviewer. Neither Stockerblog nor the interviewer nor the interviewee are rendering tax, legal, or investment advice in this interview. If you want tax, legal, or investment advice, contact the appropriate professional.

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