How our brain may misinterpret information

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Do curso por University of Geneva

Meeting Investors' Goals

781 classificações

University of Geneva

Meeting Investors' Goals

781 classificações

Curso 2 de 5 em Specialization Investment Management

In this course, you will dive into the concepts of rationality and irrationality and understand how they impact our investment decisions and what the consequences can be at the market level. You will first explore the different biases that we, as humans, are subjected to when facing investment decisions and how they may impact the outcomes of these decisions. Moreover, you will see how emotions and ethical concerns such as honesty and trust influence market participants. When they are considered as a group rather than individually, you will discover how rationality and irrationality can drive asset prices to and away from their fair value. Finally, you will be presented with different portfolio construction methodologies and investment styles that make up the landscape of today's portfolio management industry. At key points throughout the course, you will benefit from the practical knowledge of experts from our corporate partner, UBS, in how to build and manage clients' portfolios.

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How Individuals Make Financial Decisions

The focus of this second week is on you, the investor: what are the reasons you participate in financial markets? How do you make investment decisions? What can go wrong in your decision process and what are the consequences? What can you do about it? To answer these questions, we will talk about cognitive biases, emotions and moral values and their respective link with investment decisions.

How our brain may misinterpret information4:55

The basic steps in investment2:00

Biases when choosing which assets to look at3:25

Biases when processing financial information4:38

Biases when rebalancing you portfolio4:55

Biases when evaluating performance2:41

Conheça os instrutores

University of Geneva- Tony Berrada
SFI Associate Professor of Finance
Geneva Finance Research Institute
University of Geneva- Jonas Demaurex
Teaching Assistant
Geneva Finance Research Institute
University of Geneva- Rajna Gibson Brandon
SFI Senior Chaired Professor of Finance and Managing Director of the GFRI
Geneva Finance Research Institute
University of Geneva- Michel Girardin
Lecturer in Macro-Finance - Project Leader for the "Investment Management" specialization
Geneva Finance Research Institute
University of Geneva- Kerstin Preuschoff
Associate Professor of Neurofinance and Neuroeconomics
Geneva Finance Research Institute
University of Geneva- Olivier Scaillet
SFI Senior Chaired Professor of Finance and Vice-dean (research) at GSEM
Geneva Finance Research Institute
University of Geneva- Philip Valta
SFI Assistant Professor of Finance
Geneva Finance Research Institute

[MUSIC]

In the previous video,

we have seen how people don't always behave like rational players.

More importantly,

we have seen that not being a rational player can actually win you the game.

In this video, we are going to challenge the notion of rationality

a little bit further and we're going to try and

give you an intuition as to why we are not always rational.

In order to do so

we're going to take a quick detour into the world of visual illusions.

Take a look at the following two images.

What you see is two circles, both of which are surrounded by several other circles.

The question is, which of the two inner circles is larger?

Now, I deliberately put this illusion

because I think a lot of people will have seen this before.

So we probably have two answers here.

Those people who've never seen this before will say the circle on the left is larger.

If you have seen this before,

you might say well I know that they're both of equal size.

And of course, you are right.

But what's happening here?

Now there are three things that we can learn from these answers.

The first is the brain has notoriously bad at perceiving absolute values.

So judging the absolute size of something is incredibly difficult and

the brain constantly uses other queues to extract information from the environment.

The second thing that we learn is knowing this, you can constantly adjust for

the mistakes that the brain might make.

In this case, perceiving one circle as larger than the other.

The third observation, though, is even though you know they're of equal size,

it doesn't actually change your perception.

If you're being honest you still see the circle on the left

as larger than the circle on the right.

Let's take a look at two more examples.

What do you see on this slide?

On the right, you see a green shape and a red shape.

On the left, you see a couple of line segments, and

three Pac-Man's arranged in a particular manner.

I deliberately tried to just describe the information that is actually present

on the slide.

What do you actually perceive?

On the right,

you probably perceive a green circle that is covering a red square.

Now I can move apart these two shapes, and

what you will see is that the second structure

wasn't actually a complete square, but there's a corner missing off that square.

Now this is something that's extremely unlike to happen.

In fact, this might be the only time this happens

when you perceive this kind of information.

I didn't do this just to trick you, but I was just trying to make a point here,

which is your brain constantly tries to fill in information.

So it takes the information available, in this case the green circle, and

a fraction of what appears to be a square, and

fills in the missing information to arrive at the most likely explanation.

And in this case the most likely explanation is of course a green circle,

that's covering a red square.

In very rare circumstances your brain might be wrong, as in this case.

But most of the time it will actually be correct, and

that will be valuable information based on which you can make decisions.

Now let's take a look at the image on the left.

Again, you have three Pac-Man's and a few line segments.

And what you probably perceive on the left is a white frameless triangle

hovering above another triangle.

Now let's see what happens when I remove the three Pac-Man's.

Normally what should happen is that maybe for a couple more seconds you still

perceive the hovering triangle, but then it suddenly disappears.

It turns out that the hovering triangle too,

was just your brain filling in information that wasn't actually there.

The particular arrangement of the circles and the line segments

caused your brain to think that there is a triangle on top of another triangle.

To summarize this, your brain is constantly filling in information that

isn't actually there in order to give you a complete image of the world around you.

It is important to note that your brain receive information through your eyes,

through your ears, that information is translated into electrical pulses.

And based on these pulses your brain has to reconstruct an extremely

complex world that surrounds you.

And the only way for

your brain to do that is to make a lot of assumptions about the world around you.

Most of the time your brain is right in these assumptions, but

once in a while these assumptions are wrong.

And then they lead to errors in your perception and your judgements.

We've seen the errors in perception in the examples I just showed you.

And you'll see more errors in judgments and decision makings in the video.

[MUSIC]

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