Book Notes - blog notes [bn] >

1. | Biases | |

2. | Confirmation bias - Jersey driver | |

3. | Status quo bias - we like to keep things as they are | |

4. | Endowment effect - 2 endow one's holdings w/> value then they have simply bcuz 1 holds them | |

5. | Avoiding Losses (loss aversion) - people take > risks to avoid losses than 2 obtain gains | |

6. | Mental Accounts - you start w/$15 at casino, make $1 million, lose all and think you lost $15 bucks | |

7. | | |

8. | Self-fulfilling prophecy | |

9. | data mining | |

10. | survivorship bias | |

11. | | |

12. | DC Sniper Probability Problem | |

13. | Parrando's paradox | |

14. | Gambler's fallacy - coin flips are governed by a probablistic rubber band | |

15. | Newsletter Scam - 64,000 names 1/2 get buy and 1/2 get sell stock xyz, repeated until 7 in a row for 1000 people and charge high rate for 8th pick | |

16. | People have difficulty simulating a series of coin flips | |

17. | Benford's Law = #'s start with 1 30% of time, 2 abt 18%, 3 12.5%...9 < 5% from distributions of distributions | |

18. | Compound Interest formula = P * (1 + r)^t, where Principle, Rate, Time in years | |

19. | Quarterly compounding = A = P(1 + r/n) ^ (n*t) | |

20. | Continuous compounding = P * e ^ (r * t) where e = 2.718 | |

21. | Discounting - determining the Present Value of Future money | |

22. | Avg vs. Geometric return = if 80% up and -60% down per week, start w/10K, avg = 1.4mm and geo = $1.95 | |

23. | Buy stocks with PEG < .5 and sell with PEG > 1.5 | |

24. | Buy stocks w/low P/B ratio or low p/s ratio | |

25. | 35 stocks with highest rate of return and 35 w/lowest rate reversed 3 - 5 yrs later | |

26. | Regression to mean | |

27. | Value investing over 3 - 5 year period does better than growth investing | |

28. | Puzzle 3 men at hotel convention | |

29. | Expected value <> Value Expected | |

30. | Expected value = Avg of its values weighted according to their probablity | |

31. | Estimate stock will increase 1% pr = 95%, down 60% pr = 5% | |

32. | Expected value = (.01 * .95) + (-0.6 * .05) = -2.1% | |

33. | Value expected = +1% | |

34. | Central Limit Theorem - avgs and sums of sufficent # of chance dependant quatities are always normally distributed | |

35. | covariance - between 2 stocks is the degree to which they vary together | |

36. | a chg in one is proportional 2 a chg in the other | |

37. | goal is to find stocks w/negative covariance | |

38. | There aer > funds than stocks | |

39. | A fund is a set of stocks | |

40. | If there are n stocks there are 2^n subsets | |

41. | Pollitically incorrect sectors (tobacco, alcohol, defense, fast-food, gambling) | |

42. | Single index model(?) | |

43. | Sharpe ratio = (rtn - risk free rtn) / volatility | |

44. | CAPM = Capital Asset Pricing Model | |

45. | Systemic Risk = is related to movement in the market. Can be eliminated or diversified away | |

46. | Non-systemic risk = idiosyncratic to stock of portfolio | |

47. | Criticism of Beta - problem of forcing a non-linear world into a linear model | |

48. | Complex behavior can result from simple rules of interaction | |

49. | Non-linear Systems - hit a rack of billiard balls two times and you get different results, even if intial hit appears the same | |

50. | Power Laws | |

51. | When volume is high trades are influenced by few popular nodes | |

52. | * Mutual funds | |

53. | * Analysts | |

54. | * Media outlets | |

55. | becoming aligned in teh sentiments | |

56. | This alignment creates extreme price movement | |

57. | A contagious alignment of this handful of very popular, connected, influential nodes will occur > frequently than people expect | |

58. | Extreme price movement will occur > frequently than people expect | |

59. | EMH - Efficicient Market Hypothesis. If people believe it, it doesn't exist, if people don't believe it, it exists | |

60. | Prisner's Dilema | |

61. | Game Theory | |

62. | Neural Networks | |

63. | Don't succumb 2 hype & enthusiasm | |

64. | Don't put too many eggs in one basket | |

65. | Don't forget to insure against sudden drops | |

66. | Don't buy on margin |