The Electric Vehicle (EV) Bubble is rising and appears to be starting to burst. Issuances continue to pick up.  The entire basket of EV stocks that we discussed in Episode #68 of Mental Models Podcast is now DOWN 42 % (at the time of this recording). The market will fluctuate and we will likely experience a surge with the approval of the US government stimulus. At this point it’s fair to declare the EV bubble BURST!

Observing the current market is analogous to being a sea captain in the 1700’s. One has to wonder whether there is really land up ahead, or is it an illusion? What type of winds are about to blow in? In early 2021 It is like being in an El Nino year in the 1700’s, and everything is shrouded in mist. There are many unknowns, and a matter of waiting to see what is coming.

We focus on what cognitive biases can tell us about investing. People may become more tolerant of risk when they use their stimulus checks to invest in the stock market, because this feels like found money. When you didn’t directly earn money, you have less personal attachment to it, which makes it easier to lose and enhances the tendency to take risks. By contrast, when the stock is declining, loss aversion can take over. This occurs when an individual refuses to sell because they do not want to feel foolish, or have to reverse themselves publicly.

Experience in watching the market has shown that when a bubble bursts, it continues to decline for the next two years.  During the extended fall, prices will typically level out, and then fall again. Individuals involved in the bubble may be prone to undesirable anchoring bias as they continue to wait for the price to recover to a previous level and then sell. You are not alone if you experience this happening to you!

The 2021 "Alice in Wonderland Market" with all of its twists, turns and volatility will continue. Keep you eyes on the horizon, there is no easy fix! Don’t fall down the rabbit hole of cognitive biases along the way.

Links
Play and Understand Stock Market Bubbles: #68 https://podcasts.apple.com/us/podcast/mental-models-play-and-understand-stock-market-bubbles-68/id1458795155?i=1000505145809

#EV #electricVehicle #StockMarketBubble #EVBubble
#Mentalmodelspodcast #cognitiveibias

Mental Models: EV Bubble Bursting: #71

GameStop $GME shops mainly sold physical video games. They would also stock many resale items. The physical locations capitalized on the same type of business that comic book shops often had by selling collectibles as well. Many projected that Game Stop had a very limited future and had been cut out of the supply chain as many electronic games are simply sold online in recent years.

Hedge funds had high interest in shorting GameStop at the end of 2020. In January 2021 a long position idea existed with the idea that a pivot to in-person gaming meetings could be a way forward. Michael Burry was featured in the Big Short and he had advocated for a potential bright future for GameStop lending credibility to the value position. Melvin Capital was known for this, and was pretty aggressive in advocating for the short position.

“Deep F…ing Value” (aka “Roaring Kitty”) entered the scene with the WallStreetBets crowd and advocated for buying GameStop and driving up the price. Around GameStop there was herd mentality forming and a desire to squeeze the hedge funds. It was equivalent to an ‘occupy Wall Street movement’. Everyone online had to going to buy Game Stop stock and not sell it for the short squeeze to work.  These are known as “diamond hands”, which also happens with cryptocurrency. It became the ‘Prisoners Dillema’, a trust game, where everyone has to stay the course and not sell. A religious fervor built up as online investors from Robinhood wished to take down hedge funds that were seen as greedy. 

We discuss the typical scenario around short selling and short squeezes. There is some value for markets to have short sellers as they act as a shock absorber. Contrarian short sellers are naturally unpopular due to the historical interest in companies continuing to succeed. A set of factors aligned in 2021: the bull case for the stock, an online sentiment to stick it to short sellers, and the natural appeal of using Robinhood to become wealthy from the comfort of one’s own home. Meteoric rises in the price continued until it had reached three hundred dollars per share. This scenario may serve as a sign that retain online investors are coming online. It’s a case where people with limited investing skills scored a victory in this risky scenario. 

Some people may have participated simply to experience the thrill of being part of this movement as entertainment for some people. It is not healthy for society overall to have people treating the stock market like a casino. It had a sports betting feel to it.

AMC theaters was on the way to bankruptcy, but took advantage of a price rise to raise capital to help their business. GameStop might have done this same thing. Financial markets serve a purpose and this type of scenario goes against the natural functionality of markets. The risk levels always rise with betting on perception this way. 

Perhaps GameStop will act as a gateway stock for people to begin investing careers.
$AMC

Mental Models: Game Stop Stock Unhinged: #72

The keys to flexible thinking come from exploring the different solutions to a problem vs. exploiting the rewards, resulting in perseveration behavior.  In this episode we explore the ‘set effect’ which is linked to problem solving.  An example of successful flexible thinking and over coming the ‘set effect’ is when Warren Buffet realized that investing had changed and it was time to find a new approach and move away from Net-Nets, which he had learned from his mentor Benjamin Graham. 

Investing tips include discipline, awareness too changes and sticking to the circle of competence. See Chapter 8 in our book “Understanding Behaviorally Bia$” to learn more about these 3 tips, as well as post-moretems and deep analysis. http://amzn.to/2XHtsOE  

Chess experts such as the  chess masters at the University of Texas at Dallas (UTD) are experts and can utilize flexible thinking and overcome the “set effect.” As we become experts in a field, such as investing we can become more flexible thinkers. Research by Dr. Daniel Krawczyk on chess experts. https://www.utdallas.edu/reasoninglab/research/expertise-and-cognition/ 
UTD chess team: https://www.utdallas.edu/chess/chess-team/ 
 
  “Understanding Behavioral Bia$” will help you overcome the biases that are keeping you from investment success! http://amzn.to/2XHtsOE  
Authored by Daniel Krawczyk, Ph.D. & George Baxter, JD, CFA your hosts of Mental models Podcast.  #mentalModels 

     VIDEO of Dr. Daniel Krawczyk on Fox4News discussing new book “Understanding Behavioral Bia$" https://www.fox4news.com/video/655696

Mental Models: Keys to Flexible Thinking and Problem Solving: #45

Compassion and our basic human values drive us. In this episode we revisit a popular episode, and discuss values in detail from both an investing & psychological perspective. Our mental models of other people’s behavior. As the market turns…Stay safe and healthy out there! 
   For more on best investing strategies, avoiding bias and learning about your brain BUY 5 star reviewed book “Understanding Behavioral Bia$” on Amazon - link here: http://amzn.to/2XHtsOE
   Join Dr. Dan Krawczyk, host of Mental Models Podcast and Deputy Director of the Center for BrainHealth(Dallas TX)and Bonnie Pitman (former director of the Dallas Museum of Art, Bonnie is a national leader in the public engagement of art) for a FREE virtual talk on compassion.  How can we become more compassionate? How do our brains accomplish compassion? What effects does compassion have on others and on ourselves? They will tell us more about the biology and psychology of compassion,  who will explain the benefits of leading a compassionate lifestyle. Bonnie will also teach us skills and methods for us to refine our practices to become more compassionate individuals.  LOCATION
Virtual: A link to access the event will be provided upon registration. 
DATE: 9/17/2020
TIME: 7:00-8:00 PM (central time)
TICKETS: Free! Pay it forward by sharing with a friend.
REGISTER (copy and paste link) https://brainperformanceinstitute.force.com/BPI/evt__QuickEvent?id=a233u000001UUaG

Links:
Chart of Basic Human Values by Schwartz: https://en.wikipedia.org/wiki/Theory_of_Basic_Human_Values

Mental Models Podcast Episode #2 "Value Drives our Lives! Your Brain Response to Value and Investing" listen on Apple Podcast https://podcasts.apple.com/us/podcast/value-drives-our-lives-your-brains-response-to-value/id1458795155?i=1000434905197 or SoundCloud https://soundcloud.com/user-682136294/2-value-drives-our-lives-your-brains-response-to-value-how-it-affects-our-investing-lives

Mental Models: "Inside Bill's Brain: Decoding Bill Gates": #28  listen on Apple Podcast https://podcasts.apple.com/us/podcast/mental-models-inside-bills-brain-decoding-bill-gates-28/id1458795155?i=1000453548100

Teed, A. R., Rakic, J., Mark, D., & Krawczyk, D. C. (2019). Relative activation patterns associated with self-transcendent and self-enhancement core values: An fMRI study of basic human values        theory concepts in males. Social Neuroscience, 25,1-14.

Mental Models: Compassion & Revisit #47 Our Basic Human Values: #62

Hot hand effect is the mystic behind your winning streak, despite all of your theorizing. There are many factors that explain the wins in the stock market, but the hot hand effect/bias is one to consider. For more on best investing strategies, avoiding bias and learning about your brain BUY 5 star reviewed book “Understanding Behavioral Bia$” on Amazon - link here: http://amzn.to/2XHtsOE  Continue to listen to Mental Models Podcast for updates on the current state of the market. Stay safe and healthy out there!

Mental Models: Mistique behind Winning Streak, Hot Hand Effect: #64

A talent that you have, but will it last, unlikely! We all want that superior money earning performance to continue, and we enjoy the success of an individual over a team (Jessie Walker and Tom Gilovitch reported on it in 2020, links below). Because we like narratives and we want to be the hero of our story, just like Kolby Bryant or LeBron James were for the Lakers.
For more on best investing strategies, avoiding bias and learning about your brain BUY 5 star reviewed book “Understanding Behavioral Bia$” on Amazon - link here: http://amzn.to/2XHtsOE  Continue to listen to Mental Models Podcast for updates on the current state of the market. Stay safe and healthy out there! 
Links:
Walker & Gilovich (2020) Journal of Personality and Social Psychology  https://doi.apa.org/doiLanding?doi=10.1037%2Fpspa0000256
More on Streaking Star effect in Science Daily https://www.sciencedaily.com/releases/2020/08/200831094719.htm

Mental Models: Streaking Star Effect or Bias: #65

Analogies help when we are faced with new challenges. Current events matter for the stock market, let’s frame these current events in relationship to historical perspective of the 2016 election and the impact of the market. ‘Political theater’ impacts the stock market, with the unknowns of the last 4 years and the uncertainty of the control of the senate for 2021.  The. Market is a forward looking mechanism and what is the market thinking about the future, in terms of the most positive and most negative outcomes. In reality even if you know the outcome, you don’t know the response that the market will take.  In six to 12 months there will be an economic recovery as the vaccine is distributed, the market will continue to watch .  Currently, There is a great deal of bullishness and optimism.  As the year ends that pattern will continue into 2021. Our next podcast #66 will focus on the stocks and industries that are the winners and losers of 2020, going into 2021 due to the COVID-19 effect.  For more on best investing strategies, avoiding bias and learning about your brain BUY 5 star reviewed book “Understanding Behavioral Bia$” on Amazon - link here: http://amzn.to/2XHtsOE  Continue to listen to Mental Models Podcast to avoid the biases that are keeping you from making a profit in the market. Stay safe and healthy out there!

Mental Models: Political Theater, Psychology and Stock Market predictions for 2021: #66

COVID-19 has created an unprecedented impact on the stock market.  There have been clear wining and losing stocks in 2020, where will these stock go in 2021? We review the uncharted stock market ahead, stocks to consider travel, #RV, #technologies, & #paper products. So much more to think about with the change that the vaccines for COVID_19 will bring - #hope for a healthier economy. For more on best investing strategies, avoiding bias and learning about your brain BUY 5 star reviewed book “Understanding Behavioral Bia$” on Amazon - link here: http://amzn.to/2XHtsOE  Continue to listen to Mental Models Podcast to avoid the biases that are keeping you from making a profit in the market. Stay safe and healthy out there!

Mental Models: Stock Winners and Losers heading into 2021: #67

Mental Models Podcasts predicts that this historic and unprecedented bubble will crash by the second quarter of 2021. Bubbles are driven by narratives.  Bubbles have an end but timing the end of the bubble is unknown, which is the risky part, and very different than sports betting. Predictors are, volatility, age tilt, issuance, market cave, and acceleration.
   How do you understand bubbles...visiting with historical features of bubbles, academic literature, lessons learned from Saberpoint Capital’s review, biases, and looking forward into 2021.  Robin Greenwood, Andrei Shleifer, and Yang You (2017) observed the period of 1926-2014 identified 40 different bubbles, suggesting bubbles are not that common. The four main findings are presented on pages 2-3 in Greenwood, et al, paper based on Eugene Fama’s work, see Link https://doi.org/10.1016/j.jfineco.2018.09.002. [Eugene Fama (academic papers listed below)] 
   A SPAC investment is a Special Purpose Acquisition Company (SPAC)”created solely to merge or acquire another business and take it public”, this is often a cheaper option to a PO (public offering).
  Biases to be aware of are optimism and fear of missing out that could push your towards the bubble.
   For more on best investing strategies, avoiding bias and learning about your brain BUY 5 star reviewed book “Understanding Behavioral Bia$” on Amazon - link here: http://amzn.to/2XHtsOE  Continue to listen to Mental Models Podcast to avoid the biases that are keeping you from making a profit in the market. Stay safe and healthy out there! 

Fama’s Academic papers:
Fama, Eugene F., 1965, “The Behavior of Stock-Market Prices,” Journal of Business 38, 34-105. 
Fama, Eugene F, and Kenneth R. French, 1992, “The Cross-Section of Expected Stock Returns,” 
Journal of Finance 47, 427-465. Fama, Eugene F, and Kenneth R. French, 1997, “Industry Costs of Equity,” Journal of Financial 
Economics 43, 153-193. Fama, Eugene F., 2014, “Two Pillars of Asset Pricing,” American Economic Review 104, 1467- 
1485.

Mental Models: Play and Understand Stock Market Bubbles: #68

Brain and Investing lessons that we took from the book Sapiens by Yuval Noah Harari (2017). An excellent read covering many surprising insights about human behavior from individuals to global institutions.
From a scientific standpoint this book highlights the unique cognitive capacity of Homo sapiens. We can imagine theoretical constructs that cannot actually exist. This tendency gave rise to our ability to create other fictions that we live by. These include monetary systems, corporations, and law structures. Group behavior and trust underlie many phenomena that we take for granted in our lives.

The book discusses the development of money, a powerful fictional construct that works because we all believe in the fiction and agree upon its value. Money can be viewed as a contract that enables us to transact on the fly. For more depth on this topic, please listen to Episode #2 of this podcast “Value drives our lives”

Another remarkably important development the book covers is the willingness of people to admit that they do not know something. Professing uncertainty serves as a driver for human progress. Admitting ignorance gives us a reason to explore the world and run experiments so that we find better answers. Our quest for learning enables us to fill in the blindspots that exist within our mental models of the world.

Another fascinating feature of our lives is that we now imagine a better future filled with dramatic progress. This is a new phenomena relative to many prior civilizations that did not have reasons for optimism, since they were much more subject to disease, lack of progress, and stagnation. Trust leads to cooperation which leads to growth. This leads to greater optimism and even more trust, which can transform a society for the better.

Chapter 16, The Capitalist Creed is likely the most interesting chapter for our audience. The insight that trust underlies credit is fundamental to progress. With credit, growth is possible in a nearly magical way. Paying back loans led to further extension of investment and this drove history forward, rather than the dictator model where a monarch determines that land should be acquired by conquest.

History is not predetermined. Rather, it is a dynamic series of complex interactions that can take unexpected turns and is often only predictable in retrospect. Please see our previous episode #13 on the Hindsight Bias if you find this topic compelling and want to hear more. 

A final interesting point about human progress is asking the question “are we happier?” after all of the progress that we have made. This remains open for debate and may inspire new research aimed at addressing our core needs as our lives become further enmeshed within technology and widespread information availability. We end by touching upon the intriguing topic of “brain hacking”.

Links: Sapiens by Yuval Noah Harari (2017)
Read more on Amazon https://www.amazon.com/Sapiens-Humankind-Yuval-Noah-Harari-ebook/dp/B00ICN066A/ref=as_li_ss_tl?pf_rd_m=ATVPDKIKX0DER&pf_rd_p=fcaa6d12-8b2b-4ad7-b277-864b2da79f6e&pf_rd_r=6FFDPEP8Z6AEX1RBSPTF&pd_rd_wg=Rl5OI&pf_rd_s=desktop-dp-sims&pf_rd_t=40701&pd_rd_w=T017i&pf_rd_i=desktop-dp-sims&pd_rd_r=3fdfa333-966e-11e8-a126-fd3c94bb211d&pd_rd_i=B00ICN066A&psc=1&refRID=6FFDPEP8Z6AEX1RBSPTF&linkCode=ll1&tag=natsite-20&linkId=42ececba032ff9e0d90705e1943bacac&language=en_US

Mental Models: Lessons for finance, economy, & human behavior. Book review of “Sapiens”: #69

Financial insecurity impacts our brain and body throughout human development. Stress is increased with more authority & responsibility. 
Lessons from of Robert Sapolsky’s book “Behave: The Biology of Humans at Our Best and Worst”
  For more on best investing strategies, avoiding bias and learning about your brain BUY 5 star reviewed book “Understanding Behavioral Bia$” on Amazon - link here: http://amzn.to/2XHtsOE  Continue to listen to Mental Models Podcast to avoid the biases that are keeping you from making a profit in the market. Stay safe and healthy out there! 

Sapolsky's book provides a bird’s eye view on how our behavior evolves from seconds to months and years prior to the time that we act.

It is well-stocked with excellent lessons about neuroscience, biology, genes, and culture. This lengthy book is engaging throughout and tackles complicated and controversial topics. Sapolsky provides an important biological link to explain the ways that we behave. He emphasizes that our biology is inextricably linked to our cultures and hierarchies. He takes on the challenges of social comparisons, wealth inequality, and systemic poverty. Relative positions in society link back to our mental health with implications for our health and biological function.

Human happiness in the corporate world is discussed. It is impacted by A. Autonomy, B. Place in the hierarchy, and C. Number of direct supervised employees. A and B impact our well being in a positive way, while C increases our perceived stress.

Three keys to lowering executive stress are noted: 
1. Maintain a strong place in a hierarchy 
2. Gain autonomy over your decisions
3. Outsource much of the daily micro management 

Other critical drivers of behaviors are discussed related to market participation. These include economic exchange games including the ultimatum game. People who participate in high trade volume (whether it be in a financial market or a street market) tend toward making fair offers. This establishes trust and reputation which lead to human thriving and the development of productive civilizations. This has implications about need for autonomy and experience in growing your own success. Zero-sum thinking leads toward people avoiding you. There needs to be a healthy balance between cooperation and competition. You can go very far in life if you ensure that you maintain mutual benefit with any sort of deal you make.

The book frames many sophisticated and complex behaviors in terms of evolutionary theory, genes, and neurobiology. Honor and revenge cultures lead to tremendous stress and unhappiness. 

Sapolsky reminds us that so many systems from culture down to genes is one of modulation. 

Links: Robert Sopolsky’s book “Behave: The Biology of Humans at Our Best and Worst”
https://www.amazon.com/Behave-Biology-Humans-Best-Worst/dp/1594205078

Mental Models: Money, genetics and your brain, lessons from “Behave” by Robert Sapolsky: #70

All about your brain & obtaining real-world behavioral finance knowledge! Listeners have access to original and engaging discussion of behavioral finance and cognitive bias.

Mental Models: Keys to Flexible Thinking and Problem Solving: #45

Mental Models Podcast | Behavioral Finance

Related tracks