Alphabrain: How a Group of Iconoclasts Are Using Cognitive Science to Advance the Business of Alpha Generation

298 Pages·2019·5.92 MB·English

by  Stephen Duneier

Table of Contents
Cover
Preface
How a Mistake Made Me a Better Investor
About the Author
Part I: Decision Analysis
Chapter 1: Marginal Improvement, Significant Impact
Decision-Making as a Skill
Spectators in Our Own Decisions
Marginal Improvement and Its Outcomes
Marginally Speaking
The Power of Avoiding Mistakes
Chapter 2: Blinded by Bias
Mistakes and Markets
Blind to Our Blindness
Minimizing Effort
Chapter 3: Rational Decisions
The Science of Decision-Making
Swing Analysis for Portfolio Managers
Asking the Right Questions
Mistakes in Common
Descriptive versus Prescriptive Decision Theory
Chapter 4: Decision Analysis
We Are All Students of the Same Game
Decision Analysis
The Biggest Mistake in Decision-Making
Chapter 5: How to Solve Any Problem
Close Enough
We See What We Are Shown
Stay Home, See the World
ABQs of Research (Always Be Questioning)
Working Smarter, Not Harder
How Information Can Lead Us Astray
Postscript
Chapter 6: Cerebral Junk Food
10 Reasons Listicles Are Bad for Your Health
You've Been Framed
A Picture Is Worth a Thousand Biased Words
How We Manufacture Uncertainty and Volatility
What Dieting Taught Me About Consuming Information
Chapter 7: The Input Paradox
Bowflex Behavior Modifier 2000
Dieter's Paradox
Negative Calorie Foods
Diversifier's Paradox
Illusory Invulnerability
Chapter 8: Auditing Mental Accounting
Example 1: Wasteful Education
Example 2: Drunken Economics
Example 3: Bet the House
Example 4: Half Off
How to Stop Turning Winners into Losers
Part II: Decisions in the Financial Context
Chapter 9: Mistakes at the Heart of Investment Management
A Common Risk Management Mistake
Why Risk Takers Stopped Taking Risk
Chapter 10: Manager Selection
Designing a Manager Selection Algorithm
Flipping the Frame
Stroke of Genius
The Definition of Actionable Intelligence
What Allocators Can Learn From Paper Traders
Chapter 11: Prophecy of Value
From Scalping to Trading
How Regret Makes Us Do Things We'll Regret
What Would You Do?
P&L Driven P&L
Chapter 12: Mind over Matter
Painfully Aware
Fooled by Stability
The 20/80 Rule
Why Size Matters
Lessons from Nick Saban and the Octagon
Doubling Down on Luck
Capitalizing on Change
Chapter 13: Coaching
Why Coaching Is a Waste of Time and Money
Why Even the Best Seek Coaching
The Power of Confronting Fear
Chapter 14: Trading Decisions
What Makes Trading So Difficult
The Freedom of a Straightjacket
The Natural Beauty of (Decision) Trees
Chapter 15: How to Stop Losing Money
How to Stop Losing Money on the Right View
I Knew It!
Stop-Loss Trade Entry
Easy Money
Positive Expectancy
Three Key Reasons Investors Should Use Options but Rarely Do
Chapter 16: The Danger of Shortcuts
Blinded by Myopia
Odometer Readings and Negative Interest Rates
Anchored to Missed Opportunities
Chapter 17: The Power of the Unexpected
Unconscious Influence
Ready, Fire, Aim
The Real Reason Commodities Collapsed
Slower Is Faster
Index
End User License Agreement
List of Tables
Chapter 1
Table 1.1 Novak Djokovic's overall performance, 2004–2016
Table 1.2 Novak Djokovic's performance, 2004–2016, including points
won
Chapter 9
Table 9.1 Jim's performance by month and year.
Table 9.2 Jim's performance with updated allocation.
Table 9.3 The initial $400 million investment, as a separate series from
the add...
Table 9.4 NFL 2014 season: points scored and games won.
Chapter 12
Table 12.1 Investment performance with and without systematic
adjustments
Chapter 14
Table 14.1 Prior to court ruling
Table 14.2 Decision matrix
Table 14.3 Seven scenarios: probability
Table 14.4 After court ruling
Chapter 16
Table 16.1 Actual versus predicted percentages of DAX winning
streak
List of Illustrations
Chapter 1
Figure 1.1 The Power of Avoiding Mistakes
Figure 1.2 Possessing a Competitive Edge
Chapter 2
Figure 2.1 Guilt threshold influence on verdict.
Figure 2.2 Rubik's Cube.
Figure 2.3 The brown and orange squares.
Figure 2.4 Hexadecimal code of the two squares.
Figure 2.5 What the brain sees.
Chapter 3
Figure 3.1 Lots of data from a small sample.
Figure 3.2 Age as related to fatal auto accidents.
Figure 3.3 Mistakes exist between how a decision is made and how it
should be ma...
Chapter 5
Figure 5.1 A portion of Brad Pitt's eyeball at 30x zoom.
Figure 5.2 Close-up of Chuck Close painting.
Figure 5.3 Twelve black dots on a dark-gray grid.
Figure 5.4 Twelve black dots on a light-gray grid
Chapter 6
Figure 6.1 Rental prices for top-floor NYC apartments based on the
label ($0–$1...
Figure 6.2 How to make smoking seem healthy.
Figure 6.3 CIPA camera production, 1947–2014.
Figure 6.4 Sven Skafisk's presentation of CIPA camera production,
1947–2014.
Figure 6.5 Counties with the lowest 10% age-standardized death rates
for cancer ...
Figure 6.6 Probability of o-ring failure
Chapter 8
Figure 8.1 USD/JPY spot
Chapter 10
Figure 10.1 Masters golf tournament.
Chapter 12
Figure 12.1 Scenario analysis: portfolio manager allocations
Chapter 14
Figure 14.1 A bullish investor
Figure 14.2 Expected trading range
Figure 14.3 Price action
Figure 14.4 Price moves down
Figure 14.5 Peak confidence
Figure 14.6 Spot trading probability
Figure 14.7 The effect of changing a stop-loss
Figure 14.8 Factors in a decision
Figure 14.9 Initial decision tree (left) compared with probability-
guided decisi...
Figure 14.10 Post-announcement decision tree
Figure 14.11 Post-ruling decision tree
Figure 14.12 Scenario 1 decision tree
Figure 14.13 Scenario 2 decision tree
Figure 14.14 Scenario 3 decision tree
Figure 14.15 Scenario 4 decision tree
Figure 14.16 Scenario 6 decision tree
Figure 14.17 Scenario 7 decision tree
Figure 14.18 Decision tree for Scenarios 1–7
Figure 14.19 Relevant variables only
Figure 14.20 Expectations for each branch segment
Figure 14.21 Private equity deal
Figure 14.22 Bad year 1
Figure 14.23 Bad year 2
Figure 14.24 Full expected returns in year 1
Figure 14.25 Shifting stop-loss higher (left) compared with proper
stop-loss pla...
Chapter 15
Figure 15.1 Commodity currency charts
Figure 15.2 USD/JPY spot
Figure 15.3 Probability distribution
Chapter 16
Figure 16.1 Auto odometer and value
Figure 16.2 Data mapped as a function of value
Figure 16.3 Velocity of money
Chapter 17
Figure 17.1 Long-term commodity charts
Figure 17.2 China's urbanization project
Figure 17.3 Durable consumer goods penetration in China
Figure 17.4 Annual disposable income per capita in China
Figure 17.5 China's urban population
Figure 17.6 Price and population in Victorian England
Figure 17.7 Peak oil
Figure 17.8 Production-weighted average miles per gallon
AlphaBrain
How a Group of Iconoclasts Are Using Cognitive
Science to Advance the Business of Alpha
Generation

Stephen Duneier