About Mental Models Podcast It's not a brain in a jar, that's the gist!
All about your brain & obtaining real-world behavioral finance knowledge! Listeners have access to original and engaging discussion of behavioral finance and cognitive bias.
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
17 Mar 2021
Mental Models: EV Bubble Bursting: #71
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
3 Mar 2021
Mental Models: Money, genetics and your brain, lessons from “Behave” by Robert Sapolsky: #70
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
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