BFM Sample Newsletter 2011

Be Aware of your Emotions - Step Away from Yourself

November, 2011

 Be aware of your own emotions and cognitive traps to make smarter decisions.
 Step away from yourselves to be more rational.
 Remember that we unconsciously make decisions based on positive memories.
 Learn about financial history to reduce the number of mistakes. Do not extrapolate recent past.
 Keep a well-diversified portfolio and an investment diary.
 Have a Financial Plan.

What are some of the behavioral traps that The other part of our decision making derives from
investors fall into at times like today? cognition. We tend to extrapolate from recent
events, and it‘s clear that since 2007, our assets have
According to Dr. Statman, the first issue is emotion.
gone down and we feel down. While we tend to
We need to be aware of our emotions to be able to
extrapolate from the recent past, thinking that low
step aside and watch ourselves.
returns will generate low returns in the future may be
Of course, the emotion of the day is fear. And we all wrong. In fact, on average, pessimism and fear are
understand that fear causes us to be very risk-averse, actually followed by relatively high returns rather
very pessimistic about the future, and we tend to than low returns.
make mistakes along the way.
When the market was at a low, like in 2002 (or in
2009 when we founded BFM), people were fearful;
many thought that now was not a good time to So how do investors get beyond those emotional
invest, and we know what happened after that and cognitive mistakes that they tend to make,
- a 100% bull run until 2007 (and another bull run of where they might be feeling irrationally pessimistic
85% of the S&P 500 from March 2009 to November at a time like this?
2011). In opposition, when the market was at a high
What is needed for us is to step away from
in early 2000, people felt no fear; they thought that
ourselves. Fortunately, we can do it. After all, we do
the market would provide high returns with no risk-
it when we watch a scary movie. We know that we
which, we know is not true.
feel scared, but we know that the threat is not real so
Now we are fearful and so we must be aware of that we don‘t get up and rush out of the theater. We can
and counter our emotions. do the same with the financial markets.

© 2011 Bourbon Financial Management, LLC ~ All Rights Reserved ~ Info@bourbonfm.com ~ (+1) 312 909 6539 1

We should tell ourselves, ‗I am afraid‘. We have to Should investors stay away from some stimuli like
temper our emotions by our reasoning. It is not watching business TV programs or watching their
trivial, but we do that all the time, and we have to do investment statements like a hawk?
it now.
Nowadays a large amount of investment is rushing
This varies by person. If you feel that watching
into gold bullion. Would it benefit investors?
television programs and reading newspapers that
No, says Dr. Statman, because investors are acting show scary things is really doing harm to you, stop
out of excessive fear or misjudgment. There is doing that, and if you are able to shrug, then go
nothing wrong with having some gold in a portfolio, ahead.
but putting a big chunk of a portfolio in gold would
Some investors are very concerned about the safety
be considered very risky.
of their portfolio. A lot of seniors are living on their
Research shows, there are some assets that people portfolios. What should this group of investors do?
love, and if you love it, you think it will have both
Keep in mind that we want two things in life. One is
high return and low risk. And obviously, gold is an
not to be poor and the other is to be rich.
asset that many investors love today, and they think
that it will have high returns in the future as it has For retired people it is not being poor that is
had in the past 10 years. In fact, the returns can be paramount. What is important is not only to have a
high or low, so if you overdo it, you may end up diversified portfolio, but also a portfolio that is less
being very rich, but you also may end up being very risky, a portfolio that has more bonds even though
poor. Thus, we recommend well-diversified the returns are very low. There is a need to calibrate
investment strategies that maximize the potential consumption.
for growth. Investing is really a matter of prudence, of being
able to calm yourself and being able to think
Are there any tips for countering those behavioral logically.
mistakes and the tendency to feel excessively
fearful during a market or an economic
environment like the current one?
Summary
Dr. Statman* says that we can control our own
behavior. We can control our own saving and
consumption rates. We can control our own In general, be aware of emotional issues and try to
portfolios, and so, the smart thing we can do is to counter them. Be aware of cognitive traps, and
keep a diversified portfolio. separate your emotion from reasoning. Never put all
We hope that everyday would show an increase in your resources in one basket, and consider the factor
the value of that portfolio, but we know that this will that you will live long but not forever so keep a
not happen. We learn to step away from ourselves reasonable asset structure.
and monitor our own emotions and thinking, so that
we make smarter decisions rather than poorer ones.
*
Dr. Statman is a Finance professor at Santa Clara University. BFM can help you make better, and more
informed financial decisions by giving you
straightforward and conflict-free investment
“The investor„s chief problem strategies. We make sure that you have enough
money as long as you live so that you can enjoy a
– and even his worst enemy – comfortable retirement at a chosen lifestyle with a
is likely to be himself” secured income while keeping your money safe.

Benjamin Graham


The Flaws of our Financial Memory Declarative memories are memories that people are
conscious of. It can be classified as either episodic or
semantic. In which, episodic memories are memories
The following chart shows the percentage of of significant things that happen to us or events that
countries in default over the last 200 years. The we experience, such as a wedding day, vacations,
peaks in sovereign defaults seem to recur without birthdays, or the first day at school. Semantic
exception every 30–40 years. This pattern is memories are factual memories that can be retrieved
occurring not only in emerging countries but also in at any point in time. It is factual information that you
developed countries. A similar pattern is also visible know, but you probably will not know where you
for currencies and in equity markets. It causes Mr. were when you first learned about it.
Klement (C.I.O. of Wellershoff) to consider why
investors tend to forget lessons of history. Non-declarative memories are the subconscious or
unconscious memories people have, such as how to
ride a bike or how to drive a car. We remember how
to do those activities, but after some practice, we do
not consciously focus on all the processes involved
in driving a car or riding a bike.

Classical Conditioning

Classical conditioning is best summarized by the
well-known Pavlov‘s dog experiments of the 1920s.
Mr. Klement believes that classical conditioning is
happening in the financial markets. For example,
during the technology bubble in 1999, Computer
Literacy Inc. changed its name to fatbrain.com. On
With his background in mathematics and physics, the day of the name change, its stock rose by 33
Mr. Klement was naturally inclined to look to the percent simply because it had renamed itself as a
natural sciences for explanations, especially the dot-com.
neurosciences, cognitive psychology, cognitive
neuroscience, and research about memory. Most investors during that time were trained to
equate dot-coms with a profitable investment, and it
became a self-fulfilling prophecy. The same thing
Types of Memories happened during 2004-2007, with companies that
added oil or petroleum to their name. The same thing
Memories can be divided into long-term memories is happening today for companies with ‗China‘ in
and short-term memories. Long-term memories are their name.
the things that people remember for months, years,
or even decades. In opposition, short-term memories If we looked for companies from around the world
are the things that people are consciously aware of that had changed their name to include the country
that they can use and remember for a few minutes. name ‗China‘ between 2000 and 2010, excluding
To remember things is the process of short-term companies that located in mainland China, Hong
memories becoming long-term memories. Kong and Taiwan, you would find at least 90
companies in the US, UK, Australia, and Germany
that added China to their names. Interestingly, in the
Long-term memories can be further divided into four months around the name change, the stocks of
declarative and non-declarative memories. those companies, on average, almost quadrupled in
price.


This example illustrates how individuals Flaws of Memory & Investors
unconsciously make decisions based on positive
memories from the past. Because of good Transience
experiences with Chinese stocks or Chinese
investments, investors equate China with a good Remembering a sequence of 10 colors is called a
investment, and it becomes a self-fulfilling prophecy digit span test, and if it‘s performed systemically, an
for some stocks. interesting effect occurs: people tend to remember 7
things (+/- 2) at a time, and they tend to remember
the first few and last few and forget the ones in
between.
Seven Flaws of Memories
Remembering the last few things that a person sees
There are 7 flaws of memories that can be grouped or hears is called the ―recency effect.‖ The recency
into 3 categories: effect may be the scientific underpinning of the
recency bias in behavioral economics.
Behavioralists know that people tend to extrapolate
Forgetting Things the recent past into the future and act accordingly
in their investment decisions.
This category includes transience, absentmindedness,
and blocking, which all have something to do with Remembering the first few colors or numbers that a
forgetting. It‘s natural that we tend to remember the person sees or hears is called the ―primacy effect.‖
gist of important things that we need to know or that The primacy effect is related to how people shape
have happened to us. Otherwise, if we never forget their behavior throughout their lives based on the
anything, there would be too much information for memories of what investment decisions they made
our brain to process. when they first started investing.

False Memories Thus, investors buy stocks that have gone up
dramatically over the previous 3–6 months and
The second category includes misattribution, avoid stocks or funds that have gone down over the
suggestibility, and biases, which contribute to previous 6–12 months. And the experiences people
remembering things that did not happen the way they have during their first years as investors will shape
are remembered or might not have happened at all. the way they think about markets for the rest of their
lives.
Traumatic Memories
However, these effects can be overcome through
It only includes persistence, which is about memories training. If something is practiced and repeated,
that people wish they could forget but cannot. then it can be memorized. The value of repeated
experience can also be reviewed as people tend to
use their investment experience to their own
advantage.

“Only buy something that A study by Greenwood and Nagel demonstrated the
importance of experience (figure 2). During 2000-
you'd be perfectly happy to 2002, the managers who were 25–35 years old
hold if the market shut down underperformed their peer group, whereas the fund
managers who were more than 45 years of age
for 10 years” outperformed their peer group. Recall that if
managers were older than 45 in 2000, they likely had
Warren Buffet vivid memories of previous severe bubbles and
crises in the markets, such as those in the late 1970s
and early 1980s.


In 2000-2002, the young managers stuck to Persistence
technology stocks and on average underperformed
their peer group, whereas the older managers started An example of how traumatic memories may affect
to outperform quite dramatically because they did investors is seen in those who grew up during the
not buy into the hype around the technology Great Depression in the 1930s in the United States.
securities as much as the younger fund managers. Check the difference in stock market participation
Both positive and negative experiences can be used and returns by the year of 1968, older investors (over
to train our memories. 40 years old) had on average almost 5 percent fewer
stocks in their portfolios than the younger investors.
Because most of the older ones experienced the
Misattribution Great Depression in the 1930s and they can never
forget that.
Research shows that we tend to remember things in
what is called a ―mind map.‖ We group similar A similar example is Germany, which is well known
information together, and the result is that for having a high savings rate. Most of the German
sometimes information is mixed up in our memory population suffered disproportionately from the
with other information that is stored nearby in our effects of two catastrophic wars and a disastrous
brain. period of hyperinflation—all within a short time.
Thus the influence on the succeeding generations has
The human propensity for sometimes not resulted in consumers who avoid investment in stock
remembering things or remembering false things is markets and do not buy houses.
often used in marketing materials.

“Risk comes from not
knowing what you‟re doing”
Warren Buffet


What can we do to be better investors? Thus the longer the time horizon, the more
investors can invest in equities because they have
First is to have an Investment Policy Statement or the time to bear the risks, suffer the downturns, and
a Financial Plan. Agreeing to and writing down wait for the markets to recover.
investment goals along with all the restrictions and
constraints, and then regularly auditing or reviewing The problem is that investing in times of rising
them. It helps managers to avoid going astray with yields means that bond investments may not create
investments or following the latest fashion or good returns. This observation is based simply on
technique, and it guides managers by keeping the the numerical effect that rising interest rates have on
client‘s stated goals at the forefront of their mind. bond prices and does not take credit risk into
consideration, which is a separate issue.
Another technique is to keep an investment diary.
For every investment decision good investors make, In the current markets, many people believe that
they write down the action, the reason why they did interest rates will go up for the next 10 years. As a
it, and what could possibly go wrong (the risks). result, it is likely that the most conservative
This tool helps prevent mistakes due to forget bad investors—that is, the ones with the most bonds in
decisions you have made. their portfolios—will be impacted from that effect.

Some lessons we might have forgotten

It is instructive to consider the concept of a portfolio ―We simply attempt to be
being underwater (current value of the assets is
below the initial value) from one starting point, and
fearful when others are
compare three types of portfolios for a U.S. investor: greedy and to be greedy only
a pure bond (government-only) portfolio, a balanced
50/50 stock and bond portfolio, and a pure equity when others are fearful.‖
portfolio. For a pure bond portfolio since 1985, the
maximum time underwater is about 19 months. For Warren Buffet
an equity portfolio, the maximum time underwater is
81 months. For a balanced portfolio, the maximum
time underwater is 58 months.


Summary

We all have flawed memories that can lead to
making poor decisions or repeating mistakes.
Memory flaws are observed not only in individuals
but also in the overall market. Financial market
participants seem to forget things that happened in
the past or be persistently influenced by recent past
financial events. Thus, learning about financial
history may be one of the best ways to prevent
“A man who does not
mistakes in the future. plan long ahead will find
trouble at his door”
Confucius

Patrick Bourbon, CFA

BOURBON FINANCIAL MANAGEMENT, LLC
Excellence ~ Experience ~ Ethics

616 W. Fulton St., Suite 411, Chicago, IL 60661
+1 312-909-6539 ~ www.bourbonfm.com

Member of the Financial Planning Association

Academic Affiliate of the National Association of Personal Financial Advisors

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How to Pick Better Mutual Funds?
* PEOPLE + PROCESS + PHILOSOPHY = PERFORMANCE * October, 2011

Dear friends, You should decide to be either patient with
active managers or seek a passively managed
If you have the time, desire, experience and approach. The vast majority of long-term top
knowledge of building your own investment and performing managers will endure periods of lousy
retirement portfolios, this newsletter is for you! performance.

At BFM, we are very analytical and we believe · 85 percent of all ten-year top quartile funds
that asset allocation is more important than spent at least one three-year stretch in the bottom
stocks or mutual fund selection… but many of half of their peer group (they spent about 23
you have asked us to share our disciplined due percent of all their three-year periods in the
diligence process to selecting investment bottom half of their peer groups).
managers and mutual funds.
· 62 percent of ten-year top quartile funds
Selecting a good mutual fund is extremely spent at least one five-year stretch in the bottom
difficult. Only 20% of funds may outperform half (19 percent of rolling five-year periods in the
their benchmark over the long run. 40% of funds bottom half of their peer groups). Source DiMeo.
that were in business 10 years ago are now gone.
A fund can be at the top one period and be at the Short-term greed and impatience will lead
bottom the next one. investors to fail. Before investing you should
develop confidence in the fund and the
As you can see, mutual fund returns can be very patience required for long-term success.
different (international fund category). Otherwise, you should invest in index and passive
funds (low costs).
10-year Value of
Name Return $10,000
“Do not wish for quick results, nor look for small
advantages. If you seek quick results, you will not
Old Mutual Copper Intl Sm Cap 50% $14,988 attain the ultimate goal.” Confucius.
Invesco International Sm Cap 417% $51,716
Human emotions are the biggest obstacle to
investor success. Proper research goes well
beyond the numbers. It also requires regular
The debate between active and passive meetings or calls with the managers. Natural
management (investing in index, passive funds human behavioral tendencies during the manager
and ETFs) is a constant discussion among selection and termination process generally leads
individuals in the financial world. There are to failure so we recommend a rigorous process.
qualitative and quantitative factors that need to be We believe that qualitative metrics for selecting
understood and analyzed correctly before picking mutual funds are as important as quantitative
a good fund. metrics.


What traits and factors do we look for, review Such data may not available by directly looking
carefully, and monitor constantly? into sources like Bloomberg, Morningstar, and
Lipper. This requires contacting every fund and
Qualitative factors: requesting them to provide the data.
1. People: education, qualifications, experience,
depth, stability, diversity, quality and diligence
of the investment team (portfolio managers, Quantitative factors:
analysts, traders, auditors…)
1. Fees*/ Expense ratio: Funds in the cheapest
2. Investment philosophy that is consistent, quintile were more than twice as likely to beat
clearly articulated and understandable the average for their categories than the most
expensive quintile
3. Investment process and style based on
meritocracy that are transparent, repeatable, 2. Tenure / Experience / Track Record of the
consistent, and definable with good buy and Portfolio Managers and Analysts. The average
sell discipline and risk management tenure maybe close to 6 years only…
procedures
3. Fund ownership** by the portfolio
4. Stewardship: a corporate culture of management team
excellence, with clean regulatory history,
board integrity, independence, ownership and 4. 5 and 10-year Information Ratio (IR) and
compensation who will put your interests first peer ranking. The IR measures the risk-
adjusted return for assessing the performance
5. Firm ownership structure of active portfolio managers
6. Manager compensation and incentives 5. Long-term after tax return / performance:
structure (salary, bonus, stocks, shares…) that GMO Emerging Country Debt had a 10-year
reward individual contributions annual return was 14.54% ($10,000 became
$38,880) but after tax, the post-tax return was
7. High conviction approach that is distinct and 9.80% ($10,000 became $25,468 or 35% less)
with potential to outperform. “Worldly
wisdom teaches that it is better for reputations 6. Consistency of portfolio returns with the
to fail conventionally than succeed investment process (attribution reports)
unconventionally.” J. M. Keynes.
7. Funds concentration
8. What percentage of research is generated
internally (vs. sell-side research from Wall 8. Tracking Error and Active Share: these
Street)? numbers represent how much the fund
returns deviate from the benchmark
We also review the portfolio composition, size
9. Beta and Correlation with the fund’s true
(small or large cap) and style of the funds,
Benchmark (R square)
manager concentration, and if a manager has
closed a fund to new investors in the past and ask
10. Inflows/Outflows and total assets in the fund
how they decide to close it in the future.
today and 5 years ago


11. Up/Down capture ratio and maximum
drawdown
*: Of domestic stock funds, 47% in the cheapest
12. Sortino Ratio which measures the risk- quintile beat the average over a 10-year period,
adjusted return while just 19 percent of the most expensive
quintile beat the category average. The cheapest
13. Volatility quintile of domestic-stock funds survived and
beat the cheapest index fund 29% of the time,
compared with just 17% of the most expensive
14. Turnover which measures the number of quintile. There is a high correlation between
times securities/shares are replaced/traded costs and survivorship, as high-cost funds have
a large attrition rate. Looking at rolling 5 and 10-
year periods for US stock funds, the cheapest
group had an attrition rate of 13% over 5-yr
The quantitative data is available from a variety of periods and 25% over 10-year periods. The
sources like Morningstar, Lipper, Bloomberg, attrition rate for the most expensive group was
fund prospectus, fund statement of additional double that: over 5-year periods, 29% of the high-
information, shareholder reports, fund cost funds had merged or liquidated and 49% had
companies… merged or liquidated over 10-year rolling periods.

You can see that these lists could include many
more factors. Also important is that these factors
**: We like managers to have skin in the game.
are not available easily. You need time and a
Does your Manager eat his own cooking? Would
good network to obtain all the necessary you invest in a fund when its portfolio manager
information. does not even invest in it? 46% of the US stock
funds managers report no ownership! 59% for
It does not end there. You may want to look at a international foreign funds managers. This
fund's correlation with other assets/funds in your information can easily be found at
portfolio to optimize your portfolio risk level and www.morningstar.com/goto/fundspy or in the
decide what capital allocation would be best to fund prospectus (statement of additional
minimize your downside risk. Short-term information. Higher investment levels aren’t a
performance is not important. guarantee of success or an ethical manager, but it
shows that managers believe in the funds.


DETAILS

Investment knowledge is imparted by investment
and finance professionals. These professionals
The world is a mix of different professionals. include individuals with professional degrees like
Every professional has his or her own duty to an MBA, Masters, CFA, CFP, CPA...
perform well, be it as a teacher, mechanic or
bartender. Many times individuals try to But in spite of the experience and education
experiment with ideas outside their expertise. professional investors possess it is difficult to
There is nothing wrong in learning new ideas; attain the highest skills in all the different
they rejuvenate you and can bring a fresh investment arenas. So, being a common person
perspective to your daily routine. But what is who does not work intensively in the world of
important is that you should not be over finance, you can see the complexities in making
confident in pursuing activities beyond your investment decisions.
expertise. For example, practicing skydiving
without a professional skydiver or dancing Ballet
without a ballerina’s guidance can harm your
body.
What Are Mutual Funds?

A mutual fund is a company that pools money
Investing your wealth, just like skydiving and from many investors and invests the money in a
ballet dancing, is an art. Investing without combination of stocks, bonds, and other securities
knowledge is like jumping into a valley or assets. The combined holdings that the mutual
without a parachute. fund owns are known as its portfolio. Each share
represents an investor's proportionate ownership
of the fund's holdings and the income those
There are two main categories of investments: holdings generate.

 Equity
 Fixed Income


Which Strategy to Choose: Active vs. Passive Management?

Passive Management is an investment strategy Active Management, on the other hand believes
that attempts to replicate the returns of an index the market can be inefficient sometimes.
or benchmark by owning the same assets, in the Managers attempt to add value over the returns of
same proportions, as the underlying index. Passive an index by picking assets based on models,
investing does not seek to capture any excess insights, and analytical research. Managers aim to
returns, but rather tries to match the performance achieve a higher return then the benchmark by
of the index. Indexed Mutual Funds and ETFs are selecting a superior stock, currency, market, or
common vehicles used for passive investing. sector, etc. Active managers will try to exploit
pricing inefficiencies to obtain excess return.
(Source: SPDR University).

Percentage of Active Funds are Underperforming the Benchmark

Efficient wealth management is a tedious and large-cap value and large-cap growth, all the other
time-consuming activity. It requires a categories have more than 75% of the funds
psychological self-understanding along with underperforming the benchmark.
excellent analytical and technical skills. Here we
look at how actively managed mutual funds have By looking at the numbers we can say that
performed across the years compared to their selecting a good mutual fund is extremely
respective benchmarks and the numbers are very difficult. Thus, effective organized financial
surprising. planning is important. The finance professional
cannot guarantee above average returns but some
The figures below are Equity and Fixed Income of them will be more adept and skillful in
mutual funds style boxes after adjusting for managing investments than a layman.
survivorship bias. We see that all the categories
have more than half of the funds
underperforming the benchmark. Also, except for

EQUITY FIXED
% below Value Blend Growth INCOME
benchmark % below
Government Corporate GNMA
benchmark
Large 56% 83% 73%
Short 94% 99% 100%
Mid 99% 96% 98%
Intermediate 80% 91% N/A
Small 84% 93% 76%

Sources: Vanguard calculations, using data from Morningstar, Inc., MSCI, Standard & Poor’s, and Barclays Capital


Why do active managements underperform active managers outperformed the relative indexes
benchmarks so poorly? An indexing investment only in three asset classes—small cap blend, small
strategy performs favorably in relation to actively cap growth, and international as shown in the
managed investment strategies because of figure below.
indexing’s low costs, broad diversification,
minimal cash drag, and, for taxable investors, the Research conducted in the 1960s by Jensen
potential for tax efficiency. Combined, these (1968), Sharpe (1966) and Treynor (1965) found
factors represent a significant hurdle that an active that, on average, active funds underperform their
manager must overcome just to break even with a benchmarks on a risk-adjusted basis and that the
low-cost index strategy over time. magnitude of underperformance directly relates to
the level of expenses.
Some studies support the notion that active funds
can sometimes outperform passive funds in less This debate about Active and Passive
efficient markets over certain down market Management is of constant discussion among
periods and sustained time horizons. individuals in the financial world. Thus, instead of
trying to find the winner the fundamental
A research report by State Street Global Advisors approach should be to ask: “How can I make the
and SPDR® ETFs for the 15-year period ended best decisions with respect to my goals and
December 31, 2010 found that more than 50% of objectives?”

Percent of Active Managers Outperforming Indices ~ 15-Year Annualized

Fixed Income 15%

Emerging Markets 42%

International 65%

Small Cap Blend 54%

Small Cap Growth 59%

Large Cap Blend 35%

Large Cap Growth 43%

0% 10% 20% 30% 40% 50% 60% 70%

Source: Morningstar Direct, SSgA Global ETF Strategy & Research as of 12/31/2010.


The decision to pursue passive or active management strategy should be decided based on understanding
your objectives by asking certain questions as shown in the figure below.

Do you believe
Do you believe that there are
that markets are some managers
generally who can
inefficient? consistently beat
the benchmark?

How comfortable Do you believe
are you with that you can find
taking on active these skillfull
risk? managers?

YES

ACTIVE MANAGEMENT


Passive strategies should be relied upon when your objectives, and understanding the factors like
the potential to beat the market is relatively poor taxes, fees and risk tolerance. The best investor
and to minimize tax liabilities related to capital would be the one who can identify market
gains. segments which are not efficient and employ
active strategies among those segments. In
Active Strategies should be pursued in those addition, one must identify superior active
markets which are less efficient and when you managers in asset classes where the manager has a
have high confidence. greater chance of outperforming.
You should make a decision as to which is the (Source: Passive and Active Management , A Balanced Perspective
correct and advisable strategy after accounting for Thomas Guarini, ETF Strategies, Global ETF Strategy & Research, State
Street Global Advisor)

We just saw the strenuous procedure involved Picking the right mutual funds is not an easy
into opting for passive or active management. task. There are qualitative and quantitative factors
Now the active investor needs to create a universe that need to be understood observed and more
of Mutual Funds to choose from. Creating this importantly analyzed correctly.
universe of funds involves tremendous skills in all
aspects. The active investor needs to have good
analytical as well as technical skills. Also
important are qualitative aspects like good
networking skills and having knowledge of
behavioral finance.

Manager Due Diligence
It is very important to perform diligence on the team changes every year. We would want the
company and its management, to know whether same management for at least 10 years. We
the management is engaged in costly litigation or need to evaluate how a manager has done in the
is involved in finding innovative ideas for the long-term. Why?
firm.
Short-term performance is of little use in picking
The performance of a mutual fund is largely a fund that you’re going to hold for the long term.
driven by the manager and his/her team. Funds with the top trailing one- and three-year
returns may continue well over the next short
Investment style, people, philosophy and term period, but may fare poorly over the long
performance are all carefully reviewed in the term.
manager search and selection process.
How big is the team? We prefer firms with a
The fund’s manager tenure period is looked at. strong team of analysts.
You would not want a fund whose manager and


How is the management team compensated? We expensive 20% of equity funds. (Source: Fund Spy by
are more interested in private firms, where Russell Kinnell)

managers receive ownership stakes in the firm. We review how managers performed in the past,
We want funds with at least enough assets under during bull markets and bear markets. We like
management because this will generate enough downside protection. Once a manager’s past
revenue to pay the salaries of good analysts and performance is understood, expectations can be
keep them for many years. set for future performance. These performance
We like for managers to have skin in the expectations and an investor’s tolerance for risk
game. We look at a manager’s ownership in his should be explicitly discussed and accepted when
or her own fund and like to see ownership valued selecting a manager.
at $500,000 or more. You wouldn’t like to see a Even after a manager is selected, constant
CEO who doesn’t own any stock in his own monitoring and reviewing is a difficult task.
company and for that reason we demand it in Unfortunately, ongoing manager review often
fund managers. becomes an afterthought or is not even discussed.
With regard to the fund’s portfolio, we want a low We review if a manager has closed a fund to new
turnover because it gives a low tax impact. investors in the past and ask how they decide to
close it in the future. Closing a fund means a fund
We want funds to have concentrated company is passing up fee income and hurting its
portfolios with fewer stocks. If the mutual fund own short-term profits in order to avoid letting
owns so many stocks, it may be better to just buy asset growth harm performance of the fund.
the index which is cheaper. We pay managers to
take risks. The managers selected should remain true to the
style and asset class for which they are being
What is the investment strategy? Funds that rely selected. A large-cap growth manager should not
on momentum strategies to buy hot stocks incur deviate drastically from his/her intended strategy.
greater trading costs than those more contrarian
Any change to the investment team should be
strategies that involve buying the stocks that
immediately reviewed. Changes to senior
everyone is desperate to sell. Like Warren
management or to the structure or ownership of
Buffett, we believe in buying stocks and
the firm should also be evaluated with a critical
holding it for the long-term.
eye as to their impact on the investment team’s
We prefer no-load mutual funds with low time, resources and capabilities.
expenses for several reasons. First, it shows that a
manager keeps business costs under control.
There is a high correlation between costs and
survivorship, as high-cost funds have a large
attrition rate. Second, fees reduce investor * People + Process + Philosophy = Performance *
return. When the cheapest 20% of equity funds is
compared to the cheap index fund, it is twice as
likely to beat the index as compared to the most


Let’s Put Things in Perspective

September 2011

Summary

• This summer’s stock decline was nothing exceptional (only down
8% in July/August)

• The economy doesn’t look that bad

• Equity valuations are O. K.

• Equities tend to perform well over the long-term, sometimes right
after a major correction and/or spike in volatility

© 2011 Bourbon Financial Management, LLC 2

Details

• U.S. Stocks have been going up in the long run and outperformed bonds most of the time over any 5-year periods

• Historically stock market declines have been much worse: down 86% in 1929-32, 49% in 2001, 57% in 2007-09…

• Other asset classes have seen much worse decline:
• Long U.S. Treasury Bond real return was negative 67% between 1941 and 1981.
• Gold was down 62% between 1980 and 1986
• Japan Stocks were down 82% between 1990 and 2009

• Most declines have been followed by 5 years of gains

• Nearly every significant up year for the markets had also a significant intra-year decline

• When the volatility is high, markets often rise

• U.S. Companies are in much better shape (profits, cash holdings, dividend payouts) than in 2000

• The Yield curve is usually flat before recessions. It is far from flat now

• When consumer sentiment bottoms, the following 12 months tend to be good for stocks. Extreme pessimism in
consumer confidence may be a bullish sign for the market

• Moderate GDP Growth (2%-3%) has not been bad for stocks historically. But can we keep a 2%+ growth?

• DIVERSIFICATION WORKS!


U.S. Stock Market History: Volatile but Going Up


Stocks Outperformed Bonds Most of 5-Year Periods


Historical Markets Declines: We Have Seen Much Worse

Trough=Bottom - As of Mid August 2011


Many Declines Have Been Followed by 5 Years of Gains


Intra-Year Declines Happen Very Often


When the Volatility is High, Markets Often Increase


U.S. Companies Today vs. 2000


Slowdowns Do Not Mean Recessions All the Time


Initial Job Claims Is Down: Usually, it is Up Before Recession

Recessions are in Grey


Yield Curve is Not Flat: Usually, it is Flat Before a Recession


The Current P/E Ratio is Not High


Consumer Sentiment Bottoms = Good 1-Year Stocks Returns


Leading Indicators Index Does Not Yet Predict a Recession


Moderate GDP Growth (2% - 3%) Has Not Been Bad for Stocks


Cash Underperformed Historically Over 1-Year Periods


Diversification Works

• If you had a “All Cash Portfolio” between January 2008 to April 2011, your portfolio
returns would have been 0.2%.

• If you had a “All Stock Portfolio” between January 2008 to April 2011, your portfolio
returns would have been 3.1%. Your portfolio would have been very volatile. Down 48%
then up 20%.
• If you had a “Diversified Portfolio” between January 2008 to April 2011, your portfolio
returns would have been 8.1%.


Quote


Disclosures
• This material was prepared by BFM, Copyright by Bourbon Financial Management, LLC. All rights reserved. BFM is a
trademark of Bourbon Financial Management, LLC. No part of this publication may be copied or distributed, transmitted,
transcribed, stored in a retrieval system, transferred in any form or any means-electronic, mechanical, magnetic, manual, or
otherwise-or disclose to third parties without the express written permission of Bourbon Financial Management, LLC, 616 W.
Fulton #411, Chicago IL 60661. The information contained in this presentation is not written or intended as tax or legal
advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice
from your own tax or legal counsel. The content is derived from sources believed to be accurate. Neither the information
presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. BFM assumes no
responsibility for statements made in this publication including, but not limited to, typographical errors or omissions, or
statements regarding legal, tax, securities, and financial matters. Qualified legal, tax, securities, and financial advisors should
always be consulted before acting on any information concerning these fields.
• All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an
investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The
views expressed in this presentation are not intended to be a forecast of future events, a guarantee of future results or
investment advice. The information contained herein has been prepared from sources believed to be reliable, but it is not
guaranteed by Bourbon Financial Management, LLC as to its accuracy or completeness. Forecasts and predictions are
inherently limited and should not be construed as a solicitation or recommendation or be used as the sole basis for any
investment decision. All investments are subject to risk including the loss of principal.
• The information provided here is for general informational purposes only and should not be considered an individualized
recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for
everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any
investment decision. We believe the information obtained from third-party sources to be reliable, but neither Schwab nor its
affiliates guarantee its accuracy, timeliness, or completeness. The views, opinions and estimates herein are as of the date of the
material and are subject to change without notice at any time in reaction to shifting market conditions. Past performance is no
guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Examples
provided are for illustrative purposes only and not intended to be reflective of results you should expect to attain.


Human Brain and Decision-Making
Factors behind Investor Choices August, 2011

Dear Friends, In research conducted by Loewenstein &
Kalyanaraman (1999), a group of people were
The age old phrase: “You Reap What You Sow”
asked to pick one movie (out of 24 titles) for
emphasizes the fact that it is very important to
the same night, one week later and two weeks
make the right choices now to reap the desired
later. These movies were broadly classified into
benefits later. But making a choice is not always
two segments:
easy. Today’s world offers so many options in
everything that a simple decision--like ordering  Highbrow (e.g. Schindler’s List)
from a menu at a new restaurant--becomes a  Lowbrow (e.g. Four Weddings and a
time and effort consuming process. Funeral)

Every available choice in a decision making About 66% of the group picked a lowbrow
process offers a level of utility to us. Utility (or movie title to watch on the same night. While
expected utility) can be defined as the level of choosing a movie for next week, only 34%
relative satisfaction that can be achieved from picked a lowbrow movie. When they were
the outcome (or expected outcome) of a asked to pick a movie to watch two weeks later,
decision. 29% of the group chose from the lowbrow
titles.
There are many factors that can affect the
utility associated with an option. But one of the The results indicate that people appear to have
main factors that affect the utility of an option a preference towards immediate rewards and
is the time delay between making a decision discount the value of all delayed benefits.
and receiving its outcome or benefit. The
research that we cover in this newsletter deals To get a clearer understanding of how the
precisely with how utility varies with time increase or decrease in time affects the utility
differences and how our brain makes decisions of a choice, let’s take a look at another
based on it. We first discuss some ground experiment by McClure, Ericson, Laibson,
breaking experiments and results in decision- Loewenstein and Cohen, 2007.
making, then we link those results to making
investment decisions and finally, based on the
research, we suggest some best practices to
improve financial decision-making.

‘Tonight I want to have fun; Next week I
want things that are good for me’

© 2011 Bourbon Financial Management, LLC. All Rights Reserved. Info@bourbonfm.com. +1 312 909 6539. 1

The Effect of Time Delay on Decision b) The second observation was that short term
Making: discounting was greater than long term
discounting. In other words, a delay of 5
In this experiment a group of extremely thirsty minutes between now and receiving actual
people, were presented with the choice of two benefit was a bigger factor in deteriorating
options: the utility of a choice than the same
 One cup of orange juice immediately. difference 20 minutes into the future.*
c) A choice that appears to be rewarding to
 Two cups of orange juice after 5 minutes.
the brain may not necessarily be a result of
Although the common notion may be that a analytical thinking. It could also be a result
greater quantity is preferable, the results of emotions. For example, the decision to
strikingly differed from this expectation.. About have a slice of chocolate cake instead of
60% of the group chose to immediately have fruit salad, when following a low calorie diet
just one cup of orange juice. In this situation, is not a logical decision but is based on
the 5 minute time gap played a huge role in feelings of temptation.
diminishing the utility of two cups of orange
Another experiment quoted in research by
juice relative to just one cup--even though the
Choi, Laibson, Madrian, Metrick (2002)
quantity possible was plainly greater in the
demonstrates a similar behavior where the
second option. In another round of a similar
subjects of the experiment do not make logical
experiment, the thirsty subjects were given a
choices even when it concerns their own
different set of options:
savings. In a survey that was conducted
 One cup of orange juice after 20 minutes amongst 590 employees of a company, each
 Two cups of orange juice after 25 minutes. employee was asked the following two
questions:
When given the above set of choices,
approximately 70% of the people chose the  Do they feel they are saving too little?
second option. In this scenario the utility of  If yes, then would they raise their savings
higher quantity of juice was not diminished by a rate in the next 2 months?
5 minute difference. Remarkable! Isn’t it? This
68% of all the 590 employees thought that they
experiment helped establish the relationship
were saving too little. Despite this initial
between the delay in the reward and
answer, of 590 people surveyed, only 24%
discounting of its utility. There were two
planned to raise their savings rate. After two
important observations from this experiment:
months, administrative data on their savings
a) The first observation was that the human was collected to find out how many people
brain discounts the utility of a delayed actually increased their savings. Surprisingly,
reward. only 3 percent of all those who were surveyed,
actually followed through on their thoughts.


The result defied logic. Even though 68% of the are two separate neural systems in the brain,
group felt their savings were low, only 3% took the Mesolimbic dopamine (M-D) system and
measures to increase their savings. the Fronto-parietal (F-P) system.

This behavioral phenomenon suggests that The M-D neural system was found to be
decision making by a human mind is affected involved with emotional activities and was
by many other factors and not just for more active when the subjects chose smaller
analytical reasons. and immediate rewards.
*Ramsey (1930s), Strotz (1950s), & Herrnstein (1960s) were the
first to understand that discount rates are higher in the short The F-P neural system was more active when
run than in the long run. larger, delayed rewards were chosen which
required analytical thinking.
Decisions: Products of Analytical &
Emotional Brains These two systems operate in conflict with
each other. The brain then makes a decision
based on the combined effect of the activity in
these two systems

For 14 female thirsty test subjects presented
with delayed juice and water rewards, McClure,
et al. observed neural activity which implied
that brain areas produced a discount factor of
0.96/minute. Referring to our earlier example
then, a discount rate of 0.9625 = 0.36; 0.9620 =
0.44; and 0.9605 = 0.82. (An 18% loss from the
zero to 5th minute, versus a am 8% loss from
the 20th to the 25th minute.) Perceived value
declines steeply in the near term, but soon
levels off to an analytical value.

Or, in simpler words, all decisions, choices and
actions are affected by both of these neural
systems.

Researchers are beginning to measure how
people perceive time and discount value with
fMRI scans. In a scientific study of human brain
activity (McClure, Laibson, Loewenstein, and
Cohen Science, 2004), it was found that there


A question that may come to the mind at this principles like mean reversion, long term
point is: How does all that scientific jazz relate investing and market efficiency have either
to financial decision making? benefitted from such market movements or
have been able to avoid major losses to their
Well, at BFM, we want our clients to be very
investments.
careful, patient, analytical and logical when it
comes to making important investment
decisions.

The recent times of economic slowdown and
highly volatile market activities have tested
investors’ patience to a great extent. But a
majority of those investors who believe in

Our Advice
We can point to some general practices that can help investors improve their investment decision
making:

 Thinking more analytically when making important financial decisions.
 Being pro-active, curious and non-assumptive at
all times and spending time to evaluate
Weigh your choices carefully!
investments, possible risks and benefits.
 Continuously striving towards improving self-
control and avoiding hastiness. “In the short run, the market is a
 Avoiding making any important investment voting machine. In the long run,
decision while being in a passive state of mind. it’s a weighing machine.” –
 Creating a balance between being patient and Benjamin Graham
being dynamic about investment choices.


Challenges in Financial Advising From the
Scope of Behavioral Finance July, 2011

Dear Friends,

In today’s world, especially after the recent decisions but it could also lead to irrational or
financial meltdown, understanding the human poor decisions, which could be a big issue if
emotions and sentiments before investing these are financial decisions.
money is capturing interests of researchers and
Reflective mind is the one which is slow,
advisers. We too continue our long love with
analytical and requires conscious effort. It leads
Behavioral Finance and present you some
to more thoughtful and rational decisions.
interesting findings by researchers in this area.
Financial Adviser’s role is to understand the
Before we discuss the topics in detail here is a
reflective mind of clients and help them to
brief introduction on Behavioral Finance.
reduce the mistakes caused by intuitive mind.
‘Behavioral Finance combines the
psychological characteristics with traditional Investor Paralysis:
finance principles in evaluating an investment.
The psychological fallout of the ‘08-‘09 financial
Behavioral finance focuses on the cognitive crisis was very profound. Huge amounts of cash
and emotional aspects of the investment were left idle for a long time as investors
decision-making process.’ thought that the market was still bearish.
At the start we discuss Intuitive and Reflective Financial Advisers themselves can become a
minds. Following up are discussions on Investor subject to this behavior known as Investor
Paralysis, Lack of Investor Discipline and Loss of Paralysis.
Trust by Shlomo Benartzi, Ph.D, UCLA Anderson
School of Management and some other
researchers. We conclude by providing some
interesting solutions to overcome the 3
mentioned behavioral finance challenges and
why they should be understood by financial
advisers and clients.
A solution to Investor Paralysis is ‘Invest More
Intuitive and Reflective Minds: Tomorrow’ program which relies on
overcoming loss aversion and procrastination.
Intuitive mind is the one which forms quick
judgment with great ease, less effort and with
no conscious input. Often it can lead to wise


Lack of Investor Discipline: affected if the national team loses a big trophy
(Source:Edmans et al., 2007) .
From years it has been noted that investors buy
high and sell low. They also often buy the Thus we see that investors lack discipline in
wrong stocks, sell the wrong stocks and, in making sound investment choices and have
normal times, do far too much buying and their emotions, peers and intuitive mind take
selling. A winning stock offers the opportunity decisions. The challenge for behavioral finance
to sell, and lock in a gain and hence the is to find ways to help people not go with the
investors do so to experience the pleasure of crowd, and not be susceptible to the errors of
that gain. This is a positive investing episode. A the intuitive mind. We discuss later the Ulysses
losing stock involves the prospect of incurring a Strategy as a recommended solution.
loss. Investors hold on to such stocks in an
attempt to avoid a negative investing episode
(Source: Barberis, Xiong, 2010). This is not because Regaining and Maintaining Trust:
people are stupid, they are just humans.
Apart from Investor Paralysis, the recent
A study of 66,465 individual investors over a financial meltdown has also had a huge impact
six-year period in the United States found that on the bond of trust between financial advisers
the average investor turned over 75 percent of and their clients. According to a survey by
his/her portfolio each year. Due to transaction Chicago Booth/Kellogg School Financial Trust
costs associated net performance was reduced Index, at the beginning of 2009 only 34 percent
by 3.7%. (Source: Barber and Odean, 2000; Daniel et al., of Americans expressed trust in financial
1998).
institutions. Thus rebuilding trust is of top
priority for financial advisors & institutions,
even if their strategies did not lead directly to
clients’ losses (Gounaris and Prout, 2009).

The bruised psychological state of investors has
been likened to the feelings of betrayal
People buy stocks on a simple rule of thumb, or following the discovery of a partner’s affair.
heuristic: Follow the news i.e. Buy the stocks if
Demonstrating empathy and competence is the
the company is in news. This is the intuitive
key to regain and maintain the trust.
mind taking the easy way to making a choice,
but the reflective mind might reject the choice
wanting a more rational decision. Stock
markets often move in response to many
factors unrelated to true value. For example a
soccer mania country’s stock market gets


Researchers’ advice and what we at BFM strive to practice!
1) A potential solution to Investor Paralysis can be solved using ‘Invest More Tomorrow’ Strategy. This
strategy works on the lines of ‘Save More Tomorrow (SMarT)’ program. There are two parts to the
Invest More Tomorrow strategy: first, overcoming the fear of seeing the value of the portfolio decline,
or loss aversion; and second, overcoming the strong tendency to put off until tomorrow what one
should be doing today, or procrastination.

Overcoming Loss Aversion: Instead of investing all the cash at one go in the market, the investor can
invest periodically. The advantage here is that if market falls, the investor sees an opportunity to buy
cheap with the next purchase. In other words we can say intuitive mind does not react negatively
because the reflective mind turns the downfall into an opportunity.

Overcoming Procrastination: ‘SMarT’ worked by asking people to commit to increase their
contribution/saving rate in advance. In a similar way, Invest More Tomorrow involves clients to pre-
commit going into the market in the future at a specific time chosen by the investor themselves. Pre-
commitment is the important psychological element here as it results into a question of what to buy at
that point rather than whether to buy at that point.

We can summarize the Invest More Tomorrow into the following 3 steps:

1
• Clients should pre-
commit to invest at
a certain future
time and date.

• Work with clients to

2 agree on the size &
frequency of
periodic
investments.

3 • Decide in advance
on nature of assets
to be purchased.

(Source: Shlomo Benartzi, Ph.D, Chief Behavioral Economist, Allianz Global Investors)

© 2011 Bourbon Financial Management, LLC. All Rights Reserved. 7

2) To overcome Lack of investor discipline one solution is The Ulysses Strategy. The phrase “Ulysses
contract” refers to a decision made in the present to bind oneself to a particular course of action in the
future.

In this strategy the clients are advised to engage their reflective mind to pre-commit to a rational
investment strategy. Pre-commitment to a rational investment plan is important; otherwise the
intuitive mind might trigger irrational investment responses later when market conditions tempt them
to follow the herd. Also a memorandum is signed. This memorandum is not binding, in the sense of a
legal contract but it helps clients to stick with the plan when changes in market conditions tempt them
to go with the herd.

• Help clients

1 understand the
impulsive nature of
investment
decisions.

2
• Discuss what action
would be taken
when, for example:
index 30% down.

3
• Sign a commitment
memorandum, with
both client and
advisors.

(Source: Shlomo Benartzi, Ph.D, Chief Behavioral Economist, Allianz Global Investors)

3) A 2010 Golin/Harris survey revealed that the most effective action to restore broken trust is to be
“open and honest.” To regain or maintain trust demonstrating competence and empathy is important.

When performance exceeds expectations, it is human tendency to proclaim full credit but during
downfall the tendency is to blame luck and other external factors. However, this is unwise to do.
Admitting luck at the good times portrays honesty to the shareholders. Warren Buffet himself is a
student of this belief.


Talk about the downside before presenting the upside. By talking about the downside first, the
financial advisor is displaying honesty that generates a greater willingness in the listener to trust what
is then said about the upside.

Apart from making investment decisions for clients putting value on the human side of business has
been described as “relational intelligence”.

Clients portray embarrassment i.e. even if they do not understand a strategy perfectly they will not
admit it openly. So instead of asking questions like: “Is there anything about our strategy you don’t
understand one should ask “Is there anything about our strategy that I can clarify?

Competence

• Admit Luck.
• Discuss downside before upside.

Empathy

• Have frequent contact with clients,
especially in difficult times.
• Allay embarrassment.
• Seek feedback.

Source: Shlomo Benartzi, Ph.D, Chief Behavioral Economist, Allianz Global Investors)

Overall we advice that pre-committing to a strategy reaps future benefits. A good analogy for the discussion can
be with someone who wants to start going to the gym but keeps delaying: “I’ll start that exercise program next
week, I promise! But it never happens. So do not make the same mistake with your investments!

We at BFM understand investors look beyond financial advice and we are here to give you a whole new
investment experience!


Countries and Culture in Behavioral Finance
A cumulative overview June, 2011

Dear Friends,

Recently, the subject of Behavioral Finance has been of intense research for finance professionals.
Contrary to the traditional principles of finance (risk and return), investors combine their psychological
characteristics with finance principles in evaluating an investment.

Every individual has his or her own opinions, interests, dislikes etc. But when researched deeply, it has
been understood that the surroundings and culture of the investor also play a decisive role in his or her
behavior.

Behavioral finance focuses on the cognitive and emotional aspects of the investment decision-making
process. Although we can say that people are built mentally and physically the same everywhere, the
collective set of common experiences that people of the same culture share have will influence their
investment decisions. Thus, different cultures and countries show different behavior towards
investment decisions.

We first discuss briefly different cultures with some real life incidents and surveys, and then we
describe the difference in propensity for risk tolerance among countries and cultures and how
individualistic-collectivistic line affects the risk tolerance. In the end we give a brief summary about
Islamic Finance which shows us how a culture affects investment decisions.

Difference in Cultures

Incident 1:
Meir Statman, Professor at Santa Clara University experienced this incident when he came to the US
from Israel to pursue a PhD at Columbia University. While sitting in a train Meir overheard a
conversation: “I told my daughter that I would support her through college but she is on her own
afterward.” Meir was astonished. The culture in Israel was one in which parents continue to support
their children even after college and sometimes also after marriage. (Source: Countries and Cultures in
Behavioral Finance, Meir Statman)

Incident 2:
A British National went to Saudi Arabia to work not aware of the cultural differences between the
countries. On his arrival the British Embassy handed him a guide which said “Sentences for alcohol
offences range from a few weeks or months imprisonment for consumption to several years for


smuggling, manufacturing or distributing alcohol. Lashes can also be part of the sentence”. Saudis
understand that the ways of non-Muslims are different from their own and they will not generally
interfere with what foreigners do. But foreigners who take advantage of this to break the law are
running serious risks. This surprised the British National but he had to follow the law to continue
working in Saudi Arabia.

Survey 1:

In their work, “Cultures of Corruption: Evidence from Diplomatic Parking Tickets,” Fisman and Miguel
(2006) examined whether diplomats took advantage of immunity from prosecution to park wherever
they wanted in New York City without paying parking fines.
The following results were observed:
 Diplomats from Kuwait, for example, accumulated 246 tickets per diplomat during 1997–2002.
 Diplomats from the UK, Holland, Australia, and Norway accumulated no parking tickets.
 Even more interesting is that the number of parking tickets per diplomat was generally higher in
countries where corruption levels are higher.
 Conclusion: People import norms from the culture they know into their new surroundings

Survey 2:

Propensity for Maximization:

Question: “I always want to have the best. Second best is not good enough for me.”

Propensity for Regret:

Question: “Whenever I make a choice, I try to get information about how the other alternatives turned
out and feel bad if another alternative has done better than the alternative I have chosen.”
Score: (Strongly Disagree) 1 2 3 4 5 6 7 8 9 10 (Strongly Agree)

(Source: Countries and Cultures in Behavioral Finance, Meir Statman)


BFM Sample Newsletter 2011

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