FINC. LIT.

• Auction


  • The winner will get the note
  • The runner-up will have to pay the amount of his bid
• Auction bidding


  Bid starts at Rs.10 and in multiples of Rs.10
• Humans are always distracted
• Our brain is wired to notice certain things
• We come to conclusions fast
• Insurance policy offer


  • Pay Rs.50000 per year for 5 years
  • 15 years from now, get back Rs.50000 per year for 15 years
• How does this sound?
• Is this a good return or bad?
• Kitna % per year return hoga?
• Behavioural Finance


  • It is an economic theory which explains irrational financial behaviour
  • This happens since our emotions overrule our rationality
  • Evolution and our mental wiring
  • Behavioural finance identifies, defines and documents biases
  • Understanding these biases helps us be mindful and guard against them
• Endowment effect


  We consider what we have to be more valuable
• Endowment effect scenarios


  • You have won an iPhone worth Rs.100000 in a lucky draw. Your friend offers to buy it from you. What is the minimum price you will expect?
  • Your friend has won an iPhone worth Rs.100000 in a lucky draw. You offer to buy it from him. What is the maximum that you will offer to pay?
• Loss aversion


  We find the funda of guaranteed loss to be unimaginable
• Loss aversion scenarios


  • There is Rs.1000 in front of you and you have been given 2 options: Option 1: Guaranteed win of Rs.500, Option 2: Flip a coin. If its 'heads', you get Rs.1000, if its 'tails', u get nothing.
  • There is Rs.1000 in front of you, and you are given 2 options: Option 1: Guaranteed loss of Rs.500, Option 2: Flip a coin. If its 'heads', you lose Rs.1000. If its tails, you lose nothing.
• Disposition effect


  The funda of at least cost-to-cost bechungi
• Disposition effect scenario


  • You had bought stocks A and B. The current situation is like this: Company A buy value Rs.100000, market value Rs.500000, profit Rs.400000. Company B buy value Rs.100000, market value Rs.95000, loss Rs.5000. You are in need of Rs.90000. Which company shares will you sell?
• Confirmation bias


  • Seeking out information or data that suits and supports your already-made decision
  • Absence of perspective and counter opinion. One-sided view
  • Media and social media amplifies this. Not just investing, in every aspect of life
  • We become opinionated individuals with lack of data and facts
• Confirmation bias example


  • Tell me one investment you like...
• Self-serving cognitive bias

  If I score good grades, it was because: I am intelligent, sincere and hard working. If I score bad grades, it was because: the faculty is partial, my health was not ok, my parents don't support, my friends don't let me study, etc etc etc. Same happens in investing.
• Instincts


  • Evolution has made us what we are in a certain way
  • There are instincts which are hard-wired in your brain and mental makeup
  • These instincts have helped us survive and thrive as a species
  • But these same instincts make us bad investors
• Instincts that make us bad investors

  • Instinct to flee
  • Instinct to avoid pain
  • Instant gratification
  • Instinct to form groups
  • Instinct to justify
  • Instinct to do activity
• Scam


  A deceptive scheme or trick designed to trick someone into giving away money, personal information, or valuables
• Fraud


  A broader term that encompasses various dishonest or illegal activities committed to gain something of value, such as money, goods, or services, through deceit

  
• Scams


  A subset of fraud, as they involve deceptive tactics to achieve fraudulent goals

  
• Types of scams


  • Phishing Scams
  • Identity Scams
  • Investment Scams
  • Money Lending Scams
  • Dating Scams
  • Payment and UPI Scams

  
• Types of financial scams

  • High Yield Products
  • Chit Fund Scams
  • Property Scams
  • Security Scams
  • Rare Objects
  • Commodities

  
• Common in most financial scams

  • High Return
  • Short Time
  • Aggressive Selling
  • Intelligent Arguments and Big Words
  • My friend / uncle / aunt also did this
  • Too good to be true
• Scams can happen to the best of us
• Return of Capital


  Focus on getting your original investment back, not on high returns
• Forbes magazine is a contra indicator - things featured on the cover are often overvalued
• Charlie Munger: 'When you have complexity, by nature you have fraud & mistakes'
• Warren Buffet: 'It has been safer to steal large sums with a pen than small sums with a gun'
• Compound Interest


  A = P(1 + R/n)^n, where A is the eventual outcome, P is the starting position, R is the outcome of effort put in over time, and n is the period over which the effort was put in

  
• Warren Buffett: '"Life is like a snowball, all you need is wet snow and a really long hill."'
• Small but continuous improvements over a long period of time

  Will get magnified
• John Wooden: '"When you improve a little each day, eventually big things occur. When you improve conditioning a little each day; eventually you have a big improvement in conditioning. Not tomorrow, not the next day; but eventually a big gain is made. Don't look for the big, quick improvement. Seek the small improvement one day at a time. That's the only way it happens-and when it happens, it lasts."'
• Reductio ad absurdum


  • Buffett on Absurdity of Dotcom Valuation
  • Markopolos on Absurdity of Bernie Madoff's Investment Returns
• Sherlock Holmes: '"How often have I said to you that when you have eliminated the impossible, whatever remains, however improbable, must be the truth?"'
• Falsification


  It's impossible to prove most things, but it is much easier to disprove them. So learn to think like Sherlock Holmes
• Inversion


  Move terms on right hand side to left hand side of the equation, leaving one term only on left hand side