$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ WEALTH HEALTHY WOMEN [TM] Healthy Attitudes ==> Wealthy Women [TM] Volume 2, Number 2 April, 2001 $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ WELCOME to Wealth Healthy Women [TM], a free e-mail newsletter for women seeking greater financial freedom and well-being. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ IN THIS ISSUE: 1. Note From Your Editor, Lynne 2. Article: Mind Your Business: Taking the Emotion Out of Your Portfolio - Part I 3. Spotlight - SHRM 1999 Barriers to Advancement Survey 4. WealthHealthy Announcements ************************************************************ Note from your Editor How have you been faring over the past several months in the rocky seas of our current economy? What have you done with your investments, large or small, to position yourself? How have you made those decisions? And, if you are just starting to invest, how are you viewing the current investment scene? Wealth Healthy Women's feature article written by Matt Kawalec, Editor of The Beacon Street Financial, a business monthly published by Tucker Anthony, Inc., brokerage and investment banking firm, discusses psychological factors that influence our investment decisions - overconfidence, optimism, selective memory, the herding instinct, regret and other salient factors. Since the article is lengthy for this newsletter, it is divided into two parts, so look for issue 2,3 of Wealth Healthy Women (WHW) [TM]. One question that came to mind when I first read Matt's article was whether or not women and men would identify similarly with these emotional factors. Consequently, there will be a short survey following Part II in the next issue of WHW. Please speak your voice and be counted! Regardless of which emotions you identify with, getting a handle on your own "emotional biases" can make a significant difference in the decisions that you make over the next few months as markets continue to shift and adjust. Consider joining in on a free WealthHealthy teleclass "Beat Your Biases," described in the WealthHealthy Announcements, to help you along! $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Feature Article: Mind Your Business: Taking the Emotion Out of Your Portfolio - Part I When it comes to your investments, are you overconfident? Or are you a bit greedy? Do you panic at the first sign of a market drop, or become elated at the latest surge? Do you choose stocks based on a vague feeling, or because the company is located in your area? Does a ten percent loss disappoint you more than a ten percent gain pleases you? If you're like most investors, the answer to at least some of these questions is yes-whether you realize it or not. According to modern financial theory, investors make decisions based on a rational, dispassionate consideration of the facts. They are supposed to weigh the risks of any investment versus the potential reward, study historical performance data, and examine as many of the factors related to future performance as possible. But is this what actually happens? Not really, according to practitioners of behavioral finance. Investment decisions are very often driven not by reason, but by emotions: fear, greed, regret - even embarrassment. Overconfidence in one's ability to pick winners is rampant, as is following the herd, chasing last year's best performers, and seeing trends where there are none. Discovering why so many people make irrational investment decisions is the goal of behavioral finance, a relatively young academic discipline. By studying investor psychology, researchers are attempting to understand the driving forces behind the actions of millions of investors, and to study how these often inconsistent and emotionally fueled decisions affect the market as a whole. Overconfidence and Optimism Don't get us wrong: confidence is a wonderful thing. Confidence can drive an idea to success even in the face of strong opposition. But unwarranted confidence (overestimating one's knowledge) can be perilous to investors. In Why Smart People Make Big Money Mistakes, authors Gary Belsky and Thomas Gilovich argue that overconfidence is both ubiquitous and deeply entrenched. Psychological studies have revealed that most people consistently overrate their ability to make accurate estimates and predictions, leading to a false sense of control and accuracy. Overconfidence is often joined by optimism, another strong irrational bias. Studies have shown that the average person rates himself as being better than average in many categories (physical attractiveness or driving ability, for example). Obviously, most of us by definition are just average in most ways, yet we seem to think of ourselves more favorably than others do. In the realm of investing, overconfidence and optimism can lead investors astray. The illusion that one can accurately predict the direction of the market can result in an underestimation of market uncertainty, both on the upside and downside. An optimistic, overconfident investor may tend to downplay the risk involved in any given investment decision, leading to a misplaced sense of control over the outcome. Accentuate the Positive? The deleterious effects of overconfidence and optimism can be magnified by something called selective memory. This is the tendency to remember the "hits" in life while conveniently forgetting the "misses." Have you ever thought about an old friend and an instant later received a phone call from him or her? Many people have had this experience and remember it with amazement. But how many times have you thought of an old friend and the phone doesn't ring? This happens much more frequently, but it's not the type of experience you remember or tell others about. How does this apply to investing? An investor who remembers only his trading successes will likely have more unjustified confidence than an investor who recalls clearly the effects of every portfolio move, both good and bad. Making a realistic appraisal of all the risks involved is the hallmark of a prudent investor. Selective memory can enable someone to repeat the same mistakes again and again instead of learning a valuable lesson the first time. The Herding Instinct and Regret For antelope out on the plains, herding is an excellent way to secure refuge from predators. Sticking together, after all, gives an individual the safety of numbers. For investors, however, moving with the pack is a dubious strategy. Why do investors so often rush to buy stock in a company just because it's popular? Some behavioral psychologists feel that both social pressure and the fear of regret fuel the herding mentality. Our peers and our social environment influence us all to some degree. Many people flock to whatever movie is currently on top of the box office charts not because they are especially interested in the plot, but simply because so many others have gone before them. Conforming to the preferences of a crowd can significantly ease the feelings of exposure or increased scrutiny some people feel when they are outside of the mainstream. Besides, it's much easier to simply do as others do, because if things turn out badly, we're in good company. If everyone else thought that buying the latest popular stock was a good idea, why shouldn't you? This is where the fear of regret is most apparent. Some investors dread a negative outcome so much that they are willing to follow the crowd just to lessen the burden of regret. After all, it's easier to accept a loss on a popular stock because we can rightfully point out that many others believed it was a good investment, too. This also helps shift responsibility for a loss onto others, further easing the feelings of personal remorse over the loss. Author: Matt Kawalec, Editor of The Beacon Street Financial, published by Tucker Anthony, Inc. Reprinted with permission. (TO BE CONTINUED IN THE NEXT ISSUE OF WEALTH HEALTHY WOMEN [TM]) In Part 2, the author discusses three additional emotional biases: the tendency to see patterns where none may exist, framing, and myopic loss inversion. He also offers several useful strategies to become a smarter, more disciplined investor. Did you relate to any of the patterns mentioned in Part 1 - overconfidence, optimism, selective memory, the herding instinct, fear of regret? Or perhaps, do you relate more to a lack of confidence or self-doubts about your capacity to be a wise investor? As Matt points out in his article, all of these characteristics have an "up" side as well as a "down" side. What seems ideal is to find ways to maintain the benefits of those traits -- such as a positive attitude of enthusiasm (optimism), holding onto your own opinions in the face of others' views when you've thoughtfully made an investment decision (confidence), remembering your successes as a way to encourage yourself (selective memory), seeking out information from reputable financial sources (herding instinct), and asking yourself if you can take an investment risk without serious fear of regret -- while acquiring sound financial decision-making skills. See the WealthHealthy Announcements section for an opportunity to do so. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Spotlight - SHRM 1999 Barriers to Advancement Survey There is no doubt that opportunities for women in the workplace have increased substantially in the past few decades. However, it is still difficult for women to make it to the top. And, making it up the ladder translates into higher salaries and (hopefully) greater financial well-being. The Society of Human Resource Management's (SHRM) 1999 Barriers To Advancement Survey indicates that nine out of 10 women encounter obstacles on the career ladder. As reported in the Wall Street Journal, October 17, 2000, the top five barriers to advancement for women are: Corporate culture favors men (4.01); Stereotyping /preconceptions of women (3.85); Lack of women on board (3.69); Exclusion from informal networks (3.55); Perception by management that family responsibilities will interfere (3.54). The numbers in parentheses are the average ratings of survey participants, on a scale of 1 to 5. One (1) represents "no barrier at all" and 5 represents "a significant barrier." However, Tory Johnson -- founder and chief executive officer of New York-based Women for Hire who was also interviewed in the same Wall Street Journal article -- points out ways to break through these barriers and increase your chances of "making it to the finishing line." She advocates empowering women through coaching, mentoring and networking activities - and particularly at the beginning of their careers. Consider the benefit of a professional coach or mentor at any stage of your career! And, remember to allocate some of your precious time for those essential networking opportunities. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ WealthHealthy Announcements FREE WealthHealthy Teleclass on "Beat Your Biases." Examine your particular set of emotional biases when investing and develop strategies to replace them with WealthHealthy attitudes. Join other like-minded women in an informal, interactive 50-minute class. This teleclass will be offered on Tuesday, May 1, at 7:00 pm (EDT). Register by contacting Lynne@ WealthHealthy.com. Please put "Beat Biases" in the Subject box of your e-mail. $$$$ To hear a 10-minute description of the WealthHealthy approach, as well as a bit about me, you can call 1-212-461-2660. If you are interested in coaching, simply e-mail me at Lynne@WealthHealthy.com or call me at (202) 387-5923. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Pass this newsletter along to friends, family, and colleagues who also may be interested in moving toward greater financial freedom and well-being. They can get their own free subscription by going to http://wealthhealthy.com and signing up - it's as simple as typing in their e-mail address. Or, send an e-mail to whw-request@WealthHealthy.com with the word "subscribe" in the body of the letter. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NOTE: Wealth Healthy Women [TM] is intended for informational and educational purposes only. It is not a substitute for financial, legal, accounting, psychotherapeutic, or other professional advice and consultation. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Copyright 2001 Lynne Hornyak All rights reserved. The above material is copyrighted but you may retransmit or distribute it to whomever you wish as long as not a single word is changed, added or deleted, including the contact information. However, you may not copy it to a website without my permission. Reprint permission will be freely granted upon request. Advance written permission must be obtained for any reprinting of this material in modified or altered form. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CONTACT INFORMATION Lynne Hornyak, Ph.D. WealthHealthy.com Phone: (202) 387-5923 Fax: (202) 986-8980 e-mail: Lynne@WealthHealthy.com Web: http://WealthHealthy.com