Yellowtail Blog

I’ve just come back from an interesting morning with JP Morgan discussing behavioural finance, the science of behaviour in financial markets and decision making.

Consider the following scenarios: If you have £1,000 and are presented with 2 options, which one would you take? (You must take one). The first option means a loss of £500, no more and no less. The second option is that on the single toss of a coin you will either keep your £1,000 or you will lose the lot, which one will you take?

Most groups of people that I have encountered show that the majority of people take option one, preferring to keep a guaranteed £500 rather than possibly lose it all.

The second question is similar but instead you are starting with £2,000 and you can either a) voluntarily give up £500 or you can b) toss a coin to either keep your £2,000 or lose £1,000.  In my experience (and this is borne out through other studies and research) the majority of people will take the second option, even though the probability of a negative outcome is exactly the same as in the first scenario.

Interesting but it doesn’t exactly answer why supermarket trolleys appear to be getting larger. However, the following might. A recent study by a major UK supermarket asked shoppers the following question: “when did they know when to stop shopping?”

By far and away the most popular answer was not related to shopping lists or budgets, but was in fact simply that the shopping trolley had become full. The supermarket’s answer therefore was to increase the size of the trolley and hey presto, a significantly increased turnover. Are we equally irrational in our investing decisions as we are when out shopping?