https://www.dpegan.com/Recent content on Daniel EganHugoen-usMon, 23 Mar 2026 16:26:42 -0400https://www.dpegan.com/blog/the-duckweed-riddle/Mon, 23 Mar 2026 12:00:00 +0000https://www.dpegan.com/blog/the-duckweed-riddle/Shane Frederick’s Cognitive Reflection Test — one of the most widely used measures in behavioral science — poses three questions designed to see if you can override your gut with deliberate thinking. The third goes like this: In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake?https://www.dpegan.com/ai-gallery/Thu, 12 Feb 2026 00:00:00 +0000https://www.dpegan.com/ai-gallery/https://www.dpegan.com/show-n-tell/Sat, 15 Nov 2025 00:00:00 +0000https://www.dpegan.com/show-n-tell/Sometimes it’s better to show someone how something works, than just tell them. In that vein, I’ve tried to make interactives you can explore with to figure things out yourself. Why Personal Returns don’t add up This interactive tool explores the difference between time-weighted returns (what the market did) and money-weighted returns (what you actually earned). And explains why the number often Explore Personal Returns → Duckweed Pond Simulator The classic riddle: if duckweed doubles every day and covers a pond in 30 days, when is it half-covered?https://www.dpegan.com/about/Mon, 04 Jul 2022 00:00:00 +0000https://www.dpegan.com/about/Hi there! I am a behavioral scientist focused on improving the design & tech for personal finance and investing. I work at Betterment and PreThink. I love making new & useful FinTech tools, beautiful data visualiations, science fiction, dogs, and snowboarding. I studied economics and decision science, finishing my MSc in 2005. I've collaborated on a few academic papers, done a lot of public speaking and press, and some pretty cool coding.https://www.dpegan.com/highlights/Fri, 04 Feb 2022 00:00:00 +0000https://www.dpegan.com/highlights/A few projects we loved contributing to. 📱 Prototype: financial health app An advisor-tech wanted to turn their in-house models for financial health into a web & mobile app. After 4 months of collaboration they had a working prototype web-app, a stronger conceptual model, a extentable design system, and began using it in pitches to prospect partners and grant funding. 😕 Self-service game changer Analysis showed that around 90% of customer service inbounds were for features that already existed in the app.https://www.dpegan.com/ideas/Fri, 04 Feb 2022 00:00:00 +0000https://www.dpegan.com/ideas/ Ideas Shovel ready ideas, but I don't have the shovel. Want to build one of them? Get in touch. Profyle Profyle gives you a single place to manage all your personal info, and get paid for it. Learn more Avalanche Avalanche is a robo-advisor for debt repayment strategies. Learn more FXP FXP is a pure financial advice, wellness and education app. Write-up coming.https://www.dpegan.com/license/Fri, 04 Feb 2022 00:00:00 +0000https://www.dpegan.com/license/My blog posts are released under a Creative Commons Attribution-ShareAlike 4.0 International License.https://www.dpegan.com/research/Fri, 04 Feb 2022 00:00:00 +0000https://www.dpegan.com/research/Reviewed articles Increasing tax salience reduces market timing Many investors make mistakes when it comes to taxes - they actively trade in taxable accounts compared to tax-advantaged accounts, and realize short-term capital gains when long-term treatment would be preferable. In a field experiment we show the effect of highlighting tax consequences of portfolio allocation changes before investors commit to the change. Allocation changes drop significantly when investors are notified of potential taxes owed.https://www.dpegan.com/services/Fri, 04 Feb 2022 00:00:00 +0000https://www.dpegan.com/services/Services It's always dangerous to say what you do, in case people think you don't want to try new things. If you have an idea or request that isn't on here, feel free to get in touch.. The more novel, the better. Advisory work We've got decades of successes and failures we've learned from. If you have a new product or service and you want someone to help you avoid the mistakes they've already made, we'd be happy to help.https://www.dpegan.com/talks/Fri, 04 Feb 2022 00:00:00 +0000https://www.dpegan.com/talks/I occasionally speak on TV, podcasts, college classes, industry conferences and to regulators. If you want to invite me to speak, pop over here. 🔊 👂 Invest like the Best with Patrick O’Shaughnessy. This podcast is easily one of the best ones for investing. I got lucky that Patrick invited me early on, before his podcast became a big deal. The Long View with Christine Benz and Jeff Ptak We discuss what works in financial education, the benefit of mental accounts, and learning-by-doing in investing.https://www.dpegan.com/blog/low-cost-is-better-than-free/Tue, 23 Mar 2021 00:00:00 +0000https://www.dpegan.com/blog/low-cost-is-better-than-free/I blame Jack Bogle. His ‘cost matters’ message was honed so finely to a simple effective point that it dominated the fund industry for decades. Fund costs fell relentlessly. So we hit the logical conclusion: nothing is lower cost than ‘free’! We now have free trades, free index funds, and ‘free’ financial advice. Yet, ‘free’ can be a poison wrapped in chocolate. When something is ‘free’ the incentives for both the consumer and provider change dramatically, often in ways that are invisibly worse for consumers.https://www.dpegan.com/blog/the-myth-of-the-panicky-individual-investor/Sat, 14 Mar 2020 18:35:08 +0000https://www.dpegan.com/blog/the-myth-of-the-panicky-individual-investor/In early 2009 I had one of the most exciting weekends of my professional life. Over the course of the financial crisis I was granted access to the database of the UK’s largest self-directed brokerage. A kid in a candy store had nothing on me. Oh, the behavioral biases I would document, the negative alpha I would discover! I did find poorly constructed and undiversified portfolios. Some had just five similar stocks; others had extreme allocations of 0% stocks and 100% stocks.https://www.dpegan.com/blog/sacrifice-throws/Sun, 23 Feb 2020 15:22:17 +0000https://www.dpegan.com/blog/sacrifice-throws/Sutemi-waza are a class of throws in jujitsu or aikido known as sacrifice throws. They are tricky, but very powerful: they work because of the opponent’s momentum. You don’t try to stop your opponent. You do not try to dodge them. You accept and use the momentum, but redirect it. Sutemi-waza are risky: Sacrifice throws require the thrower to move into a potentially disadvantageous position in order to be executed, such as falling to the ground.https://www.dpegan.com/blog/not-so-great-expectations/Sun, 09 Feb 2020 19:42:24 +0000https://www.dpegan.com/blog/not-so-great-expectations/There’s a game potential clients and advisors play, and I think everyone loses. Here’s how it usually goes: Person: What are your expected returns? Advisor A: About 7% annually. Person: Ah, ok, I’ll be in touch. ….. Person: What are your expected returns? Advisor B: About 14% a year. Person: Wow, great, where do I sign? This might seem fine, and it is quite common. I’d like to convince you this is bad, and we should stop playing.https://www.dpegan.com/blog/when-treatment-is-harder-than-diagnosis/Thu, 25 Apr 2019 12:24:39 +0000https://www.dpegan.com/blog/when-treatment-is-harder-than-diagnosis/There’s a seduction in behavioral science: “here’s a bias, go be better by not being biased”. Spoiler alert: actually doing is hard. Really hard. Yes, all these biases are interesting. Yes, it means we might be making mistakes everyday. Yes, it seems like we should be able to do better by helping them. Yet… Just knowing about biases doesn’t fix them. You need to understand how and where they manifest, and what might sidestep, mitigate, or treat them.https://www.dpegan.com/contact/Mon, 25 Feb 2019 13:38:41 -0600https://www.dpegan.com/contact/** Contact page don’t contain a body, just the front matter above. See form.html in the layouts folder **https://www.dpegan.com/blog/the-invisible-doctor/Mon, 24 Sep 2018 16:52:02 +0000https://www.dpegan.com/blog/the-invisible-doctor/First, pictures! Please reflect on these a moment. Each sign is well intentioned. Each sign is also unintentionally exacerbating the problem it’s trying to fix. I don’t believe the creators intended for them to be ineffective. But I’d also guess they weren’t being judged on how effective they were on changing behavior. More likely, they were being judged on if they’d ‘done anything’, or ‘told people’, or ‘warned them’. And that’s the problem.https://www.dpegan.com/blog/consumer-financial-decision-making-keynote/Mon, 21 May 2018 12:42:19 +0000https://www.dpegan.com/blog/consumer-financial-decision-making-keynote/Yesterday I had the honor of opening up the Boulder conference on Consumer Financial Decision Making. Here is my presentation:https://www.dpegan.com/blog/the-skill-of-managing-luck/Sun, 22 Apr 2018 17:13:05 +0000https://www.dpegan.com/blog/the-skill-of-managing-luck/Imagine I offered you a way to instantly improve your decision making. Would you take it? Most wouldn’t. That’s because of how it improves hit rates. It doesn’t do it by winning against all odds. It doesn’t notice the detail no-one else noticed. It doesn’t make high-confidence, narrative based claims. We humans seem to be attracted to a bad process. To the unexpected, the unusual, the low probability. We’re attracted to luck - the more extreme the luck, the better.https://www.dpegan.com/blog/strategic-faith/Mon, 12 Feb 2018 02:08:15 +0000https://www.dpegan.com/blog/strategic-faith/Would Dumbo have been a good investor? For the uninitiated: Dumbo is an orphaned elephant with embarrassingly large ears. He is made to work with a quite unpleasant circus, where a Timothy (a clever mouse) tells Dumbo that he could be a star if he used his huge ears to fly. But Dumbo isn’t convince he couldn’t pull it off. So the mouse gives Dumbo a ‘magic feather’, which allows him to fly.https://www.dpegan.com/blog/the-wealth-of-sapiens/Sat, 03 Feb 2018 21:22:35 +0000https://www.dpegan.com/blog/the-wealth-of-sapiens/It’s 2am, and I’m curled up in a ball on my bathroom floor crying. I’m trying to do this without waking up my sleeping wife and daughter in the next room. And I’m pretty happy about that. True wealth is not money. It’s the option to buy what you truly need. If money can’t buy what you need, you’re on even footing with the poorest person out there. My daughter got the flu.https://www.dpegan.com/blog/the-business-of-emotion/Sun, 14 Jan 2018 19:54:11 +0000https://www.dpegan.com/blog/the-business-of-emotion/The Business of Emotion is a great song. It’s satire on the era of big data by the band Big Data: monetizing attention, addicting users and somehow creating loneliness in the biggest, most sociable crowd ever seen on earth. It’s dark, dystopian, dehumanizing. It’s about how faceless organizations use data to turn people’s attention into money. I love it. It might be my career’s theme song. But to understand why, you need to sing it with conviction.https://www.dpegan.com/blog/incentives-and-behavioral-design-brokerage-ui-edition/Sat, 06 Jan 2018 17:35:32 +0000https://www.dpegan.com/blog/incentives-and-behavioral-design-brokerage-ui-edition/One of the most powerful behavioral tools is… incentives. And how commercial incentives influence behavioral design deserves some more attention. Let’s quickly compare the incentives of brokers versus fiduciary advisors. Brokers generally make money when customers trade, either through commission (e.g. $7/trade) or routing trades to a liquidity provider who pays the broker for those trades. Brokers lend out client cash balances, and do standard banking lending. And they get paid by fund companies to prioritize the fund companies funds, either by making them more salient, or allowing them to be traded for free (these are generally called ‘platforming fees’).https://www.dpegan.com/blog/outsourcing-self-control/Sun, 05 Nov 2017 15:37:15 +0000https://www.dpegan.com/blog/outsourcing-self-control/Self control is one of the biggest struggles most people have. Me included. I’m beset by the near-term desire to behave in many ways that I wish I didn’t. I snack too much, and drink too much. I spend too much time on twitter. There are a few approaches to to deal with this: rely on my willpower pre-emptively avoid tempting circumstances (hacking the akrasia horizon) create quick feedback loops which deter it Commitment mechanisms: out-source the self control.https://www.dpegan.com/blog/the-law-of-reversed-effort/Sun, 15 Oct 2017 14:44:25 +0000https://www.dpegan.com/blog/the-law-of-reversed-effort/In most areas of life putting in more effort means achieving a better outcome. The harder and more consistently you exercise, the fitter you get. The more hours you put in studying, the better your grades. Of course there are a few, very unusual areas where the opposite rule holds. Aldous Huxley’s called this “The Law of Reversed Effort”: the harder you try, the worse you do. Think of quicksand and finger-cuffs, where success is defined by gentle, slow movements.https://www.dpegan.com/blog/visualizing-risk-return-and-time/Mon, 02 Oct 2017 00:53:41 +0000https://www.dpegan.com/blog/visualizing-risk-return-and-time/Investors usually understand returns. But risk… risk is more difficult. Risk involves communicating not just that many outcomes are possible, but how likely they are. So I’m in favor of anything that gives investors a better intuition of what risk really is. Andy Rachleff’s post on how the standard efficient frontier graph often misleads investors resonated with me. Investors do often have the perception that the highest return portfolio is best, ignoring the risk.https://www.dpegan.com/blog/change_portfolio_or_investor/Wed, 23 Aug 2017 10:36:11 +0000https://www.dpegan.com/blog/change_portfolio_or_investor/This post is a response to Corey Hoffstein’s question: “Do you believe that behavioral biases exhibited by investors can be explicitly addressed through portfolio design?” No investor is born perfect. The first step is admitting it, which isn’t easy. The second step is figuring out what you’re going to do about it. We need to be thoughtful about how we arrange our decision making. We should protect ourselves from our weaknesses, and leverage our strengths.https://www.dpegan.com/blog/behavioral-science-reading-list/Sat, 24 Jun 2017 19:10:46 +0000https://www.dpegan.com/blog/behavioral-science-reading-list/I’m often asked what I think people should read as an introduction to behavioral science. If you want the shortest, easiest introduction possible, go with The Little Book of Behavioral Investing. Beyond that, it depends on what are you looking to know about. By Tom Hermans For making yourself a better investor Little Book of Behavioral Investing Finance for Normal People Personal Benchmark For working as a financial advisor What Investors Really Wanthttps://www.dpegan.com/blog/wetware_and_software/Wed, 31 May 2017 00:46:54 +0000https://www.dpegan.com/blog/wetware_and_software/I got lucky: my interests lie at the intersection of two exciting trends which I never predicted would come together: a rapid improvement in understanding how our minds work; software being based on models akin to how our brain works. Perhaps unsurprisingly, this has lead me to have an unusual viewpoint: I think software and wetware (our brain and the ‘programs’ that run in them) are kinda similar. And they’re getting more similar at an increasing rate.https://www.dpegan.com/blog/a-little-bit-of-confidence-is-a-dangerous-thing/Thu, 04 May 2017 00:04:51 +0000https://www.dpegan.com/blog/a-little-bit-of-confidence-is-a-dangerous-thing/First comes motivation. When a person becomes motivated to invest (rather than keep money in a savings account) they want to do a good job. But the learning curve can be steep… and thus expensive. The new investor may pay in time, trading commissions, high expense ratios and of course mental effort. But the price must be paid. My completely anecdotal, unscientific impression is that a person’s investing expertise follows a path roughly like this:https://www.dpegan.com/blog/goal-based-investing-big-picture/Sat, 18 Mar 2017 20:18:31 +0000https://www.dpegan.com/blog/goal-based-investing-big-picture/I’m a big fan of the goal-based (or ‘liability driven’) approach to investing. A ‘goal’ really just means “something I think I might need to spend money on in the future”. From a planning perspective, it has a number of impressive strengths. It encourages you to think about the future, which helps you identify things you might have to spend money on, and think about how much they might cost. If you identify and start saving toward future expenditures earlier, you’ll actually need to save less.https://www.dpegan.com/blog/behavioral-finance-is-for-individuals-not-markets/Sun, 29 Jan 2017 16:45:09 +0000https://www.dpegan.com/blog/behavioral-finance-is-for-individuals-not-markets/⚠️ this post is idealistic. I believe, and would like to convince more people, that it’s more profitable to help people make better decisions, than to take advantage of how they mis-make decisions. Proving what everyone already knew Despite what some may say, traditional economics doesn’t say everyone is a perfectly rational consumer. It just says that in equilibrium (after learning and costs like information gathering are accounted for), markets are pretty darn efficient and on average, consumers are rational.https://www.dpegan.com/blog/befi_guidance/Fri, 27 Jan 2017 12:31:15 +0000https://www.dpegan.com/blog/befi_guidance/I’m going to mainly focus on a career in the private sector, doing applied work. If you want to know about government work, ask Maya Shankar or Owain Service. If what I’ve written doesn’t answer your questions, ask me. Just have something specific and interesting to ask about! But first, some screeners: Is this a long-term interest? Is this something you want to dedicate at least a decade to? It should be, otherwise you’ll get out-competed by others.https://www.dpegan.com/blog/better-decisions-through-blindness/Mon, 19 Dec 2016 20:31:29 +0000https://www.dpegan.com/blog/better-decisions-through-blindness/If you knew you could be happier and make better decisions by blinding yourself, would you do it? Ok, not complete blindness, but just to those factors you decided in advance were irrelevant. By Tingey Injury Law Firm In the short story “Liking what you see”, people can have a small, reversible operation which causes ‘calliagnosia’, or the inability to detect human beauty or ugliness. You can still recognize people, but the part of your brain responsible for discerning beauty, disgust or lust is disconnected.https://www.dpegan.com/blog/prohibition-is-not-a-nudge/Tue, 13 Dec 2016 12:05:15 +0000https://www.dpegan.com/blog/prohibition-is-not-a-nudge/One of the concerns human financial advisors often express about using an automated advisor is that they make it too easy to change your allocation or trade. I don’t think that simply layering on frictions or completely prohibiting such things is a true solution though. By Steven Pahel Human advisors themselves don’t only make it hard for their customers to trade. They are a firebreak which provides targeted real-time education, a less emotional counterweight, and a reminder of the plan the client was aiming to adhere to.https://www.dpegan.com/blog/why-i-read-science-fiction/Sun, 06 Nov 2016 15:50:01 +0000https://www.dpegan.com/blog/why-i-read-science-fiction/When I heard Barry Ritholz and Bill McNabb, CEO of Vanguard recently discussing how much science fiction they read, it made me smile. Listen to it - they talk about covering the entire genre till only the obscure titles are left. Outside of topics related to my job, science fiction is the largest genre of books that I consume. Why? To open myself for the future. Not to predict it, but to be flexible about how much stranger it might be, than I expect it to be.https://www.dpegan.com/blog/how-to-lose-by-beating-the-wrong-benchmark/Sun, 30 Oct 2016 14:23:02 +0000https://www.dpegan.com/blog/how-to-lose-by-beating-the-wrong-benchmark/I beat the benchmark massively last week. I’ve started swimming again, which has meant regaining ground previously owned. This past week I set recent records in both (speed and distance), which was a huge improvement for me. By Christoffer Engström Let’s be clear: there is no chance I could beat Michael Phelps even if he had one arm tied behind his back. There are people in my pool who are faster than me.https://www.dpegan.com/blog/when-is-past-performance-predictive/Mon, 17 Oct 2016 23:54:12 +0000https://www.dpegan.com/blog/when-is-past-performance-predictive/The phrase “past performance is not an indicator of future performance” is unavoidable when investing. Funds that have out-performed historically aren’t any more likely to perform in the future than random. A recent market rally doesn’t mean things will keep going up. The phrase is everywhere. By Richard Horvath A normal person’s first reaction is likely to be “that doesn’t sound right. Isn’t past performance usually the best predictor of future performance?https://www.dpegan.com/blog/the-positive-unintended-consequences-of-progressive-tax-rates/Fri, 22 Apr 2016 11:09:17 +0000https://www.dpegan.com/blog/the-positive-unintended-consequences-of-progressive-tax-rates/I’m a bit of an odd duck. I grew up in one of the most liberal neighborhoods in America, but then went on to study economics, a discipline which generally supports small-ish government. Perhaps that helps explain what I’m about to say. I pay a high marginal income tax rate. And I think that’s smart and good for me and society. The focus of tax policy is generally about funding services, ensuring economic growth and reducing poverty and inequality.https://www.dpegan.com/blog/the-hidden-danger-in-pleasurable-ideas/Wed, 20 Apr 2016 12:13:26 +0000https://www.dpegan.com/blog/the-hidden-danger-in-pleasurable-ideas/Do the statement below make you feel good or bad? I’m smarter than the average person. There are patterns that make the stock market predictable. I can do better than just average returns. The country where I live is going to have the best returns. The companies whose products I enjoy are going to have above-average returns. These views and ideas are likely to make us feel good about ourselves.https://www.dpegan.com/blog/do-investors-know-what-will-make-them-happy/Sun, 29 Sep 2013 12:47:23 +0000https://www.dpegan.com/blog/do-investors-know-what-will-make-them-happy/That is the question posed in a new research article by myself, Christoph Merkle, and Greg Davies: We study investor happiness in a panel survey of brokerage clients at a UK bank. When investors formulate expectations about future happiness, they set their aspirations depending on own portfolio risk levels, used benchmarks, investment horizon, overconfidence, and other individual characteristics. They are very accurate in their forecasts, only rarely are investors unsatisfied with an outcome they predicted to be happy with, and vice versa.https://www.dpegan.com/blog/want-to-increase-returns-by-8-5-close-your-online-trading-account/Fri, 18 Jan 2013 12:14:41 +0000https://www.dpegan.com/blog/want-to-increase-returns-by-8-5-close-your-online-trading-account/A new paper gives strong indication that on average, individual investors are really poor investors. I mean, really bad. Enough that by the end of the day, they’d be better off sitting in cash than trading on their own. This dude gets it. By Photoholgic It treats them to the sort of analysis which we usually subject mutual fund managers to, and finds that they’re no better, i.e. worst than a passive strategy.https://www.dpegan.com/blog/knowledge-or-patience/Tue, 25 Sep 2012 19:17:05 +0000https://www.dpegan.com/blog/knowledge-or-patience/One of the most provocative questions is what causes some people to end up with lots of money, and some with very little. Yawn! you say! How is that provocative? By Tyler Milligan It’s provocative causes lead to policy and private market solutions, if you want to treat problems. And the traditionally presumed causes are very different from the ones put forth by behavioral finance. So a recent paper by Justine Hastings and Olivia Mitchell looking at why certain people end up with more or less wealth is provocative because it goes against the common wisdom that the most important lever for improving saving and investment behavior is for financial literacy to be increased.https://www.dpegan.com/blog/when-do-investors-feel-regret-2/Tue, 31 Jul 2012 18:27:08 +0000https://www.dpegan.com/blog/when-do-investors-feel-regret-2/Investor regret: The role of expectation in comparing what is to what might have been - Wen-Hsien Huang — Marcel Zeelenberg http://journal.sjdm.org/11/11303/jdm11303.pdf Investors, like any decision maker, feel regret when they compare the outcome of an investment with what the outcome would have been had they invested differently. We argue and show that this counterfactual comparison process is most likely to take place when the decision maker’s expectations are violated. We found that decision makers were influenced only by forgone investment outcomes when the realized investment fell short of the expected result.https://www.dpegan.com/blog/the-limits-of-diversification/Tue, 05 Jun 2012 14:03:33 +0000https://www.dpegan.com/blog/the-limits-of-diversification/Diversification is always good. It’s just limited in how much good it can do. Diversification is achieved by adding assets into a portfolio which have correlations less than 1 with the portfolio. At its purest level, it reduce risk because not all assets will have the same gain or loss at the same time. By investing in different assets (which all have the same risk and return), we reduce the extreme movements of the portfolio, often in a way which doesn’t reduce the overall return quite as much.https://www.dpegan.com/blog/illustrating-the-long-term-vs-short-term/Fri, 01 Jun 2012 02:58:05 +0000https://www.dpegan.com/blog/illustrating-the-long-term-vs-short-term/A while ago the great graphics gurus (sorry) at the NYTimes created a very cool graphic showing the annualized returns of the S&P500 over a long time period: This was one of the best graphics I’d seen in a while, but there are a number of things I thought could be improved, or used to illustrate another point. Red doesn’t mean loss. The light red in the picture means a return slightly above inflation.https://www.dpegan.com/blog/the-perverse-role-of-debt-in-feeling-wealthy/Sat, 03 Mar 2012 13:32:33 +0000https://www.dpegan.com/blog/the-perverse-role-of-debt-in-feeling-wealthy/I had the pleasure of meeting up with Abby Sussman of Princeton last night, who investigates the psychology of wealth - assets and liabilities. Her recent piece in Psychological Science sums it up well: We studied the perception of wealth as a function of varying levels of assets and debt. We found that with total gross wealth held constant, people with positive net worth feel and are seen as wealthier when they have lower debt (despite having fewer assets).https://www.dpegan.com/blog/unexpected-utility/Fri, 10 Feb 2012 12:37:39 +0000https://www.dpegan.com/blog/unexpected-utility/I believe unexpected utility is one of the most under-researched ideas in behavioral finance and economics. I, for one, experience it occasionally, and it is the best kind of utility. Photo by Richard Horvath. What, exactly is “unexpected utility”? It’s an experience, usually and hopefully positive, that you completely didn’t remotely see coming. The expectation is key here. Daniel Kahneman, in his recent book, uses the example that the same meal, when made by someone else, often tastes better.https://www.dpegan.com/blog/why-rebalance-a-simple-statistical-story-part-i/Thu, 09 Feb 2012 08:00:20 +0000https://www.dpegan.com/blog/why-rebalance-a-simple-statistical-story-part-i/Once we have picked an asset allocation model, how often, or why should we rebalance? I’ve seen multiple conflicting findings about the usefulness of rebalancing. Many such conflicts happen in time-series data because the sample you use can influence things quite strongly. I therefore wanted to see if there was a simple, purely statistical basis for rebalancing. To do this, I simulated some pretty vanilla portfolios with the desired characteristics. Note that as this isn’t real data, it doesn’t have some of the finer characteristics of true returns data such as auto-correlation of volatility.https://www.dpegan.com/blog/the-problem-with-control-groups-in-the-real-world/Tue, 07 Feb 2012 02:15:10 +0000https://www.dpegan.com/blog/the-problem-with-control-groups-in-the-real-world/A problem I occasionally encounter when trying to improve behaviour in the real world is the fairness of control groups. Imagine you have a potential cure for a problem, but you have no proof that it actually works. A standard experiment would randomly allocate individuals to treatment and control conditions, run the experiment for a set period of time, and compare outcome variables. You’d then know if there was a strong effect.https://www.dpegan.com/blog/when-winning-is-losing/Wed, 01 Feb 2012 01:08:04 +0000https://www.dpegan.com/blog/when-winning-is-losing/An article in the most recent JDM makes two valuable points – sometimes winning is losing, and we’re ok with that. Some individuals are more likely to over-bid, purchasing a lottery for more than it’s best possible value. Why might they do this? Because to some people, very competitive people, it seems that “winning” is as (more?) important than making a genuine profit. This effect is probably reinforced in circumstances that meet the Winners Curse, in which optimism about ones incomplete information is compounded by a desire to “win”.https://www.dpegan.com/blog/modulus-matters/Wed, 21 Dec 2011 02:17:57 +0000https://www.dpegan.com/blog/modulus-matters/I’ve wondered about the following question a number of times: How might the fact that we operate in base-10 (0,10,20…100…200) influence our decisions? We all know that we occasionally make decisions based on simply rounding up or down. But do round numbers influence trading in the stock market - for example, when setting stop or limit orders? Consult a new paper in Management Science: This paper provides evidence that stock traders focus on round numbers as cognitive reference points for value.https://www.dpegan.com/blog/in-defence-of-individual-investors/Wed, 30 Nov 2011 01:54:07 +0000https://www.dpegan.com/blog/in-defence-of-individual-investors/The vast majority of research on individual investors’ performance gives a depressing view. The conclusion is usually that individual investors hurt themselves by their trading, and would achieve higher returns adopting a more passive buy and hold strategy. This implication is often incorrect, and many of the studies need to read critically to understand exactly what they are saying. I think there are three implied questions which are answered by these studies:https://www.dpegan.com/blog/thought-of-the-day-estimating-procedural-fairness-from-outcomes/Thu, 03 Nov 2011 01:08:04 +0000https://www.dpegan.com/blog/thought-of-the-day-estimating-procedural-fairness-from-outcomes/Historically, I think Americans have been pretty happy with procedural fairness. If we know the rules are applied fairly, we can accept unfair-seeming outcomes. And this is most relevant when seemingly unfair outcomes happen, when some people take home a much larger slice of the pie. However, what if we don’t know how “fair” the rules are? How am I supposed to know if the modern economic system is fair, in terms of procedure?https://www.dpegan.com/blog/the-returns-to-computer-based-productivity-an-anecdote/Tue, 01 Nov 2011 23:48:34 +0000https://www.dpegan.com/blog/the-returns-to-computer-based-productivity-an-anecdote/Do wages in the banking sector reflect “conspicuous consumption?” Yes, bankers like showing off their wealth. But perhaps that’s not the problem. I see the opposite end of this in my volunteering. I help out at an employment center, and was helping a woman write up her resume. She had cleaned and done inventory for a living, and was still searching for a job in similar low-wage occupations at the age of 50.https://www.dpegan.com/blog/wind-energy-and-electricity-market-dynamics/Tue, 01 Nov 2011 02:08:45 +0000https://www.dpegan.com/blog/wind-energy-and-electricity-market-dynamics/My senior thesis was on the potential effects of wind energy on electricity markets, so I was very happy to see questions (HT MR) about the short-term/long-term dynamics of electricity markets. I want to focus on exactly the same issue, but as regarding wind-power. Photo by Thomas Reaubourg For a quick background, electricity markets are one of the more unusual, in that generation capacity takes a long time and a lot of money to increase (in the form of generation plants), and the larger the up-front capital costs of the plant, the lower the per-unit marginal costs of generating electricity.https://www.dpegan.com/blog/of-course-i-deserve-free-banking/Sun, 02 Oct 2011 17:49:35 +0000https://www.dpegan.com/blog/of-course-i-deserve-free-banking/Over at the NYTimes Bucks Blog, people are angry that a bank might actually charge you for the services they supply. This reminds me of people who think they shouldn’t have to pay for investment advice either. Why would someone invest their time, resources and set up the required infrastructure for [running a bank account / giving investment advice] unless they thought they would make a living doing it? They need to get paid somehow too, and the question is, how?https://www.dpegan.com/blog/anticipation-utility/Sun, 02 Oct 2011 13:17:14 +0000https://www.dpegan.com/blog/anticipation-utility/Holidays and vacations are wonderful. They give use a break from the stress and monotony of the workplace, a time to catch up with friends and family, and a chance to see new and exciting places. And part of the enjoyment of a holiday is looking forward to it. Knowing that you have something good coming up lets you enjoy that experience before you even have it, and can change your well-being long before you actual experience it.https://www.dpegan.com/blog/optimal-behavior-for-lottery-winners-or-anyone-who-comes-into-wealth-unexpectedly/Sun, 24 Jul 2011 10:50:30 +0000https://www.dpegan.com/blog/optimal-behavior-for-lottery-winners-or-anyone-who-comes-into-wealth-unexpectedly/Last week saw a couple in Scotland win the £161 million Euro-millions lottery, a truly enormous amount for any individual to suddenly have in the bank. Research indicates that they need to approach their new-found wealth as a source of potential danger as well as happiness. What do we know about the effect of winning the lottery (or unexpectedly inheriting a significant sum)? Obviously, they are now freed from the worries and stresses that come with not having enough money.https://www.dpegan.com/blog/weekends-and-friends-are-good/Mon, 11 Jul 2011 20:48:56 +0000https://www.dpegan.com/blog/weekends-and-friends-are-good/From the department of “No, really?”, a new paper showing that we are happier on weekends: This paper exploits the richness and large sample size of the Gallup/Healthways US daily poll to illustrate significant differences in the dynamics of two key measures of subjective well-being: emotions and life evaluations. We find that there is no day-of-week effect for life evaluations, represented here by the Cantril Ladder, but significantly more happiness, enjoyment, and laughter, and significantly less worry, sadness, and anger on weekends (including public holidays) than on weekdays.https://www.dpegan.com/blog/the-allure-of-alpha/Sat, 07 May 2011 12:16:27 +0000https://www.dpegan.com/blog/the-allure-of-alpha/“Alpha”, most commonly known as beating the market on a risk-adjusted basis, in laymans terms means doing better than a passive strategy, better than most other dollars or pounds in the market. While obviously alpha is a good thing, there is no guarantee of achieving it – it is a risky prospect itself, but the fees associated with active management are a sure thing. So taking on manager risk as well as market risk implies that there is significant value to active management.https://www.dpegan.com/blog/underestimating-compound-growth-implications-for-savings-rates/Sun, 17 Apr 2011 21:39:39 +0000https://www.dpegan.com/blog/underestimating-compound-growth-implications-for-savings-rates/The Economist on using “nudges” and other behavioral economics tricks for improving pension and retirement savings: ALBERT EINSTEIN IS said to have described compound interest as the eighth wonder of the world. It should also be a boon for workers planning their retirement. Start saving early enough and a pension becomes much more affordable. Unfortunately young people are often unable or unwilling to take advantage of this miracle. Their wages are low and their main priority may be to pay off their student debts or to save for a deposit on a house.https://www.dpegan.com/blog/financial-advisors-make-us-dumb-not-so-fast/Wed, 29 Jul 2009 22:04:22 +0000https://www.dpegan.com/blog/financial-advisors-make-us-dumb-not-so-fast/Full disclosure: I work for a firm that provides financial advice. I wouldn’t do it if I didn’t think we were helping our clients, but I still cannot pretend to be an impartial party. But, I hope this also makes my opinion a little more informed. A recent paper on how we use expert financial advice has been grabbing a bit of attention lately – Dan Ariely called the results “troublesome, perhaps even frightening” .https://www.dpegan.com/blog/will-intuitive-graphics-enabling-probabilistic-reasoning-become-more-common/Wed, 29 Jul 2009 20:17:38 +0000https://www.dpegan.com/blog/will-intuitive-graphics-enabling-probabilistic-reasoning-become-more-common/Dan Goldstein notes the intuitiveness of using graphical representations of probability, especially in Bayesian settings. High-quality , sometimes even interactive, graphics and charts, have increased greatly in recent years as news and other information have migrated to the web. The New York Times has a dedicated staff of graphical artists well versed in information design, and many digital graphical artists are becoming better versed in statistics and displaying ideas and results.https://www.dpegan.com/blog/learning-curves/Sun, 19 Jul 2009 11:43:40 +0000https://www.dpegan.com/blog/learning-curves/This is the first (brief) official post of this blog. And perhaps a good intro to talk about learning curves. In March, I went snowboarding for the first time (I was 27 at the time). It was painful and humbling. Nothing prepares you for having to balance and manoeuvre on a completely new surface. By the end of the third day, I was ready to quit – every fall was like feeling all previous falls again at once.