Who is Really Benefiting from US Fed Stimulus?

In China two thirds of country's wealth is estimated to be held by just one percent of the people while in US the top one percent population controls only one third of its wealth. Watch the video below to see the real beneficiaries of the FED Stimulus.

A Very Interesting Speech by Chidambaram on Reviving GROWTH

India’s economy has encountered serious headwinds with economic growth slowing from near double-digits to below five percent a year. Finance Minister Chidambaram discussed India’s economic future and his government’s plans to restore rapid growth. He also discussed the role that the U.S.-India economic relationship can play in stimulating India’s economic revival. 


Click Here to Listen

India Gold Premium Hits Record 21.6%

With India's 10% gold import duty on top of other capital controls, the price one has to pay for gold in India has reached a record spread of 21.6% vs. what one has to pay in countries where there are no such controls or import duties as can be seen from the chart below.

See the original post here 

Neuroscience May Help Us Understand Financial Bubbles

Five years on from Lehman Brothers' collapse and “where did it all go wrong?” analysis is all the rage. Answers have varied: poor regulation, malicious bankers, dozy politicians, greedy homeowners, and so on.

But what if the answer was in our minds? New research published in the journal Neuron suggests that market bubbles are in fact driven by a biological impulse to try to predict how others behave.

Any analysis of the global financial crisis would be incomplete without a thorough understanding of the asset bubble that preceded it. In the run up to 2008, property prices hit dizzying levels, construction boomed and the stock market reached a record high.

Economists have long picked over the causes of bubbles. But researchers at the California Institute of Technology wanted to know whether neuroscience could tell us anything about why so many people kept inflating the bubble to irrational levels.

Benedetto De Martino, now at Royal Holloway University of London, is one of the study’s authors. “For a long time,” he said, “the study of how people actually made decisions was not considered important.”

“It was always assumed people were rational and wanted the best for themselves. But this didn’t match with our observations of how people actually acted in many situations. Now, thanks to advances in neuroscience, we can begin to understand exactly why people behave as they do.”

This new field, known as neuroeconomics, combines traditional economics with insights on how the brain works. To conduct the research, De Martino, a neuroscientist, teamed up with finance professor Peter Bossaerts and Colin Camerer, a behavioural economist. Collaboration between these academic disciplines was key.

The study asked participants to make trades within an experimental bubble environment, where asset prices were higher than underlying values. While making these trades, they were hooked up to scans which detected the flow of blood to certain parts of the brain.

They found two areas of the brain’s frontal cortex were particularly active during bubble markets: the area which processes value judgements, and that which looks at social signals and the motives of other people.

Increased activity in the former suggests that people are more likely to overvalue assets in a bubble. Activity in the latter area shows participants are highly aware of the behaviour of others and are constantly trying to predict their next moves.

“In a bubble situation, people start to see the market as a strategic opponent and shift the brain processes they’re using to make financial decisions,” De Martino said.

“They start trying to imagine how the other traders will behave and this leads them to modify their judgement of how valuable the asset is. They become less driven by explicit information, like actual prices, and more focused on how they imagine the market will change.”

“These brain processes have evolved to help us get along better in social situations and are usually advantageous. But we’ve shown that when we use them within a complex modern system, like financial markets, they can result in unproductive behaviour that drives a cycle of boom and bust.”

But not everyone agrees with the findings of this study. Richard Taffler from Warwick Business School points out that bubble markets exist in a social context that is difficult to replicate in a lab experiment.

“In the real world there are lots of actors - investors, the media, pundits, politicians - all unconsciously colluding together to create a desired reality,” he said.

In the case of asset pricing bubbles such as the property market in the last decade, or the dotcom boom of the late 90s, everyone has a vested interest in maintaining this unconscious fantasy.

For Taffler, understanding how the brain processes these decisions is useful but still, “a few stages removed from the reality of a real market environment in the middle of an asset pricing bubble.”

“‘Mania’ is a more useful word for this phenomenon than ‘bubble’ as it implies manic behaviour, with people getting carried away.”

But this research is just the beginning, and it is clear that the overlap between neuroscience and economics will yield some important insights into human behaviour. As De Martino points out, markets are made by people, not numbers, and the human brain has been around for far longer than any financial market. To understand the market, we must understand the brain.

This article was originally published at The Conversation. Read the original article.

THE FOUR PRINCIPLES OF SPRITUALITY

The First Principle States:

"Whomsoever You Encounter Is The Right One"

The Second Principle States:

"Whatever Happened Is The Only Thing That Could Have Happened"

The Third Principle States:

"Each Moment In Which Something Begins Is The Right Moment"

The Fourth Principle States:

"What Is Over Is Over"

click here to DELVE


Courtesy: Unknown Author

How can you ensure your Success in Stock Market?

An Investor or a trader in stock market has to be very much disciplined, organized, and should have the ability to pay rigorous attention to details. As warren Buffet once said,

 “We don't have to be smarter than the rest. We have to be more disciplined than the rest”. The above-mentioned attributes should hold good even in your personal life, not just professional life. Otherwise, you will be unable to give complete focus to your investment or trading-- and you will fail.

Majority of the people are attracted to market with the sole object of making a financial killing within a short span of time. They merely participate in market with this aim (hope rather) only and start spending lot of time on daydreaming about it, instead of focusing more time on developing a process or a system or a set of rules, which might actually help them realize their goal at least in the long run. In addition to the unrealistically set goal, their own unwillingness to work (may be, out of ignorance) makes them fail. They start blaming the market for their failure and in the process refuse to realize this is a marathon, not a sprint and it takes strength, endurance and good health to stay the course and win the race. They gradually start feeling bad about themselves, start losing their confidence and may even end up with an unstable mind. Unfortunately, they may remain unconscious to these developments for a long time until they are made to realize by some kind of upheaval in their life.

There is absolutely no such thing as a sure thing in stock market (or in life). This is a game of probabilities, and the goal is to make more than you lose. You should develop tolerance for down ticks and draw downs as there is absolutely no room for perfectionism (everything has to work every time) in stock market. This is not to say you should risk your entire capital. Your process or system should help protect your capital as and when necessary. It is equally important to be cautious even when you are consistently making money as there is a high probability of being carried away by your success. The way in which a winner and a loser view or experience the market is dramatically different. The winning investor will have proactive approach while a losing investor a reactionary approach. Benjamin Graham, considered to be father of value investing, has said "Individuals who can't master their emotions are ill-suited to profit from the investment process."

After a slew of successful investments, it may so happen you are unable to identify any good opportunity in market but still you force yourself into some trades which in all probability can lead to losses. You should always remember the distress that each lost rupee causes is twice as high as the pleasure we get from each rupee gained.  So, it is equally important to avoid the highs that come from success just as the lows that appear after failure. The skill of knowing when not to invest is as important as knowing when to invest. You should avoid investing or trading for excitement instead of making profits. To put it in Seth Klarman’s words: "You can wait for opportunities that fit your criteria and if you don't find them, patiently wait. Deciding not to panic is still a decision." By overindulging in market you will be risking your psychological capital as you will be emotionally drawn down. This may result in, you missing the real big opportunity as and when it comes by which time you would have drained your energy levels completely and hence unable to participate in market although you have the required financial capital.

You should be able to assess and ascertain at all times whether your profits or losses are by design (your system or process) or by chance (luck factor, good or bad). There is a possibility of you earning profits without your true knowledge because you just happen to be with the flow of the market. Similarly there is a possibility of making losses when you are against the flow of market. So, it is very important to be with the flow of market as far as possible by design to better your prospects of making profits.

In the current environment, media (social media, in particular) has become an integral part of our daily life. So, it has become important to understand the role of media and its perceived influence on markets. Media can at best influence market on an absolute short term basis and can have zero influence on a sustained basis  It is very important to develop a kind of skill to separate news from noise, because media keeps on transmitting  endless stream of cacophony under the guise of news. You can come under its  influence if you monitor it too closely. We should be thankful to media though, as it provides us exposure to some of the best and brightest minds of the world thereby giving us the opportunity to gain valuable insights from them. At the same time, we should realize they are in business for profits and hence they would try to make money out of us and may not make money for us. So, you have to bear this in mind and take a balanced and judicious view while following media.

Finally, you should learn to accept total responsibility for all your actions irrespective of their outcomes. Some of your actions may be indirect like, you acted upon a recommendation of someone whom you believed to be an expert, and you should accept responsibility for such actions too even when the result of such action goes against you. It is normal human tendency to attribute success to one's intelligence and failure to circumstances or someone else. But, when you start accepting total responsibility for all your actions you are improving your self-accountability and a chance to learn from your failure. You learn almost nothing from your success.  You should always remember you are the only person who can truly control you and you cannot control anything else or any one else.

I am concluding with a Peter Lynch quote wherein he has aptly put together all the qualities required for an investor to be successful.

"The list of qualities an investor ought to have include patience, self-reliance, common sense, a tolerance for pain, detachment,  open-mindedness, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic."

Can Financial Intelligence ensure SUCCESS in Stock Market?

The general perception is, it will. A study done at the University of Pennsylvania suggests otherwise. As per it, there is a big downside of getting financially intelligent. And this is what it has to conclude. Financial intelligence increases the confidence levels in an investor which leads him to make worse investing decisions!

The same study reports - "finance courses increase confidence, but this could reflect overconfidence" .It also cites an example - "Over-optimism and over-confidence in finance decision making is widespread. In a 2005 survey, 65% of Americans believed they were 'very' or 'highly' knowledgeable about personal finance, although they performed abysmally on objective questions about the subject.

This sums up the reason why so many investors run into financial problems despite being financially intelligent. We believe financial knowledge in isolation isn't enough and should be combined with emotional intelligence with it as well for becoming a successful investor.

As Warren Buffett once said, "Success in investing doesn't correlate with IQ once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."

So, your financial intelligence or your ability to master the fundamentals can only improve you to a point. It helps you to build a strong base but the work you should do after that is your own and that is the work that will carry you forward. It means, you can learn trading techniques or investment principles from a good book or from an experienced person. Unfortunately, you cannot learn about yourself from any book or from any other person. So, when we are telling you that mastering emotions is a fundamental requisite for an investor, it simply means that your emotions can undo your work (by overriding your  financial intelligence)  because you will only know what is going on in your heart and head when your speculative bets or investment positions are going against you.

You may know a lot about the markets. You may even know … when to buy, when to sell, and which stocks have the potential to move. But how well do you know yourself?.. ... is all that matters the most.

Who's afraid of a big Current Account Deficit?

A big CAD is a bad thing -- much like a big fiscal deficit.

A country is always better off with a small or zero CAD or ideally a surplus.

The CAD is a drag on growth.

The large CAD is a profound drag on India's outlook.

If we managed to reduce the CAD, things would get better.

    Statements like this are rife. They are wrong.

 what is CAD? and What is Current Account? 

  Will the present high CAD get us into BOP crisis similar to 1991?

  To get a proper perspective on these issues click the link below:

click here to Read

Learn from these animals when investing in the stock market.

*To be aggressive as wolves and don't behave like sheep*

Those who are aggressive as wolves can make lots of money whereas those are as meek as sheep only stand to lose. Sheep have limited visibility as they can only see three feet ahead. Wolves can stand at the mountain top and look down the mountain so they can see further.

Wolves are also loners and sheep are in pack.

This is the wolf's mentality. When wolves go for the kill, they attack with speed. They act swiftly when it comes to reaping the rewards. All the entrepreneurs who are to make profits have wolf-like personalities.

*Be a shark is ideal*

However, being like a wolf does not guarantee success. It would be ideal if you could position yourself like a "shark". A shark can go without food for three weeks. When it has spotted its target it can surge forward at the fastest speed and kills it with one bite.

*Don't be Rabbit*

If you behave like rabbit, it will be hard for you to make big money from the stock market. Don’t be like a rabbit. When a rabbit chews on its carrot; it would look at it, put it down and repeat the cycle continuously. A rabbit always take small bites. It is just like small retail investors earn
small and quick profits. But, eventually, they would be devoured by BBs who
are like eagles.

*Be Predators*

Predators are like wolves, eagles and sharks and they always go for the kill. Their attacks are deadly. So good investors must be vicious, must be able to bear with certain situations and must have accurate foresight. Predators have great patience. Yes. You too need to be patient when it is disadvantage to you. Accurate predictions and vicious attacks are also essential. You can only succeed when you have these three attributes.

Why smart people make dumb money mistakes

The house I did not buy at Rs 46 lakh three years back now costs Rs 1.1 crore.

• The Rs 5,000 I put in a mutual fund three years ago is now worth Rs 15,000. I regret not putting in Rs 5 lakh.
• The best-performing fund slipped as soon as I bought it.
• I sell a stock after holding it for years, and it begins to fly like a kite the day I sell it.
• My neighbour got a super price for his land; I did not for mine.
• I have the wrong insurance policy, but am holding on to it.
• The price of my car dropped a week after I bought it.

I feel unlucky with my financial decisions. Here I am a perfectly normal sort of a person with a good job, a great family, in control of most of my life. Except for one thought that rankles in my overall feeling of well-being. I feel that I constantly take financial decisions that are not so cool.

If you find any of the above even a little bit familiar, take heart, most of us feel exactly the same way. Did you know that the human mind is programmed to fall into some behavioural traps that cost us big money? A relatively new branch of Economics, called Behavioural Finance, lays down a paradigm that is different from traditional Economics, where all people were rational, all economic choices were the best possible, and markets were mostly in equilibrium.

This meant there was a perfect world out there, where men were calculating machines with zero emotions such as fear, greed, regret and anticipation, and with perfect information about all products, services and prices at all points of time. But when psychologist-economist Daniel Kahneman won the 2002 Nobel Prize for his work in Behavioural Finance, this more real branch of Economics came centrestage.

And it is now accepted that the human mind is programmed to make big money mistakes due to habit - and emotion-driven actions. Though the scope of behavioural finance is much wider, we shortlist the five most common behaviour patterns that most often cost you a lot of money. And tell what you can do to sidestep these traps.

We tend to use mental short-cuts to decode everyday life. These rules of thumb make us put money into different mental accounts, preventing us from seeing the overall picture. Sometimes this works to our advantage - putting money in sacrosanct mental buckets like insurance premiums, tax saving instruments, and so on. But sometimes these buckets cause harm.

How do you use the money that a money-back insurance policy throws up periodically? Most people tend to blow up that money instead of treating it as a return on their investment to be used to meet a financial goal, or for further investing.

Similarly, a dividend, or tax refund is often used frivolously by ordinarily responsible people. A good way to get over this is to quickly bank the cheque and wait for some time. This waiting period can allow mental accounting to kick in so that we treat this money as part of our savings and not something to be blown up.

Mental accounting does not snare us only while spending, it traps us into sub-optimal investing decisions as well. While working out overall asset allocation, we forget to include the provident fund, the Public Provident Fund and endowment insurance polices in the process because they are not seen as part of our decision-making process but as something that's pre-decided. We then divide the rest of the surplus money between debt and equity.

No wonder that the average equity in household savings is a mere 5 per cent, the rest going into debt products (Handbook of Statistics on Indian Economy, Reserve Bank of India). Since equity has given an average annual return of over 16 per cent in the last 26 years, such mental blocks bring down our capacity to create wealth by leaving too much in low-return instruments.

Mental Accounting To compartmentalise a situation and ignore the overall picture. We treat money found or won less seriously than money earned, although both can build savings equally well.
Situation One You've paid Rs 150 to buy a movie ticket. When you get there, you realise you've lost the ticket. Do you buy another?	Situation two You are yet to buy a ticket. You get to the theatre and find that you have lost Rs 150 on the way. Do you still buy the ticket?
Answer If you do not buy in Situation 1 and buy in Situation 2, you have fallen prey to Mental Accounting. In the first case, you think you are spending Rs 300 on a movie and refuse to pay that much. In the second case, you treat the loss of Rs 150 as an unfortunate, but unrelated event, and buy the ticket. Your total spend is Rs 300 in both situations.
DUMB SIGN	SMART SIGN
You don't think you are a reckless spender, but still have trouble saving You tend to spend more when you use a credit card than when you use cash You save carefully, but blow up dividends, tax refunds or money back from an insurance policy You are less than 50, with most savings in FDs You have cash in your savings account and FDs, but unpaid balances on your credit card	You value each rupee equally and treat all inflows (even bonuses, dividends, refunds and money back on an insurance) as earned income You make an asset allocation after taking your PF and PPF in the debt part of your portfolio You look at tax-saving investments as asset allocation options and not as standalone decisions You do not use the instalment payment facility on your credit card

Way out. So, do remember to look at your total savings - fixed and unfixed. Take a look at the full asset allocation pie and then divide your funds between debt and equity.

Loss aversion and sunk cost We hate losses and peg the value of a rupee lost at double that of a rupee gained. We also throw good �money after bad - keep repairing an old car as we have spent lots on it already.
Situation ONE You have been given Rs 1 lakh. Now pick between a sure gain of Rs 50,000, and equal chances of gaining Rs 1 lakh or nothing.	Situation TWO You have been given Rs 2 lakh. Now pick between a sure loss of Rs 50,000, and equal chances of losing Rs 1 lakh or nothing.
Answer If you choose a sure gain in Situation 1 and take the gamble in Situation 2, you show Loss Aversion. The first options in both get you a certain Rs 1.5 lakh. In the second options of both, you can net either Rs 1 lakh or Rs 2 lakh. But as the value of loss is double that of gain, rather than take a hit of Rs 50,000, we take a chance that could even double the loss.
DUMB SIGN	SMART SIGN
�You make your spending decisions based on how much you have already spent You prefer fixed income instruments to stocks You sell winning, rather than losing stocks You take all your money out of the market when the market index falls You keep paying premiums on useless life covers just because you have already paid the first few premiums	�You diversify your investment in non-correlated products You don't carry the past and believe stock selling should not be based on buying price, but company fundamentals You understand your risk capacity and then choose products You look at investment returns in relation to a current benchmark rate �

We hate to lose. The distress that each lost rupee causes is twice as high as the pleasure we get from each rupee gained. This is actually good because it prevents us from gambling away our retirement funds or the money we save for our kids' education. But there is a big flipside to this. We tend to hold on to the wrong consumer and financial products. Why?

Because the act of throwing the rotten thing out would bring home the loss and make us 'feel' dumb. To prevent that feeling, we stuff new but tight shoes at the bottom of the shoe rack, and a new but useless mixer-juicer at the back of the kitchen cupboard.

Similarly, you hold on to losing shares and funds. People who invested Rs 10,000 in Bajaj Hindustan, a sugar stock, in May 2006, would be left with just Rs 2,943 today. If, on the other hand, they had cut losses and moved the money to the Sensex even after losing 25 per cent at the end of May 2006, their investment would be at Rs 11,000 today.

Use the loss aversion argument carefully, for it does not work for fundamentally sound stocks. Sometimes an overall fall in the market brings down the price of strong stocks. That, in fact, is the time to buy more rather than book losses.

Linked to this is the sunk cost trait. We go on putting good money after bad in, say, car or washing machine repair. Aren't we all familiar with spending recurrent amounts on 'fixing it' when a new appliance would have cost less? Loss aversion looks nasty when we see what it does to our investment behaviour.

Take, for example, our fetish for buying a new insurance policy every year. The only life cover one needs is a term plan, but the agent keeps selling you a useless policy every year. But do you discontinue the 4-per-cent-return money-back and endowment polices even when you discover that they are garbage? Most people continue paying premiums and say they are doing so because they have already invested for a few years.

Way out. The first mantra is to learn to cut losses and move on, but it should be used selectively for investments and products that are genuine losers. The second strategy is to have a well-diversified portfolio. It would be less subject to such mental traps as it would be more stable than individual stocks or funds.

Status quo bias and regret aversion The desire not to change the current status due to the fear of becoming worse off. This is partly to avoid regret and take responsibility for a painful action.
Situation One You invested Rs 10 lakh in Stock X. You are told to sell as it is losing steam. You don't. Your holding's value falls to Rs 8 lakh.�	Situation two You invested Rs 10 lakh in Stock Y. A friend suggests that you buy Stock X. You do. Your holding's value falls to Rs 8 lakh.�
Answer If you feel worse in Situation 2, you suffer from a Status Quo Bias or the desire not to suffer regret over a decision that may cause you to lose money. Most of us want to avoid the responsibility and pain of negative outcomes and, hence, do not take any action to change the status quo.
DUMB SIGN	SMART SIGN
�You allow a very wide range of choices to confuse you You do not monitor your portfolio each year �You keep very old investments alive even if they are non-viable �You continue to pay premiums for useless life insurance polices �You do not use the cool-off period in products like insurance to get out of wrong choices	�You understand that maintaining status quo is a decision �You monitor your investments each year �You weed out non-performing investments from your portfolio �You discontinue useless insurance polices that do not fetch inflation-plus returns �You do not wait for the end of the year to do your tax-saving investments

Since we hate to lose, we go to great lengths to avoid the feeling of regret and don't want to take on the responsibility of a wrong financial decision. This is called regret aversion. In the 'Status Quo Bias and Regret Aversion' test (on the left), the two people are in the same situation, but the second person feels worse because he blames himself for a wrong financial decision.

Having been through many situations where our financial decisions were proven wrong (selling a stock just before it became a kite, buying a house at the tail end of a property bubble, buying a gadget to see its price halving a week later), we fall into the status quo bias trap, or the desire not to change anything much with our financial lives so that we don't get to a position where we regret taking faulty financial decision.

Several cash-poor but asset-rich senior citizens fall into this category. Some of them are 100 per cent invested in debt instruments and real estate. They see real estate and stock prices zooming, but are unable to take the call of selling some of the real estate they are holding selectively to get more cash and invest the rest in stocks. They feel that real estate prices may go higher and stockmarket investments may go wrong anytime.

Way out. An overall asset allocation and portfolio diversification approach makes us look at portfolio return rather than individual product returns.

�'It's the dopamine!' Philippa Huckle, founder and chief executive of Hong Kong-based The Philippa Huckle Group, an investment advisory firm, is a behavioural finance expert. Outlook Money spoke to Huckle over telephone on applying the understanding of behavioural finance in investment decisions. Excerpts from the interview: Despite having knowledge of emotions that cause mistakes, why do people repeat the mistakes? This is due to the illusion of control. Typically, it's at work when we gamble, as well as when we invest. It gives us the feeling of having control over something that we know is random. When we gamble and win, a chemical called Dopamine is released in our brain that gives us a pleasant feeling that we try to prolong with more success. In the case of investments, too, if you win, you start taking more risk. How can we avoid the illusion of control while investing? This is possible by rebalancing of portfolio. Once you set the risk level for the portfolio across uncorrelated cycles, after some time, an economic condition that affects one kind of investment doesn't impact another and helps the former perform better. As a consequence, the asset allocation of the portfolio changes. Here's an illustration. Say, your portfolio has 50 per cent in equity and the rest in non-equity. If the environment is more favourable for equity, these investments could grow in value and constitute a larger part of the portfolio's total value than non-equity. The new equity-to-non-equity ratio could become 60:40. Now, you bring the portfolio back to the original risk level (50:50) by investing 10 per cent in non-equity. This is called rebalancing, which helps you curb the illusion of control.

Anchoring

This is when we hang on to a number, fact or return figure that has no bearing on the overall investment or spending decision. When property prices began zooming up in 2003, some of us postponed our purchase decision till they 'settled down'. We watched prices rise more than 100 per cent without doing anything, for we were 'anchored' to the earlier prices.

While this sort of anchoring can really break a family's wealth creation stride, a smaller, but more insidious hurt comes in the monthly grocery bill. You may have seen this sale gimmick: 'Cheap Basmati Rice: 5-kg bag now selling at Rs 210, down from Rs 350'. But this is

Rs 42 a kg on sale, down from Rs 70 a kg. You anyway get basmati rice at Rs 40-42 a kg. When we buy more or unnecessary products and services because they are 'cheaper' or 'free', we use up money that could have been used for wealth creation. A simple way out it to use the calculator to break 'sale' prices down to per kg or per gram or per litre to skip the anchoring trap.

Another example is a stock going at, say, Rs 1,500 that someone recommends. You consider buying it, but don't. When it reaches Rs 1,800, and you see that the company is going great guns, you say, "I should have bought it at Rs 1,500". That you didn't is one mistake, another would be to not buy it at Rs 1,800. You could fall into this trap while renting out your house. You may want the older, higher rent for your property even when overall rents have gone down. As a result, you may forego rent while still paying tax on the imputed rental on the second home.

Way out. To beat this mental trap, you can look for a current benchmark and not the one that is implicitly suggested, or even better, look at a realistic lifetime return that will make you happy. This is specially useful while evaluating the performance of your portfolio, fund and, even, unit-linked insurance policy. 

Money Illusion �

Anchoring A fact or figure with no bearing on a decision ends up influencing it. Many FD investors still look for a 12 per cent return, forgetting these are linked to inflation.
Situation One Convention is you should spend at least two months' pay on an engagement ring. You start calculating two months' pay.	Situation two Convention is you should spend at least two months' pay on an engagement ring. You ignore it and decide what to spend.�
Answer If you choose Situation 1, you are suffering from Anchoring bias. Actually, the ring should not cost more than what you can afford, irrespective of how many months' pay that amounts to. By fixing unrealistic benchmarks that may not be accurate, we get trapped into financial decisions that are harmful.
DUMB SIGN	SMART SIGN
You wait for a stock to come back up to its buying price before selling it You still pine for the 12% interest rate regime You want as much as your neighbour who sold when the real estate market was at its peak You want the same bumper return as last year from your mutual fund You buy at a 'discount', but the price is equal to the normal price due to smart packaging�	You value each stock purchase according to the fundamentals of the stock You are happy with an average index return of 15% a year You break down prices to per unit to see through sharp sales pitches You look at the average annual rate of return on your investment rather than absolute return to judge performance �

We have a tendency to ignore the effect of inflation on our money choices. Take, for example, the way an average insurance agent sells you a policy. His pitch to you is: Put in Rs 100,000 every year for 15 years and get back Rs 25 lakh. Sounds great, till you remove the money illusion. The annual return here is a nominal 6.9 per cent. Factor in inflation at 6 per cent and you are left with a return of just 0.9 per cent.

Other fixed return instruments like fixed deposits and bonds also fall prey to this trap. We think FDs are giving us 9 per cent return nowadays. But, at 6 per cent inflation, the real return is just 3 per cent. Allow taxes in and the return is even lower. 

Money illusion People mistake nominal variables for real variables. Investors evaluate� the return from debt instruments without taking into account inflation.�
Situation One Gave 30% returns on his funds in a year in which the benchmark rate was 40%. Will you choose him as your fund manager?�	Situation two Limited losses to 5% in a year in which the benchmark rate was minus 20%. Will you choose him as your fund manager?�
Answer If you chose the guy in Situation 1, you suffer from Money Illusion. In the first case, the fund manager underperformed the average market rate and the investor would have been better off in an index fund. In the second case, when the market fell by 20 per cent, this investor would have just lost 5 per cent.
DUMB SIGN	SMART SIGN
You look at the nominal return without looking at post-inflation earnings You do not use equity during retirement to stay ahead of inflation You promise to save more tomorrow rather than today You do not look at other costs of investments, typically in insurance You use absolute return to judge performance	You look at real return after accounting for cost, inflation and tax You use structured equity products like ETFs to ensure long-term wealth creation You understand the benchmarks in floating rate loan products You start investing today rather than wait for a large amount to begin with You see returns as benchmark-plus or -minus

Way out. Look at returns after taking into account inflation and taxes. To get the real returns, consider all the costs and taxes that apply to an investment, then reduce the return rate by the expected inflation number - about 6 per cent in India. You will find then that the stockmarket index gives the best long-term, low-cost real return. If you had invested Rs 10,000 in the Sensex in 1979, it would be worth over Rs 12.6 lakh today; a bank FD would have fetched Rs 1.58 lakh on the same amount.

Another way money illusion hurts is when inflation keeps eroding the real value of a life or non-life cover. If we assume an inflation rate of 5 per cent, a 25-year life cover of Rs 10 lakh (Rs 1 million) would be half as effective after 15 years since Rs 10 lakh then would be able to buy only what Rs 5 lakh does today. This is one reason why our insurance covers need periodic reviews.

You can be more in control of your financial life if you know the traps that you are programmed to fall into. The real challenge is to use these five behaviour traits as two-way weapons. Wherever possible, use their good points to your advantage, while being careful about their stings. Let not your financial journey be one of remorse and regrets, but of hope and conquests.

Courtesy: rediff.com