Behavioral Bias Bingo: The Affect Heuristic
How do your feelings affect your decisions? "Humans perceive and act on risk in two fundamental ways. Risk as feelings refers to individuals' instinctive and [...]
About David Foulke
David Foulke is an operations manager at Tradingfront, Inc., a provider of automated digital wealth management solutions. Previously, he was at Alpha Architect, where he focused on business development, firm operations, and blogging on quantitative investing and finance topics. Prior to Alpha Architect, he was involved in investing and strategy at Pardee Resources Company, a manager of natural resource and renewable assets. Prior to Pardee, he worked in investment banking and capital markets roles at several firms in the financial services industry, including Houlihan Lokey, GE Capital and Burnham Financial. He also founded two internet companies, E-lingo, and Stonelocator. Mr. Foulke received an M.B.A. from The Wharton School of the University of Pennsylvania, and an A.B. from Dartmouth College.Behavioral Bias Bingo: “Knew it all along” bias
Hindsight bias: How we overestimate our prediction abilities People tend to overestimate their own predictive power when events have already occurred. This is commonly known [...]
Trusting Your Financial Advisor: Beware of your Behavioral Bias
Financial advisers are ubiquitous in the US, where many investors hire them to assist with investing, financial planning and other types of financial decision-making. Advisers [...]
Behavioral Bias Bingo – Hyperbolic Discounting, Present Bias and the Disposition Effect in Investing
Hyperbolic discounting and Present bias Executive Summary: "Intertemporal tradeoffs are ubiquitous in decision making, yet preferences for current versus future losses are rarely explored in [...]
Behavioral Bias Bingo — Ellsberg / Allais paradoxes: choice under uncertainty
Human beings crave certainty and loath ambiguity. People naturally gravitate towards the "sure thing" versus another option where the outcome is uncertain. Sometimes this is [...]
Introduction to Behavioral Finance – Part 2: Limits of Arbitrage
In the first part of our series, “Introduction to Behavioral Finance – Part 1: Behavioral Bias,” we explored several market anomalies, and the first required condition for the real-life implementability of many quantitative strategies: the existence of human behavioral biases. In this Part 2 of our series, we consider a related question following from our Keynes example: given that certain behavioral biases can affect investors, how can it be that their effects persist in markets so we can take advantage of them? This would seem to contravene the notion of efficient markets, and leads to the second required condition for implementing a tradable strategy: limits to arbitrage.
Introduction to Behavioral Finance – Part 1: Behavioral Bias
In this blog post, Part 1 of our two part series on Behavioral Finance, we explore human behavioral biases, how they affect us as investors, and how they are reflected in the stock market. In Part 2 of our series, we will explore the second required ingredient for profiting from behavioral bias: Limits of Arbitrage. Human behavior is diverse and complex and, unfortunately, despite our best intentions, it is not always governed exclusively by rationality. In particular, our judgment and decision-making can be significantly affected by intuition, a form of abstract, automatic thinking that can override our reason. Decades of research in psychology have shown that intuition is often systematically biased, and follows identifiable patterns, causing us to reach conclusions that are predictable wrong, since they are based on our gut or instincts, rather than on logic. An important aspect of behavioral biases is that they affect us in areas of our lives where it is very important that we be purely rational, such as in investing. In this blog post, we highlight a number of behavioral biases, and specifically how they can affect investors. Before getting into the specifics, we wanted to review some background we hope will be informative, and put the biases into an appropriate investing context.
Family Business Governance – Top 3 Lessons Learned
Family businesses permeate our economy and the business world. According to a recent Forbes article, close to 80% of US businesses and 40% of the [...]
Algorithms Beat Intuition – the Evidence is Everywhere
Would you trust a computer to drive your car? Google’s self-driving cars are now driving on city streets, and are rapidly becoming better drivers than [...]
Behavioral Finance 101 for Wall Street: Social Anchoring
The “anchoring bias” is firmly established in psychology circles, but a more recent area of focus within the field--social anchoring--is opening up some intriguing new [...]
Is Smart Beta Bullsh!+?
John Bogle did a tremendous service to humanity when he launched the first index fund in 1975. By providing people with a passive, low-cost way [...]
You shouldn’t buy this stock at any price.
Music to a value investor's ears: You shouldn't buy this stock at any price. Ben Graham advocated that we should always follow a cardinal rule [...]
Natural Gas Trading and Mental Accounting
It has been a long, cold winter on the East Coast. This has been very good for anyone long natural gas. Below is a chart, [...]
Buffett versus Asness on Bonds: Terrible Investment or Good Diversifier?
Financial news TV shows are a great place to wage philosophical battles, particularly with respect to investing, which tends to gets people’s juices flowing. Warren [...]
The Pursuit of Useless Information: Does this apply to Stock Picking?
Many in the investing world feel that, when assessing securities for purchase, the more information that can be assembled, the better off the investor. In [...]
The Psychology of Scarcity: Part 2 of 2 (Bonus! Scarcity in Asset Allocation)
How can one optimize performance and decision-making when one is affected by scarcity? This is the subject of Part 2 of our 2-part scarcity series. [...]
The Rocky Road to Economic Liberalization in China
China's banks are being buffeted by the winds of change. Earlier this month, the Shanghai Composite had its longest losing streak in 19 years, which [...]
The Law of Large Numbers and Casino Earnings
"…Even the stupidest man knows by some instinct of nature…that the greater the number of confirming observations, the surer the conjecture." - Jacob Bernoulli In [...]
The Psychology of Scarcity: Part 1 of 2
"…The inconveniences of a real scarcity cannot be remedied; they can only be palliated.” - Adam Smith, Chapter V, The Wealth of Nations As Adam [...]
High Payout Ratios Predict Higher Earnings Growth–Huh?
Every quarter, boards across America wrestle with the complex question of dividend policy. Perhaps the company has excess cash that should be paid out as [...]