Behavioral Finance

//Behavioral Finance

Behavioral Finance and Investing: Are you Trying Too Hard?

By | 2017-08-18T17:09:32+00:00 May 13th, 2014|Key Research, Behavioral Finance|

Everyone makes mistakes. It’s part of what makes us human. Because humans understand their actions are sometimes flawed, it was perhaps inevitable that the field of psychology would develop a rich body of academic literature to analyze why it is that human beings often make poor decisions. Although insights from academia can be highly theoretical, our everyday life experiences corroborate many of these findings at a basic level: “I know I shouldn’t eat the McDonalds BigMac, but it tastes so good.” Because we recognize our frequent irrational urges, we often seek the judgment of experts, to avoid becoming our own worst enemy. We assume that experts, with years of experience in their particular fields, are better equipped and incentivized to make unbiased decisions. But is this assumption valid? A surprisingly robust, but neglected branch of academic literature, has studied, for more than 60 years, the assumption that experts make unbias decisions. The evidence tells a decidedly one-sided story: systematic decision-making, through the use of simple quantitative models with limited inputs, outperforms discretionary decisions made by experts. This essay summarizes research related to the “models versus experts” debate and highlights its application in the context of investment decision-making. Based on the evidence, investors should de-emphasize their reliance on discretionary experts, and should instead approach investment decisions with systematic models. To quote Paul Meehl, an eminent scholar in the field, “There is no controversy in social science that shows such a large body of qualitatively diverse studies coming out so uniformly in the same direction as this one [models outperform experts].”

Behavioral Finance: Part Behavior, Part Market Frictions

By | 2017-08-18T17:09:30+00:00 June 8th, 2015|Behavioral Finance|

The baseline theory for understanding asset prices is the Efficient Market Hypothesis (the “EMH”), pioneered by Eugene Fama. Of particular interest is semi-strong market efficiency, which claims that markets prices reflect all publicly available information about [...]

Comments Off on Behavioral Finance: Part Behavior, Part Market Frictions

Behavioral Bias Bingo — Availability Heuristic

By | 2017-08-18T17:09:43+00:00 September 16th, 2014|Behavioral Finance|

If you can recall something, you think it's important From 1990 through 2000 there were 1.4 deaths per 10 million passengers on U.S. scheduled airlines. Flying understandably feels dangerous. But we have actually been less [...]

Behavioral Bias Bingo: “Knew it all along” bias

By | 2017-08-18T17:09:37+00:00 May 28th, 2014|Behavioral Finance|

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 as "hindsight bias", or the "knew it all along" phenomenon. [...]

Do Behavioral Biases affect PGA Tour players?

By | 2017-08-18T17:06:27+00:00 August 5th, 2014|Research Insights, Behavioral Finance|

Is Tiger Woods Loss Averse? Persistent Bias in the Face of Experience, Competition, and High Stakes Pope and Schweitzer A version of the paper can be found here. Want a summary of academic papers with alpha? [...]

P/E “Attention” Strategies Earn Monthly Excess Return of 1%!

By | 2017-08-18T16:59:31+00:00 July 23rd, 2015|Research Insights, Behavioral Finance|

Rankings of Published Pricing-earnings Ratios and Investor Attention Jordan Moore A version of the paper can be found here. Want a summary of academic papers with alpha? Check out our Academic Research Recap Category. Abstract: Active investors [...]

Comments Off on P/E “Attention” Strategies Earn Monthly Excess Return of 1%!

How to Make Money in Markets: Understanding Expectation Errors

By | 2017-08-18T17:03:19+00:00 June 24th, 2015|Behavioral Finance, Value Investing Research, $SPY, Yahoo Tickers|

A new working paper from Gennaili, Ma, and the one-the-only Andrei Shleifer. Expectations and Investment Using micro data from Duke University quarterly survey of Chief Financial Officers, we show that corporate investment plans as well [...]

Comments Off on How to Make Money in Markets: Understanding Expectation Errors

For an Auditor, Intuition Might Matter!

By | 2017-08-18T17:04:50+00:00 February 6th, 2015|Research Insights, Behavioral Finance|

Thinking Fast versus Thinking Slow: The Effect on Auditor Skepticism Wolfe, Christensen and Vandervelde A version of the paper can be found here. Want a summary of academic papers with alpha? Check out our Academic Research Recap [...]