Behavioral Finance

///Behavioral Finance

Do Security Analyst Recommendations Bet on or Against Academic Findings?

By |2017-10-16T08:10:03+00:00July 6th, 2017|Research Insights, Larry Swedroe, Behavioral Finance|

As my co-author Andrew Berkin, the director of research for Bridgeway Capital Management, and I explain in our new book, “Your Complete Guide to Factor-Based Investing,” there is considerable evidence of cross-sectional return predictability. Citing [...]

The Dividend Disconnect: Behavioral Finance Strikes Again

By |2017-08-18T16:55:39+00:00June 2nd, 2017|Research Insights, Behavioral Finance|

The first prediction in the paper is that "Capital Gains and Dividends Viewed as Distinct Desirable Attributes". But what does that mean? The authors highlight that when assessing stock positions, an investor has two options for how to assess the performance -- (1) simple price appreciation/depreciation or (2) total return. Note that price appreciation/depreciation is simply the price appreciation/depreciation on the position, while total return includes both the price appreciation/depreciation plus the dividend return. Directly from the paper: For many positions, either price changes or returns including dividends will yield the same category of gain or loss. However, some positions are at a gain when dividends are included, but at a loss without their inclusion. Do investors treat such positions as being at a gain or at a loss when evaluating whether to sell the position? This is equivalent to asking whether investors adjust for the mechanical decrease in shares price that results from dividend payments.

The Value Premium: Risk or Mispricing?

By |2017-08-18T16:55:06+00:00May 24th, 2017|Research Insights, Larry Swedroe, Other Insights, Behavioral Finance, Value Investing Research|

One of the great debates in finance is whether the source of the value premium is risk-based or a behavioral anomaly. In our book, “Your Complete Guide to Factor-Based Investing,” my co-author Andrew Berkin and [...]

A Direct Test of the Dividend Catering Hypothesis

By |2017-08-18T17:11:24+00:00May 18th, 2017|Research Insights, Behavioral Finance|

Why do CEOs decide to pay dividends? That is an interesting question, and one that academics have been researching for years. Miller and Modigiliani in 1961 show that if one assumes perfect and efficient capital [...]

“Alternative” Facts about Formulaic Value Investing

By |2017-08-18T17:12:00+00:00April 22nd, 2017|Research Insights, Key Research, Behavioral Finance, Value Investing Research, $vlue, $brk-a|

A new paper, "Facts about Formulaic Value Investing," is making the rounds and professes to plunge a dagger directly into the heart of systematic value investors. Half of my inbox is filled with questions regarding this [...]

Swedroe Spotlight: Does Market Sentiment Help Explain Momentum?

By |2017-08-18T16:56:30+00:00April 17th, 2017|Research Insights, Larry Swedroe, Guest Posts, Behavioral Finance, Momentum Investing Research|

David Smith, Na Wang, Ying Wang and Edward Zychowicz contribute to the literature on momentum with their paper, “Sentiment and the Effectiveness of Technical Analysis: Evidence from the Hedge Fund Industry,” which was published in the December 2016 issue of the Journal of Financial and Quantitative Analysis. Their work examines how investor sentiment affects the effectiveness of technical analysis strategies (which include the use of moving averages as well as momentum) used by hedge funds (which are considered sophisticated investors).The study was motivated by prior research that has focused on “investor sentiment,” which is the propensity of individuals to trade on noise and emotions rather than facts. Sentiment causes investors to have beliefs about future cash flows and investment risks that aren’t justified. Two researchers, Malcolm Baker and Jeffrey Wurgler, constructed an investor sentiment index based on six measures: trading volume as measured by NYSE turnover; the dividend premium (the difference between the average market-to-book ratio of dividend-payers and non-payers); the closed-end fund discount; the number and first-day returns of IPOs; and the equity share in new issues. Data is available at through Wurgler and New York University.

Active Versus Passive for the US and the Canadian Markets

By |2017-08-18T17:10:53+00:00February 7th, 2017|Behavioral Finance, Active and Passive Investing, ETF Investing|

We all hear about the massive move away from active to passive in the US market. We also hear arguments that passive may eat the world and that active management is a zero sum game [...]

Book Review — Loaded: Money, Psychology, and How to Get Ahead…

By |2017-08-18T17:09:08+00:00January 16th, 2017|Book Reviews, Behavioral Finance|

A few months ago I had the pleasure of hearing Sarah Newcomb speak at a recent Morningstar ETF conference. She was extraordinary. Although I only caught the last 20 minutes of her talk, she had [...]

Value investing is quite possibly the worst idea…EVER

By |2017-08-18T16:53:51+00:00September 14th, 2016|Research Insights, Behavioral Finance, Value Investing Research|

We believe deeply in the value philosophy as first described by Ben Graham: view stocks as ownership in a firm; buy with a margin of safety; avoid stories; think independently; and so forth. In fact, [...]

Behavioral Finance Must See: Thaler’s 2016 Presidential Address

By |2017-08-18T17:09:31+00:00July 1st, 2016|Behavioral Finance|

This is a great video to watch over the holiday weekend. Prof. Thaler does a great job walking through behavioral finance/economics. He also has a paper on related topics: Behavioral Economics: Past, Present and Future [...]

Leveraging Persuasion Science to Nudge Investors in a Better Direction

By |2017-08-18T17:01:25+00:00June 22nd, 2016|Behavioral Finance|

Making choices can be difficult, but possible alternatives can be arranged in a way that facilitates effective decision-making. This is the idea behind “choice architecture,” an concept that is explored in the book, “Nudge,” by [...]

Want to Know the Secret to Inefficient Prices? Lazy Prices.

By |2017-08-18T16:52:52+00:00June 13th, 2016|Research Insights, Behavioral Finance|

How do you handle repetitive tasks? If you're like most people, you work through a task in a variety of ways, find the most efficient approach, and then stick to that workflow. Consider email address autofill, automatic [...]

Behavioral Finance Strikes Again: Contrast Effects in Financial Markets

By |2017-08-18T17:09:30+00:00May 19th, 2016|Research Insights, Behavioral Finance|

At this point, even hard core efficient market fans will likely admit that behavior can influence investment decisions. Humans aren't robots. However, just because some investors exhibit bad behavior that doesn't mean they can influence prices. As the story [...]

Book Review — The Drunkard’s Walk: How Randomness Rules Our Lives

By |2017-08-18T17:09:06+00:00May 10th, 2016|Research Insights, Book Reviews, Behavioral Finance|

Although randomness is all around us, we often fail to recognize the profound role it plays in our lives. Evolutionary biology and faulty intuition lead us to make mistakes that can radically distort our perception of [...]

Alternative Beta can be Great: But Beware of Data-Mining!

By |2017-08-18T17:10:40+00:00May 9th, 2016|Research Insights, Behavioral Finance|

Quantifying Backtest Overfitting in Alternative Beta Strategies Antti Suhonen, Matthias Lennkh, and Fabrice Perez A version of the paper can be found here. Want a summary of academic papers with alpha? Check out our Academic Research Recap [...]

How Testosterone and Stress Affect Financial Decision-Making

By |2017-08-18T17:03:31+00:00May 3rd, 2016|Behavioral Finance|

Decision Making, Financial Risk Aversion and Behavioral Biases: The Role of Testosterone and Stress Nofsinger, Patterson and Daigler A version of the paper can be found here Want a summary of academic papers with alpha? Check [...]

Computers Still Beat Humans? We Ask, Will Grove Responds.

By |2017-08-18T17:07:56+00:00April 21st, 2016|Behavioral Finance|

Overconfidence is the death of everything in investing. I suffer from the problem just like everyone else because last time I checked...I'm human. As humans, we need to face the reality of overconfidence. Overconfidence is like [...]

Recreating Asset Bubbles in the Laboratory

By |2017-08-18T16:58:00+00:00March 29th, 2016|Research Insights, Behavioral Finance, Momentum Investing Research|

Are we in a bubble? It depends on what asset class you’re referring to, whom you ask, and what you mean by “bubble.” We’ve posted before on how some great finance minds define bubbles, and [...]

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