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 [...]
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 [...]
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 [...]
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, [...]
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 [...]
There are many studies showing that models beat experts, including the meta-study "Clinical versus mechanical prediction: A meta-analysis" by Grove et al. (2000). However, given this knowledge that models beat experts, forecasters still prefer to [...]
Curse of the Benchmarks Vayano and Woolley A version of the paper can be found here. Want a summary of academic papers with alpha? Check out our Academic Research Recap Category. h.t., J. Zaccardi. Abstract: Obsession with [...]
A really interesting paper hit the NBER wires recently. The central argument of the paper is that "rock star" thought leaders dominate a field, but when they die, new thought leaders are able to emerge. [...]
We cannot overemphasize that identifying sustainable alpha in the market is no cakewalk. More importantly, being smart, having superior stock-picking skills, or amassing an army of PhDs to crunch data is only half of the equation. Even with those tools, you are still only one shark in a tank filled with other sharks. All sharks are smart, all sharks have a MBA or PhD from a fancy school, and all the sharks know how to analyze a company. Maintaining an edge in these shark infested waters is no small feat, and one that only a handful of investors has accomplished. In order to achieve sustainable success as an active investor, one needs not only skill, but also an understanding of human psychology, and an appreciation of market incentives (behavioral finance). We start our journey where mine began: as an aspiring PhD student studying at the University of Chicago. Let the adventure begin... This post is not meant to convert a passive investor into an active investor; however, we do explain why we believe active investing can sustainably beat passive strategies in the long run. Plus, we bring to bear many years of cumulative research and experience to support our arguments. We cannot overemphasize that alpha in the market is no cakewalk. More importantly, being smart, having superior stockpicking skills, or amassing an army of PhDs to crunch data is only half of the equation. Even with those tools, you are still only one shark in a tank filled with other sharks. All sharks are smart, all sharks have a MBA or PhD from a fancy school, and all the sharks know how to analyze a company. Maintaining an edge in these shark infested waters is no small feat, and one that only a handful (e.g., we can count them in one hand) of investors has successfully accomplished. In order too achieve sustainable success as an active investing, one needs both skill and an understanding of human psychology and market incentives (behavioral finance). We start our journey where mine began: as an aspiring PhD student studying under Eugene Fama at the University of Chicago. Let the adventure begin...
Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns Turan G. Bali, Nusret Cakici, and Robert F. Whitelaw The Journal of Financial Economics, Vol. 99 February 2011 A version of the paper can [...]
"Though formal and informal sex work has long been identified as crucial for the spread of HIV/AIDS, the nature of the sex-for-money market remains poorly understood. Using a unique panel dataset constructed from 192 self-reported diaries, we find that women who engage in transactional sex substantially increase their supply of risky, better compensated sex to cope with unexpected health shocks, particularly the illness of another household member. These behavioral responses entail significant health risks for these women and their partners, and suggest that these women are unable to cope with risk through other consumption smoothing mechanisms."
"We study how professional investors use social networks to impound price-relevant information into asset prices. Exploiting novel data from an online social network that facilitates information sharing among fund managers, we find that long (short) recommendations released into the private network generate cumulative abnormal returns of 3.61% (-4.90%) over a twenty-day window. These results suggest that social networks play a direct role in facilitating the price discovery process."
Tweets and Trades: The Information Content of Stock Microblogs Timm Sprenger and Isabell Welpe A version of the paper can be found here. Abstract: Microblogging forums have become a vibrant online platform to exchange trading [...]
When is a Liability not a Liability? Textual Analysis, Dictionaries, and 10-Ks. Tim Loughran and Bill McDonald A published version of the paper can be found here. The authors keeps a version of the paper [...]
We here at Turnkey Analyst are big fans of Ben Graham, and are stalwart believers in the enduring relevance of Graham’s famous character, Mr. Market, to questions about investing in common stocks. Graham’s Mr. Market [...]
Almost a year ago, we posted a few articles on strategies focused on using Twitter as a mechanism to trade stocks. Our basic conclusion was "BS!" Here are the original articles: https://alphaarchitect.com/2011/05/institutional-investor-on-twitter-trading/ https://alphaarchitect.com/2011/04/is-trading-with-twitter-only-for-twits/ And an [...]
Analyzing Speech to Detect Financial Misreporting Jessen L. Hobson, William J. Mayew, Mohan Venkatachalam A version of the paper can be found here. Abstract: "We examine whether vocal markers of cognitive dissonance are useful for [...]
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 [...]
My uncle, who happens to a professional fisherman down in Mexico, just sent me a link to an article on sportfishing. http://www.bdoutdoors.com/article/fishing-cabo-san-lucas-mexico/ The article actually has a picture of me and my dad from 10+ years [...]
Just when you thought academics were not wasting their time doing incredibly useless research, along comes this intriguing research: Voice Pitch Predicts Labor Market Success among Male Chief Executive Officers by William Mayew and Mohan [...]