In this week's post, we discuss two posts. The first post, written by Elisabetta, examines a new method attempting to directly measure aggregate investor overconfidence. [...]
Aggregate Investor Confidence in the Stock Market Christoph Meier Journal of Behavioral Finance, 2018 A version of this paper can be found here Want to read [...]
A good friend, Sherman Doll, related the following story. Sherman has been a two-line sport kite flier for years. While not a pro, he has [...]
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 [...]
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.
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 [...]
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 [...]
A 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 [...]
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.
Psychology permeates nearly every area of human endeavor. In the world of investing, for instance, psychology can help us understand the systematically poor decision-making that [...]
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 [...]
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 [...]
n short, value investing the past few years has been a bad experience, but things can get a lot worse before they can get better. Sadly, this is the lot of the value investor. Value investing is really a tragic story of pain, anguish, and heartbreak that never really has a happy ending. The expected gains are almost always offset with extreme relative performance pain.
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 [...]
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,” [...]
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, [...]
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 [...]
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 [...]
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 [...]
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 [...]
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