Challenging the Biggest Idea in Behavioral Finance

In a recent article for Bloomberg, columnist Barry Ritholtz rebuts the notion presented in a recent paper that the theory of loss aversion is a fallacy. The idea that people place more weight on avoiding losses than accumulating gains–a central theory in behavioral finance—was challenged by a recent study that suggests “cognitive bias via loss avoidance doesn’t exist, and messages framed in terms of losses are not more persuasive than those framed in terms of… Read More

Human Error and Behavioral Biases

A recent article in Morningstar addresses the subject of behavioral biases and how they affect investment decision-making. “Most investors,” it says, “could improve their portfolio risk management by turning the spotlight on themselves and recognizing when their behavioral biases may lead to bad decisions that hurt performance.” The article groups these biases into two categories: emotional biases and cognitive errors, noting that investors would be well-served to identify which they are more vulnerable to: Emotional… Read More

Swedroe Reviews New Book on Behavioral Investing

In a recent article for Institutional Investor, BAM Alliance Director of Research Larry Swedroe included Daniel Crosby’s new book The Behavioral Investor as one of his favorites on the study of behaviorial finance and how human nature “leads to investment errors, including the mispricing of assets.” “Crosby begins with a look at the sociological difficulties surrounding investment decision-making,” Swedroe explains, adding, “He then examines how the brain and body are poorly matched to the task… Read More

The Mental Roadblocks Faced by Investors

An article in offers an overview of seven cognitive biases that can significantly impact investor decision-making. “Given the foundational level at which these biases exist,” the article contends, “they have the capacity to affect practically all decisions, but can have an especially profound impact on financial planning and investment choices:” Overconfidence bias—having an “inflated view of one’s own decision-making abilities.” This can lead investors to make “wrong-headed—and ultimately harmful—investment decisions.” Confirmation bias—can prompt investors… Read More

The Psychology of Loss Aversion

An article in Psychology Today discusses loss aversion, and how regulating emotion and taking a different perspective can reduce it—and “help people overcome potentially disadvantageous decision biases.” Loss aversion, the article explains, is an expression of fear, which is why humans focus on negative events more than on positive ones. This shows up in consumer behavior, it says, in that price increases will lead to a great percentage drop in demand than price decreases will… Read More

Behavioral Finance is Alive and Well

An article in last month’s MorningstarAdvisor  provides a “brief tour through the history of behavioral finance” and offers some insights as to what might lie ahead. “Behavioral finance as a distinct approach is very much alive and well, and it is being applied in a variety of contexts within the industry,” writes Morningstar’s Steve Wendel, who oversees a team of researchers dedicated to developing “behavioral tools to help investors in an increasingly complicated market.” Wendel… Read More

Ritholtz Says Stock-Picking is Still Alive if Not Kicking

Active fund management has been losing followers but isn’t going away entirely, writes Barry Ritholtz in a recent Bloomberg article. While stock-picking has seen a host of changes, he offers several insights as to “how we got here” including the following: Beating the market is tougher than most people thought, a notion that Ritholtz says has become “widely accepted among both professional investors and individuals.” We have a much greater understanding of investor psychology, and… Read More

Jason Zweig on Investing Fact Versus Fiction

The human mind seeks to “confirm its pre-existing beliefs while ignoring warning signs that we might be wrong,” writes Jason Zweig of The Wall Street Journal. He uses the example of the surprise Trump win to illustrate how people avoid admitting that they were wrong. “If it requires fibbing to ourselves,” writes Zweig, “so be it.” Psychologists define the brain’s tendencies using the terms confirmation bias and hindsight bias. The first drives us to find… Read More

The Trading Effect

In psychology and behavioral economics, the endowment effect is the hypothesis that people assign more value to things they own. Past studies have shown that experienced securities traders are less susceptible to this bias but the reasons have been unclear. However, researchers at the University of Chicago recently published results of several experiments which suggest the cause, as reported in last week’s UChicago News. According to study findings, when experienced traders are selling they have “reduced activity in… Read More

Asness and Arnott Talk Market Timing, Smart Beta and Behavioral Biases

Maybe not always. At least that was the upshot of a debate between Cliff Asness of AQR and Rob Arnott of Research Affiliates, panelists at the recent Morningstar conference in Chicago. Although they debated various topics, they seemed to agree that value stocks deserve attention when they’re cheap. According to Asness, founder and managing principal at AQR, “Timing the market is hard and we call it a sin, but we recommend that investors sin a… Read More