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

Understanding the Behavioral Continuum on Your Way to Becoming a Better Investor

Shreenivas Kunte, director of content at the CFA Institute, recently wrote about the Behavioral Continuum and how it affects our decision making process. He contends that “behavioral patterns extend across a wide continuum. On the darker side, they can generate negativity or lead to disaster. On the lighter side, they are useful, even essential.” Thus, Kunte cautions that “being mindful about the structure and continuum of these patterns and their potential paradoxes is critical for… Read More

Emotions and Biases Play Huge Role in Bad Investment Decisions

In a recent New York Times article, columnist Gary Belsky observes that “the majority of cognitive biases and shortcuts that influence everyday judgement and choice have analogues in investment behavior.” In other words, insights from behavioral economics and finance explain why people don’t often behave rationally when investing. For example, amateur investors believe they can outperform the professionals, largely because of cognitive biases. The article highlights several, such as overconfidence and optimism biases, as described… Read More

Grantham Says Our Bias Toward Good News Makes Us Manipulable

In a recent Barron’s excerpt of a longer article, Jeremy Grantham, founder of asset management firm GMO, says Americans “have a broad and heavy bias away from unpleasant data” that makes us “ready to be manipulated by vested interests in finance, economics, and climate change, whose interests might be better served by our believing optimistic stuff ‘that just ain’t so.’” He points to a few examples of propositions that are “widely accepted by an educated… Read More

Working through the Pain for the Best Long Term Gain

  In a Financial Planning article titled “Investing Should Be Painful,” founder of research firm Wealth Logic, LLC Alan Roth writes, “I suggest telling clients to embrace the pain and take it as a good sign.” This approach reflects insights from psychology and behavioral finance.  The “pain” Roth is referring to comes from going against the cognitive biases of the human brain. Borrowing from Nobel Laureate Daniel Kahneman and others, Roth describes the more automatic… Read More