Psychological biases lead to market overreaction and underreaction, and it can be difficult to discern which is happening at any given point, according to a recent article in Bloomberg. “For an investor, the idea that other people are making poor decisions is a tantalizing one,” the article states, which raises the question of if and how the predictable irrational behavior of humans can translate into stock market patterns that can be exploited by traders. ”… Read More
Richard Thaler, who was just awarded a Nobel Prize in Economics, “upended how people think about financial markets, helping found the field of behavioral finance,” according to an article in The Wall Street Journal. As Justin Lahart of WSJ put it, “Nobody gets a Nobel Prize for saying that stupid things happen in financial markets. One of the reasons economist Richard Thaler just got one is that he helped explain why.” Thaler’s research challenged the… Read More
By John P. Reese — It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity… So begins the celebrated classic, A Tale of Two Cities–Charles Dickens’ novel set during the French Revolution–but this opening paragraph could just as easily lead into a stock market chronicle outlining the vagaries of… Read More
By Jack Forehand — With so many great investing podcasts out there, it can be difficult to identify the best ones. Through our new Podcasts of the Week segment, I will try to help filter out the most interesting episodes and identify the podcasts I learned the most from each week. In addition, we will also take a look at a great podcast from the past via the From the Archives section. Best Episodes This… Read More
By John P. Reese — The celebrated author Mark Twain said, “It’s not what you don’t know that kills you, it’s what you know for sure that ain’t true.” Twain’s point is well taken, and a keen interpretation of the human condition. As a species, we are extremely accomplished at spinning tales and making meaning, whether based in logic or not, and formulating decisions based on those stories. A precarious tendency when it comes to… Read More
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
Richard Thaler is known for his pioneering research in the field of behavioral finance, and in a recent piece for Institutional Investor, Thaler explains how investors and NFL general managers can learn a lot from each other.
Richard Thaler, the researcher whose work has brought such key behavioral finance issues as myopic loss aversion to light, says recent events have shown markets are not efficient, but that they are still the best way to employ capital. “Counting the earlier bubble in Japanese real estate, we have now had three enormous price distortions in recent memory,” Thaler wrote in The Financial Times. “They led to misallocations of resources measured in the trillions and… Read More