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Excess Returns, Ep. 29: Timeless Investing and Life Lessons with Jim O’Shaughnessy

In this week’s episode we are privileged to be joined by Jim O’Shaughnessy. Jim is a pioneer in quantitative investing and the founder of O’Shaughnessy Asset Management. He is also the author of the best selling book What Works on Wall Street, which is now on its 4th edition and is considered by many to be the definitive guide to factor-based investing. In this discussion, we get Jim’s takes on a wide range of topics… Read More

Thaler Warns to Sell Losers Before 2019

In a recent interview with Barron’s, behavioral economist and Nobel Laureate Richard Thaler said that although investors should sell their losing stocks at year-end, they resist doing so. Thaler said, “The most common mistake at the end of the year has an interesting behavioral twist, which is the failure to sell losers. We all know that if you have a choice between selling a winner and a loser, it’s a good idea to sell a… Read More

Investing Lessons from the Best Poker Players

Researchers on game theory say that poker strategies can translate into lessons for investors, according to a recent article in The Wall Street Journal. Carnegie Mellon professor of philosophy Kevin Zollman says that investors dislike losing more than winning and are prone to what behavioral finance refers to as the disposition effect, which leads them to sell assets that have increased in value but hold onto those that have decreased in value. The same behavior… Read More

Behavioral Finance and the Investment Process

In a recent podcast by CFA Institute, Clare Flynn Levy shares insights regarding the role that behavioral economics plays in investment decisions and the experiences that led rought her to create Essentia Analytics. In the interview, Flynn Levy notes that the finance industry “rewards people for skill, but performance is a measure of outcome, not necessarily a measure of skill. A lot of luck is involved.” She recounts her own strong performance as a tech… Read More

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 CNBC.com 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