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 cites some of the key players in this field of study as well as some major findings with respect to biases and other relevant factors. […]

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 this “makes the case for low-cost index investing even more compelling.” Quantitative studies, writes Ritholtz, suggest that much of active investing performance is attributable to […]

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 support for our pre-conceived notions, and the second compels us to believe that, once an outcome is known, we knew it was coming. Zweig writes, […]

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 the area of the brain often associated with pain and negative emotions,” thus allowing them to demand a higher price to sell a good than […]

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 little.” The panelists discussed the pros and cons of smart beta strategies, generally agreeing on most points. “The point of our whole exercise is check […]