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. […]

Morgan Housel Explains the Lure of Pessimism

“Every past market crash looks like an opportunity, but every future market crash looks like a risk,” writes Morgan Housel in a recent blog for Collaborative Fund. Housel offers insights as to why investors tend to attach more to negative thoughts than to positive ones, why pessimism is more “seductive” than optimism. Pessimism, he writes, “can be hard to distinguish from critical thinking and is often taken more seriously than optimism, which can be hard to distinguish from salesmanship and aloofness.” According to Daniel Kahneman, 2002 Nobel Laureate for his work in the field of behavioral economics: “Organisms that treat […]

To Beat Your Biases, Read Kahneman

While Nobel Prize-winning Economist Daniel Kahneman is not a believer in active management, his research is something investors and advisors should make themselves familiar with, Investment News says in a recent editorial.

Advisers vs. Machines

Professional and individual investors have long had a hard time beating the broader market. And, says Mark Hulbert, the rise of computer trading programs may be making it harder than ever. Hulbert writes in The Wall Street Journal that it’s been “nearly impossible lately” for investors to consistently beat index funds, and just as difficult to predict which managers will be able to do so. “Consider the 51 advisers out of more than 200 on the Hulbert Financial Digest’s list who beat the market in the decade-long period that ended April 30, 2012, as measured by the Wilshire 5000 Total […]

Battling Your Brain: How Loss Aversion Hurts Investors

Human beings are prone to a variety of behaviors that make them bad investors, and in an article for The Economic Times, Vivek Kaul looks at a major one: “loss aversion”. First identified and named by psychologists Daniel Kahneman and Amos Tversky, loss aversion is a phenomenon in which “people tend to base their decisions on perceived gains rather than perceived losses because the emotional impact of losses is far greater than that of gains,” Kaul writes. “Extensive research in behavioural economics shows that people experience twice as much pain when they face a loss in comparison to the pleasure […]