Animal Spirits
Are investors and traders cats, rationally and independently sniffing out returns? Or are they cows, flowing with a herd that must know something? These blog entries relate to behavioral finance, the study of the animal spirits of investing and trading.
Pricing Corporate News May 31, 2005
In their May 2005 draft paper entitled “The Market Impact of Corporate News Stories”, Werner Antweiler and Murray Frank apply computational linguistics to 245,429 Wall Street Journal news stories published during 1973 to 2001 to examine how, and how quickly, stock prices fully reflect 43 different kinds of news. They find that: More…
Detecting Wisdom in a Crowded Market May 6, 2005
In The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, James Surowiecki identifies and discusses the three conditions necessary for a crowd to make good group decisions. Applied to the stock market, good decisions means stock prices that reflect the true values of underlying assets. As depicted in the figure below, the three conditions are: More…
The Animal Spirits of Day-Trading April 16, 2005
In the March 2005 update of their paper entitled “Fear and Greed in Financial Markets: A Clinical Study of Day-Traders”, Andrew Lo, Dmitry Repin and Brett Steenbarger examine possible links between psychological factors and trading performance in a sample of 80 day-traders recruited from a five-week on-line training program offered by Linda Bradford Raschke. Interaction with study participants occurred via anonymous email and online questionnaires. The authors find that: More…
Disagree with Me? Idiot! Liar! Basher! Pumper! April 1, 2005
Thinking about stock message boards… More…
Investors Behaving Badly? March 28, 2005
“[B]ehavioral finance attempts to explain and increase understanding of the reasoning patterns of investors, including the emotional processes involved and the degree to which they influence the decision-making process. Essentially, behavioral finance attempts to explain the what, why, and how of finance and investing, from a human perspective.” In his March 2005 paper entitled “A Research Starting Point for the New Scholar: A Unique Perspective of Behavioral Finance,” Victor Ricciardi provides a brief history and overview of behavioral finance. He notes that: More…
Your Attention, Please! (You Are About to Lose Money) February 6, 2005
In their January 2005 paper on “Profiting from Predictability: Smart Traders, Daily Price Limits, and Investor Attention”, Mark Seasholes and Guojun Wu examine the counterplay between active individual investors and rational speculators (smart traders) after attention-grabbing events. Exploiting special access to detailed trading data for the Shanghai Stock Exchange during January 2001 through July 2003, they show that: More…
The Media: All Frenzy All the Time? December 29, 2004
In his July 2003 draft paper “Meta-Communication and Market Dynamics. Reflexive Interactions of Financial Markets and the Mass Media”, Thomas Schuster explores the role of the media in feeding investor irrationality. He concludes that: More…
The Importance of Animal Spirits? December 20, 2004
In their October 2003 paper entitled “Determinants of Stock Market Volatility and Risk Premia”, Mordecai Kurz, Hehui Jin and Maurizio Motolese model and examine “the dynamics of diverse [but still rational] beliefs” as the driver of asset market volatility. Specifically, they postulate that: More…
Implicit Coordination of Individual Investors? October 30, 2004
In their April 2003 paper entitled “Systematic Noise”, Brad Barber, Terrance Odean and Ning Zhu investigate the degree to which the trading behaviors of individual investors are systematic and herd-like. Using samples of 66,465 investors at a large national discount broker and 665,533 investors at a large retail broker, they find that: More…
Overview of Investor Herding October 9, 2004
Investor herding is convergence of behavior based only on observation of what others are doing (such as buying or selling). Examples in the stock market are trend-following, “don’t fight the tape” and momentum investing. Herding is distinct from investors acting at the same time but independently in response to news related to investment fundamentals (such as the latest jobs report from the Bureau of Labor Statistics or a company earnings release). In their December 2001 paper entitled Herd Behavior and Cascading in Capital Markets: A Review and Synthesis, David Hirshleifer and Siew Hong Teoh provide an overview of financial herding. More…
