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Are investors and traders cats, rationally and independently sniffing out returns? Or are they cows, flowing with a herd that must know something? Here is a listing of past blog entries related to behavioral finance, the study of the animal spirits of investing and trading:
Seasonal Environmental Factors and Perceived Risk ...traders may be able to exploit predictable seasonal changes in implied volatility that derive from the effects of investor mood on perceived risk and not from variations in actual risk.
Local Bias and Regional Abnormal Returns: Invest in Depressed States? ...investors may be able to exploit local bias-induced undervaluation (overvaluation) of stocks headquartered in U.S. states with depressed (exuberant) economies.
The Behavioral Asset Pricing Model ...investors on the whole base their (mis)perceptions of risk and return on feelings rather than rational pricing analysis. Contrarians may be able to exploit the underpricing of "despised" stocks by focusing on small value.
Unconditional Love for Losers? ...investors appear to focus on underperforming/losing stocks, cut them more slack and put more money into them.
Anger Management Training for Traders? ...traders should care strongly about their trading, focus on understanding any negative emotions they experience while trading, and work hard to prevent emotions from affecting their risk management practices.
Thrill Factor: The Stock Market as Amusement Park? ...game-like trading-enabled visual abstractions of the stock market may encourage individuals to see the market as amusement and treat trading like "edgework," wherein experiencing anticipated risk becomes an end in itself. (Perhaps some individuals should set up a separate, relatively small, edgework account for amusement.)
Multi-year Reversals for Past Winners and Losers ...the persistent and robust multi-year reversal of returns observed among UK stocks supports the view that investors overreact to price trends of the past few years, driving good (poor) performers too high (low).
Investors as Social (Relative Wealth) Climbers ...status may be more powerful than wealth as a motivator, with significant implications for investor/trader behavior.
What Puts Brits in the Mood (for Buying or Selling Stocks)? ...there is no reliable weather-sun-moon risk premium.
A Bear's Perspective on a Bull Market? When the market trend challenges their beliefs, what do we hear from market "experts"?
Why Rational Asset Pricing Models Don't Work Well ...the authors find that both market friction and investor irrationality play substantial roles in the pricing of stocks.
A Sign of All Times... Perhaps this blatant disrespect for the doom segment of the financial services industry portends a market top?
"Media"ting Your Portfolio? ...journalists amplify the attention bias of individual investors, especially for sell recommendations. (German financial) journalists show predictive ability in their (1) sell recommendations and (2) buy recommendations for value stocks and positive momentum stocks.
More Information is Better, Isn't It? ...individual investors should continually ask themselves whether their information gathering efforts support rational execution of new decisions, or merely feed overconfidence in past decisions.
Selling Too Soon, and Holding on Hope? ...data from Taiwan strongly supports the conjecture that investors avoid taking losses so that they do not have to admit mistakes.
Do Mutual Funds That Practice Behavioral Finance Principles Outperform? ...investing based on the principles of behavioral finance is indistinguishable from value investing, producing similar raw excess returns.
Spam Spasms: This Stock Ready to Explode! ...investors/traders who take the advice of spam stock touts are likely to lose big and fast.
Doom and the Stock Market ...there is no clear connection between proximity of doom for humanity and stock market performance. Other measures of doom may yield a relationship.
Scared by Randomness? ...investors/traders who check investment performance frequently should make mental adjustments for pain-avoidance bias.
The Illusionary Markets Hypothesis? Can influential traders actively profit from the psychological biases, the not fully rational decisions, of others? Stock market information warfare may be a winning strategy.
The Hedge Fund Public Relations Game Plan? Is this how a savy hedge fund manager plays the game? First, get cozy with other fund managers, market research firms and the media. Then "orchestrate" the attention paid to a company in which the manager's fund has taken a position? Here's a picture, with some links to relevant allegations and news/commentary...
An Overview of Investor Animal Spirits ...mood affects investor behavior, but it does not offer much in the way of practical trading edges. Keeping one's own emotions in check does seem key to outperforming as a trader.
Emergence of Behavioral Finance ...human psychology and sociology can trump the forces of stock market rationalization, at least for a while.
Sophistication + Experience > Behavioral Bias? ...sophisticated and experienced investors/traders avoid most of the bad effects of the disposition bias. Trading practice helps.
Channeling the Ghosts of Stocks Past ...individual investors should exercise special care when considering the repurchase of stocks previously owned or the purchase of more of stocks already owned to ensure that their intellects are in charge of their feelings.
The Animal Spirits of Day-Trading ...given that trading involves logical reasoning, numerical computation and long-term planning, one component of successful trading may be a reduced level of emotional reactivity.
Disagree with Me? Idiot! Liar! Basher! Pumper! Thinking more broadly about stock message boards...
Investors Behaving Badly? ...behavioral finance adds elements of human irrationality to the standard finance foundation concepts of Modern Portfolio Theory and Efficient Markets Hypothesis.
Your Attention, Please! (You Are About to Lose Money) ...reasonably isolated attention-grabbing events are opportunities for profitable day trading.
The Media: All Frenzy All the Time? The media...constitute a possibly destabilizing element, since they support the continuation and reinforcement of states of disequilibrium, or maybe even trigger them.
The Importance of Animal Spirits? ...investor emotions drive market volatility, but there is an asymmetry to fear and greed.
Implicit Coordination of Individual Investors? ...individual investors systematically show attention-driven herd-like behaviors.
Herd: The Latest ...investor and analyst herding and cascading helps explain some observed stock market price phenomena.
