The document discusses various behavioral biases that can negatively impact investment decision making, such as overconfidence, hindsight bias, and familiarity bias. It explains how these biases can cause investors to make poor decisions by buying high and selling low. The document advocates using a disciplined and diversified long-term investment approach to help control for behavioral biases and avoid attempts to time the market.
Bill Janeway, Managing Director, Warburg Pincus discusses the good and the bad of investment bubbles and why he worries about the Unicorn Bubble.
Watch the full talk, with transcript by following this link:
http://businessofsoftware.org/2016/01/bill-janeway-warburg-pincus-productive-bubbles-video-slides-transcript-bos-europe-2015/
Bill Janeway, Managing Director, Warburg Pincus discusses the good and the bad of investment bubbles and why he worries about the Unicorn Bubble.
Watch the full talk, with transcript by following this link:
http://businessofsoftware.org/2016/01/bill-janeway-warburg-pincus-productive-bubbles-video-slides-transcript-bos-europe-2015/
Behavioural Finance - An Introspection Of Investor PsychologyTrading Game Pty Ltd
Investors always try to make rational decision while analyzing and interpreting information collected from various sources for different investment avenues to arrive at an optimal investment decision. But at the same time they are influenced by various psychological factors that influence them internally and bias their investment decision. Linter (1998) studied the various factors that influence internally the informed investment decision and included them under the discipline of behavioural finance. Behavioural finance studies how people make investment decision and influenced by internal factors and bias. The main purpose of the paper is to assess impact of behavioural factors over mutual fund investment decision made by investors in Raipur city.
My interview with hedge fund king Ray DalioVikram Khanna
Thirty nine years ago, Ray Dalio started Bridgewater Associates from his apartment in Manhattan. Today it is the world's largest hedge fund, with assets under management of more than US$150 billion. I got the rare opportunity to talk with this self-effacing about his investment philosophy his radical - you might even say bizzare - approach to management and his world view. He also talked about meditation, to which he credits many of his insights and much of his success
Dissertation on behavioral finance and its impact on portfolio investment dec...Rahmatullah Pashtoon
Extreme volatility has plagued financial markets worldwide since the 2008 Global Crisis. Investor sentiment has been one of the key determinants of market movements. In this context, studying the role played by emotions like fear, greed and anticipation, in shaping up investment decisions seemed important. Behavioral Finance is an evolving field that studies how psychological factors affect decision making under uncertainty. This thesis seeks to find the influence of certain identified behavioral finance concepts (or biases), namely, Overconfidence, Representativeness, Herding, Anchoring, Cognitive Dissonance, Regret Aversion, Gamblers’
Fallacy, and Mental Accounting, on the decision making process of individual investors in the Indian Stock Market. Primary data for analysis was gathered by distributing a structured questionnaire among investors who were categorized as (i) young, and (ii) experienced. Results obtained by analyzing a sample of 74 respondents, out of which 12 admitted to having suffered a loss of at least 50% because of the crisis, revealed that the degree of exposure to the biases separated the behavioral pattern of young and experienced investors.
Gamblers’ Fallacy, Anchoring and Representative and Herding bias were seen to affect the young investors significantly more than experienced investors.
A research study on investors behaviour regarding choice of asset allocation ...SubmissionResearchpa
Every rational economic decision maker would prefer to avoid a loss, to have benefits be greater than costs, to reduce risk, and to have investments gain value. Loss aversion refers to the tendency to loathe realizing a loss to the extent that you avoid it even when it is the better choice. How can it be rational for a loss to be the better choice? Say you buy stock for $100 per share. Six months later, the stock price has fallen to $63 per share. You decide not to sell the stock to avoid realizing the loss. If there is another stock with better earnings potential, however, your decision creates an opportunity cost. You pass up the better chance to increase value in the hopes that your original value will be regained. Your opportunity cost likely will be greater than the benefit of holding your stock, but you will do anything to avoid that loss. Loss aversion is an instance where a rational aversion leads you to underestimate a real cost, leading you to choose the lesser alternative. Aim of this paper is to identify the various factors which are affecting to the investment decision and behavioural finance by Gobinda Dhamala, Khushboo Sharma, Kunal Jaiswal, Dimple Patel, Pooja Singh and Ritu Sinha 2020. A research study on investors behaviour regarding choice of asset allocation of teaching staff. International Journal on Integrated Education. 3, 3 (Mar. 2020), 126-135. DOI:https://doi.org/10.31149/ijie.v3i3.298 https://journals.researchparks.org/index.php/IJIE/article/view/298/291 https://journals.researchparks.org/index.php/IJIE/article/view/298
Abstract
The idea of an Efficient Market first came from the French mathematician Louis Bachelier in 1900: « The theory of speculation ».
Bachelier argued that there is no useful information in past stock prices that can help predicting future prices and proposed a theory for financial options’ valuation based on Fourier’s law and Brownian’s motions (time series).
Bachelier’s work get popular in the 60s during the computer’s era.
In 1965, Eugene Fama published a dissertation arguing for the random walk hypothesis (Stock market’s prices evolve randomly: prices cannot be predicted using past data).
In 1970, Fama published a review of the theory and empirical evidences
The EMH (Efficient Market Hypothesis): Financial markets are efficient at processing information. Consequently, the prices of securities is a correct representation of all information available at any time.
Weak:
Not possible to earn superior profits (risk adjusted) based on the knowledge of past prices and returns.
Semi-strong:
Not possible to earn superior profits using all information publicly available.
Strong:
Not possible to earn superior profit using all publicly and inside information.
The CAPM describes the relationship between market risks and expected return for a security i (also called cost of equity), E(Re_i):
Re_i = Rf – Bi(Rm – Rf)
With:
Rf = Risk free rate (typically government bond rate)
Rm = Expected return for the whole market
Bi = The volatility risk of the security i compared to the whole market
(Rm – Rf) is consequently the market risk premium
According to the EMH, for a well-diversified portfolio, expected returns can only reflect those of the market as a whole. Consequently, in the CAPM formula, It would involves that for a diversified-enough portfolio: β = 1 so Re = Rm
Investors want to value companies before making investment decisions.
A typical way to do so is to use the Discounted Cash Flow (DCF) method:
See also: Prospect theory, disposition effect, heuristic, framing, mental accounting, Home bias, representativeness, conservatism, availability, greater fool theory, self attribution theory, anchoring, ambiguity aversion, winner's curse, managerial miscalibration and misconception, Equity premium puzzle, market anomalies, excess volatility, Bubbles, herding, limited liabilities, Fama French three 3 factors model.
"The Patience Principle" is an article written by Jim Parker, Vice President at DFA Australia Limited, for Dimensional Fund Advisors Outside the Flags column.
The impression often given by the financial media is that passive investors will be undone by poor behaviour, and that they'll panic when markets experience a serious downturn. But the evidence tells a different story.
Behavioural Finance - An Introspection Of Investor PsychologyTrading Game Pty Ltd
Investors always try to make rational decision while analyzing and interpreting information collected from various sources for different investment avenues to arrive at an optimal investment decision. But at the same time they are influenced by various psychological factors that influence them internally and bias their investment decision. Linter (1998) studied the various factors that influence internally the informed investment decision and included them under the discipline of behavioural finance. Behavioural finance studies how people make investment decision and influenced by internal factors and bias. The main purpose of the paper is to assess impact of behavioural factors over mutual fund investment decision made by investors in Raipur city.
My interview with hedge fund king Ray DalioVikram Khanna
Thirty nine years ago, Ray Dalio started Bridgewater Associates from his apartment in Manhattan. Today it is the world's largest hedge fund, with assets under management of more than US$150 billion. I got the rare opportunity to talk with this self-effacing about his investment philosophy his radical - you might even say bizzare - approach to management and his world view. He also talked about meditation, to which he credits many of his insights and much of his success
Dissertation on behavioral finance and its impact on portfolio investment dec...Rahmatullah Pashtoon
Extreme volatility has plagued financial markets worldwide since the 2008 Global Crisis. Investor sentiment has been one of the key determinants of market movements. In this context, studying the role played by emotions like fear, greed and anticipation, in shaping up investment decisions seemed important. Behavioral Finance is an evolving field that studies how psychological factors affect decision making under uncertainty. This thesis seeks to find the influence of certain identified behavioral finance concepts (or biases), namely, Overconfidence, Representativeness, Herding, Anchoring, Cognitive Dissonance, Regret Aversion, Gamblers’
Fallacy, and Mental Accounting, on the decision making process of individual investors in the Indian Stock Market. Primary data for analysis was gathered by distributing a structured questionnaire among investors who were categorized as (i) young, and (ii) experienced. Results obtained by analyzing a sample of 74 respondents, out of which 12 admitted to having suffered a loss of at least 50% because of the crisis, revealed that the degree of exposure to the biases separated the behavioral pattern of young and experienced investors.
Gamblers’ Fallacy, Anchoring and Representative and Herding bias were seen to affect the young investors significantly more than experienced investors.
A research study on investors behaviour regarding choice of asset allocation ...SubmissionResearchpa
Every rational economic decision maker would prefer to avoid a loss, to have benefits be greater than costs, to reduce risk, and to have investments gain value. Loss aversion refers to the tendency to loathe realizing a loss to the extent that you avoid it even when it is the better choice. How can it be rational for a loss to be the better choice? Say you buy stock for $100 per share. Six months later, the stock price has fallen to $63 per share. You decide not to sell the stock to avoid realizing the loss. If there is another stock with better earnings potential, however, your decision creates an opportunity cost. You pass up the better chance to increase value in the hopes that your original value will be regained. Your opportunity cost likely will be greater than the benefit of holding your stock, but you will do anything to avoid that loss. Loss aversion is an instance where a rational aversion leads you to underestimate a real cost, leading you to choose the lesser alternative. Aim of this paper is to identify the various factors which are affecting to the investment decision and behavioural finance by Gobinda Dhamala, Khushboo Sharma, Kunal Jaiswal, Dimple Patel, Pooja Singh and Ritu Sinha 2020. A research study on investors behaviour regarding choice of asset allocation of teaching staff. International Journal on Integrated Education. 3, 3 (Mar. 2020), 126-135. DOI:https://doi.org/10.31149/ijie.v3i3.298 https://journals.researchparks.org/index.php/IJIE/article/view/298/291 https://journals.researchparks.org/index.php/IJIE/article/view/298
Abstract
The idea of an Efficient Market first came from the French mathematician Louis Bachelier in 1900: « The theory of speculation ».
Bachelier argued that there is no useful information in past stock prices that can help predicting future prices and proposed a theory for financial options’ valuation based on Fourier’s law and Brownian’s motions (time series).
Bachelier’s work get popular in the 60s during the computer’s era.
In 1965, Eugene Fama published a dissertation arguing for the random walk hypothesis (Stock market’s prices evolve randomly: prices cannot be predicted using past data).
In 1970, Fama published a review of the theory and empirical evidences
The EMH (Efficient Market Hypothesis): Financial markets are efficient at processing information. Consequently, the prices of securities is a correct representation of all information available at any time.
Weak:
Not possible to earn superior profits (risk adjusted) based on the knowledge of past prices and returns.
Semi-strong:
Not possible to earn superior profits using all information publicly available.
Strong:
Not possible to earn superior profit using all publicly and inside information.
The CAPM describes the relationship between market risks and expected return for a security i (also called cost of equity), E(Re_i):
Re_i = Rf – Bi(Rm – Rf)
With:
Rf = Risk free rate (typically government bond rate)
Rm = Expected return for the whole market
Bi = The volatility risk of the security i compared to the whole market
(Rm – Rf) is consequently the market risk premium
According to the EMH, for a well-diversified portfolio, expected returns can only reflect those of the market as a whole. Consequently, in the CAPM formula, It would involves that for a diversified-enough portfolio: β = 1 so Re = Rm
Investors want to value companies before making investment decisions.
A typical way to do so is to use the Discounted Cash Flow (DCF) method:
See also: Prospect theory, disposition effect, heuristic, framing, mental accounting, Home bias, representativeness, conservatism, availability, greater fool theory, self attribution theory, anchoring, ambiguity aversion, winner's curse, managerial miscalibration and misconception, Equity premium puzzle, market anomalies, excess volatility, Bubbles, herding, limited liabilities, Fama French three 3 factors model.
"The Patience Principle" is an article written by Jim Parker, Vice President at DFA Australia Limited, for Dimensional Fund Advisors Outside the Flags column.
The impression often given by the financial media is that passive investors will be undone by poor behaviour, and that they'll panic when markets experience a serious downturn. But the evidence tells a different story.
StockTakers Risk Price partitions markets with clarity of firms debt structure. Modal Geometry projects trading connections worth creation process better from N-dimensions than GAAP can account from 2-dimensions. Know better, trade better, because we can.
4 active vs passive advisor insert funds flows dfa (advisor present) p. 1-3, ...Weydert Wealth Management
This excellent article contains three key graphics illustrating how average investors flow into and out of investments at the wrong times and contrasts this with the average DFA investor who remains much more consistent and disciplined.
Similar to Behavioral Finance and Investor Returns (20)
4 active vs passive advisor insert funds flows dfa (advisor present) p. 1-3, ...
Behavioral Finance and Investor Returns
1. Behavioral Biases
and Investment Implications
Scott A. Bosworth
Vice President
Date of first use: September 10, 2009.
2. Behavioral Biases
and Investment Implications
“I can calculate the motion of heavenly bodies,
but not the madness of people.”
—Sir Isaac Newton, response to the 1720 collapse of the
“South Sea Bubble”
1
3. Behavioral Biases
and Investment Implications
► What are the common biases?
► How do biases affect decision making?
► How investors can control for biases.
2
4. Behavioral Biases
“. . . emotion overwhelms reason.”
“Financial losses are processed in the
same areas of the brain that respond
to mortal danger.”
Jason Zweig, Your Money and Your Brain (New York: Simon & Schuster, 2007). 3
6. Overconfidence
► Survey of investors, asked how the market would do and how their
own portfolio would do over the ensuing 12 months.
Market Portfolio
June 1998 13.4% 15.2%
February 2000 15.2% 16.7%
September 2001 6.3% 7.9%
Kenneth L. Fisher and Meir Statman, “Bubble Expectations,” Journal of Wealth Management 5, no. 2 (Fall 2002): 17-22. 5
7. Hindsight Bias
“How could I have been so stupid?”
►Past events seem easy to predict.
►The future, therefore, seems easy to predict.
►Hindsight is not 20/20.
6
8. Familiarity Bias (invest in what you know)
► Provides a false sense of security by giving the impression of control.
► Examples:
– Concentrating wealth in a few well-known companies with which you
are familiar.
– Holding a “legacy” stock.
The market does not reward investors with risk premiums
for “loyalty” or “familiarity.”
7
9. Regret Avoidance
“I won’t make that mistake again.”
► Counterfactual thoughts lead to regret.
► “If only I had not made the decision to buy X.”
You did buy X, so not buying it in the past
is counterfactual.
Diversification neither assures a profit nor guarantees against loss in a declining market. 8
10. Self Attribution Bias
“Look how smart I am.”
OR
“No one could have seen that coming.”
Credit: Attribute success to self-possessed skills or inherent abilities.
Blame: Attribute failures to externalities that we could not know or control.
9
11. Extrapolation
Historical returns
are based on old
news.
Future returns are unknown . . .
10
12. “News”
► A report of recent events.
► Previously unknown information.
► Something having a specified influence or effect.
Source: Merriam-Webster online dictionary. 11
13. Magazine publication dates: Fortune, March 3, 1997 (America’s Most Admired Companies); Money, August 1997 (Don’t
Just Sit There… Sell Stocks Now); Money, May 1999 (Tech Stocks, Everyone’s Getting Rich!); Time, September 9,
1974 (Economy: The Big Headache); Time, October 15, 1990 (High Anxiety); Time, November 2, 1987 (The Crash).
12
14. Steve Forbes
Publisher, Forbes Magazine
“You make more money selling advice than
following it. It’s one of the things we count on
in the magazine business—along with the
short memory of our readers.”
Excerpt from presentation at The Anderson School, University of California, Los Angeles, April 15, 2003. 13
15. Investor Behavior
In 2008 the S&P 500 Index returned -37.72%
In 2008 the average equity investor earned -41.63%
From Jan 1989 through Dec 2008 (20 Years):
► Average equity investor earned annual return of 1.87%
► Underperformed the S&P 500 Index by 6.48%
► Underperformed inflation by 1.02%
Takeaways:
► Investors buy high and sell low.
► Returns are more dependent on investor behavior than fund performance.
► Buy-and-hold investors typically earn higher returns over time than those who
time the market.
The S&P data are provided by Standard & Poor’s Index Services Group.
Dalbar, Inc., “Quantitative Analysis of Investor Behavior 2009,” (www.dalbar.com). DALBAR develops standards for, and provides research,
ratings, and rankings of intangible factors to the mutual fund, broker/dealer, discount brokerage, life insurance, and banking industries. They 14
include investor behavior, customer satisfaction, service quality, communications, Internet services, and financial-professional ratings.
16. The Appeal of Market Timing
► What if you only invested in the stock market in months when it
outperformed T-Bills?
► From 1990 through 2008, a $1 MM investment in the following would
have returned:
US T-Bills (buy and hold) $2.12 MM
US stock market (buy and hold) $3.94 MM
US stock market only when equity
premium is positive $136.21 MM
► Wealth from timing would be 34 times that of a buy-and-hold strategy.
US stock market measured by CRSP 1-10 Index. Third calculation based on highest asset class return each year from previous slide.
CRSP is a research center at the Graduate School of Business (founded in 1898) of the University of Chicago. CRSP is a non-profit
center which also functions as a vendor of historical data. CRSP end-of-day historical data covers roughly 26, 500 stocks – active and
inactive – listed on the NYSE, Alternext (formerly known as the Alternext (formerly AMEX)), NASDAQ and ARCA exchanges. OTC
bulletin board stocks are not included.. US T-Bill data provided by Ibbotson Associates. .
Treasury securities are negotiable debt issued by the United States Department of the Treasury. They are backed by the government’s
full faith and credit and are exempt from state and local taxes. Stock is the capital raised by a corporation through the issue of shares 15
entitling holders to an ownership interest of the corporation.
17. Perspective on Markets
“October is one of the peculiarly dangerous
months to speculate in stocks. The others are
July, January, September, April, November, May,
March, June, December, August, and February.”
—Mark Twain
“The market can stay irrational longer than you
can stay solvent.”
— Quotation attributed to John Maynard Keynes
Dan Wheeler is the founder of the Dimensional Fund Advisors Financial Advisors Services. 16
18. Perspective from Academia
“As I have often argued: Even the Almighty cannot
determine a single correct value for the market as a whole.”
—Burton Malkiel, “How Much Higher Can the Market Go?” Wall Street
Journal, September 22, 1999.
“There’s something in people, you might even call it a little
bit of gambling instinct . . . I tell people [investing] should be
dull. It shouldn’t be exciting. Investing should be more like
watching paint dry or watching grass grow. If you want
excitement, take $800 and go to Las Vegas.”
—Paul Samuelson, 1970 Nobel Laureate in Economics, in “The Ultimate
Guide to Indexing,” Bloomberg, September 1999.
17
19. Risk and Return
► Free markets must compensate investors for bearing risk.
► The market is “forward looking.” Expectations of risk are priced into
the market currently.
► Risk is higher (and prices lower) during recessions.
► Expected returns for risky assets should be higher during recessions.
Expected return is the percentage increase in value a person may anticipate from an investment based on the level of risk associated with
the investment, calculated as the mean value of the probability distribution of possible returns.
Dalbar, Inc., “Quantitative Analysis of Investor Behavior 2009,” (www.dalbar.com). DALBAR develops standards for, and provides research,
ratings, and rankings of intangible factors to the mutual fund, broker/dealer, discount brokerage, life insurance, and banking industries. They
include investor behavior, customer satisfaction, service quality, communications, Internet services, and financial-professional ratings. 18
20. Disciplined Approach
What You Can’t Control What You Can Control
– Pick winning stocks – Reduce expenses
– Pick superior managers – Diversify portfolio
– Time the markets – Minimize taxes
– Financial press – Discipline
Diversification neither assures a profit nor guarantees against loss in a declining market. 19
21. Nick Murray
“At the end of our investing lifetime, it won’t
matter what your funds did, it’ll matter what you
did. And what you did will be a pure function of
the quality of the advice you got—from one
caring, competent [advisor], and not from any
number of magazines.”
Diversification neither assures a profit nor guarantees against loss in a declining market.
“Murray on Marketing,” Investment Advisor Magazine, October 1994. 20
23. For US Investors:
Dimensional Fund Advisors is an investment advisor registered with the
Securities and Exchange Commission. Consider the investment
objectives, risks, and charges and expenses of the Dimensional funds
carefully before investing. For this and other information about the
Dimensional funds, please read the prospectus carefully before
investing. Prospectuses are available by calling Dimensional Fund
Advisors collect at (310) 395-8005; or on the internet at
www.dimensional.com; or, by mail, DFA Securities LLC, c/o
Dimensional Fund Advisors, 1299 Ocean Avenue, 11th Floor, Santa
Monica, CA 90401. Mutual funds distributed by DFA Securities LLC.
24. For Australian Investors:
This material is provided for information only. No account has been
taken of the objectives, financial situation, or needs of any particular
person, and no person should place reliance on this material prior to
seeking independent financial product advice. To the extent that this
material may be considered to constitute general financial product
advice, investors should, before acting on the advice, consider the
appropriateness of the advice, having regard to the investor’s
objectives, financial situation, and needs. This is not an offer or
recommendation to buy or sell securities or other financial products, nor
a solicitation for deposits or other business, whether directly or
indirectly.
25. For Australian Investors:
A Product Disclosure Statement (PDS) for the Dimensional Australian
Resident Trusts, under which offers to invest in these trusts are made,
is available from the issuer of the PDS, DFA Australia Limited (ABN 46
065 937 671, Australian financial services license no. 238093) or by
download from our website at www.dimensional.com.au. Investors
should consider the current PDS in deciding whether to invest in the
trusts, or to continue to hold their investments in the trusts.
Unless an exemption applies, anyone wishing to accept the offer in the
PDS will need to complete the application form accompanying the
PDS. DFA Australia Limited is the manager and responsible entity of
the trusts and in that capacity receives fees from the trusts, details of
which are set out in the current PDS. Investors may also obtain a copy
of DFA Australia Limited’s Financial Services Guide by calling (02)
8336 7100 or by download from our website at
www.dimensional.com.au.
26. For Canadian Investors:
Dimensional Fund Advisors is an investment advisor registered with the
Securities and Exchange Commission and is the sub-advisor to the
mutual funds managed by Dimensional Fund Advisors Canada ULC.
This publication is distributed by Dimensional Fund Advisors Canada
ULC for educational purposes only and should not be construed as
investment advice or an offer of any security for sale. Unauthorized
copying, reproducing, duplicating, or transmitting of this material is
prohibited. The mutual funds advised by Dimensional Funds Advisor
Canada ULC are available only to Canadian residents, through
approved advisors.
27. For Canadian Investors:
The prospectus contains more complete information on risks, advisory
fees, distribution charges, and other expenses and should be read
carefully before you invest or send money. Prospectuses for
Dimensional Funds can be obtained directly from Dimensional Fund
Advisors Canada ULC at Suite 1520, 1500 West Georgia Street,
Vancouver, British Columbia V6G 2Z6; by calling (604) 685-1633, or by
visiting www.dfacanada.com. Mutual funds are not guaranteed; their
values change frequently and past performance may not be repeated.
All fund performance data shown in US dollars. Investment in
mentioned funds is open to US investors only.
28. For UK Investors:
This material had been distributed by Dimensional Funds Advisors Ltd.,
registered address 7 Down Street, London W1J 7AJ, Company
Number 02569601, which is authorised and regulated by the Financial
Services Authority—Firm Reference No. 150100. It is provided for
information purposes and intended for your use only and does not
constitute an invitation or offer to subscribe for or purchase any of the
products or services mentioned. The information provided is not
intended to provide a sufficient basis on which to make an investment
decision.