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A Theory of Behavioral Finance – Assumption 1 – A Combination of Factors
Last week I published A THEORY OF BEHAVIORAL FINANCE which was a high-level description of my theory. In that work I promised to explore each of my assumptions in greater depth. This week, therefore, I deepen the discussion around Assumption 1 that posited: Human behavior is a complex combination of multiple factors that must be considered in total to glean insight, these primary factors are: Biological, with energy and time conservation being the drivers of these factors Psychological, with the level of self-awareness being the driver...
read moreA THEORY OF BEHAVIORAL FINANCE
Over the summer I authored a series of articles that were deep dives into the major behavioral biases. I promised that these pieces would culminate in a theory of behavioral finance. Then business intervened. I was inordinately busy. My apologies. Without further adieu… A Theory of Behavioral Finance. The Modern Paradigm A criticism of behavioral finance is that it lacks an overarching theory.[i] Namely, that it is just a long list of quirks and oddities logged by scientists about human behavior, but without an explanation for why they...
read moreBehavioral Finance – Bias Deep Dive: Mental Accounting
Last up in this series of deep dive articles on behavioral finance is mental accounting. Very generically, the bias describes some of the errors in judgment that occur when investors contextualize information. In this way it is similar to some of the other biases I have covered where improper context is the root cause of distorted thinking (e.g. Anchoring, Availability, and Representativeness). Next week I conclude the deep dive by landing with A Theory of Behavioral Finance. To my knowledge the discipline of behavioral finance has avoided...
read moreEconomic Times NOW extended interview!
Me featured on India’s #1 business news channel Economic Times NOW discussing consciousness and investing: Thanks to Saurabh Mukherjea for featuring me in both his outstanding book The Victory Project, as well as in this interview.
read moreBehavioral Finance – Bias Deep Dive: Representativeness
We are now in the home stretch of my series of deep dive articles on behavioral finance. Up this week is representativeness bias. One complaint I have with some of behavioral finance is their changing of terms we all know and giving them new titles. This is especially true of representativeness bias which is essentially the use of stereotypes when judging investment phenomena. In several weeks I conclude the deep dive by landing with A Theory of Behavioral Finance. A Helpful Mnemonic Device: LOCHAARM To my mind the major behavioral...
read moreBehavioral Finance – Bias Deep Dive: Availability
Like the other biases in this behavioral finance deep dive series is a mental shortcut. Specifically, it is the phenomenon where people’s opinions and concerns are unduly shaped by immediate: information, mental models, and other things recently experienced. Essentially, this bias boils down to “if something can be recalled then it must be important.” Recall that at the end of this series I am going to land with A Theory of Behavioral Finance. A Helpful Mnemonic Device: LOCHAARM To my mind the major behavioral biases are: Loss aversion...
read moreBehavioral Finance – Bias Deep Dive: Anchoring
Have you ever found yourself in a conversation stuck on a thought? If so, you are likely to have been in the midst of a discussion swallowed by anchoring bias. Anchoring is the fixation on a reference point within a continuum of information in decision making and is the latest bias deep dive I am covering for investors. At the end of this series I am going to land with A Theory of Behavioral Finance. A Helpful Mnemonic Device: LOCHAARM To my mind the major behavioral biases are: Loss aversion Overconfidence Confirmation Herding...
read moreBehavioral Finance – Bias Deep Dive: Herding
Why do markets form bubbles? Why do markets capitulate and collapse in value rapidly? Asked succinctly: why do investors engage in herding behavior? This is the fourth in a series of deep dive articles on behavioral finance and its major biases. Ultimately, I am going to land with A Theory of Behavioral Finance. In the meantime, let’s turn our attention to why investors stampede. A Helpful Mnemonic Device: LOCHAARM To my mind the major behavioral biases are: Loss aversion Overconfidence Confirmation Herding Anchoring Availability...
read moreBehavioral Finance – Bias Deep Dive: Confirmation
Up third in my deep dive articles on the crucial behavioral biases to understand as investors is this one on confirmation bias. Similar to the other biases, confirmation bias has nuances that if understood can change our approach to investing. This ensures we are not victims of their pernicious effects. Recall that my ultimate goal is to have this series culminate in a Theory of Behavioral Finance. A Helpful Mnemonic Device: LOCHAARM To my mind the major behavioral biases are: Loss aversion Overconfidence Confirmation Herding Anchoring...
read moreBehavioral Finance – Bias Deep Dive: Overconfidence
This is my second in a series of deep dive articles on the most important behavioral biases that we confront as investors. In this week’s article I discuss overconfidence. It bears repeating that most investment pros have not read the original source material on the biases and thus are missing out on key nuances. I think understanding these subtleties improves our ability to overcome the biases. Further, I believe that overconfidence is a source contributing to the emotions driving equity returns to the upside and is therefore a rich source...
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