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Beyond Greed and Fear

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Beyond Greed and Fear

Understanding Behavioral Finance and the Psychology of Investing

Oxford UP,

15 min read
10 take-aways
Audio & text

What's inside?

Fear, greed, hope: emotions rule investment picks more than market theorists admit. To feel good, avoid costly mistakes.

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Editorial Rating

9

Qualities

  • Innovative
  • Applicable

Recommendation

If only you could bring yourself to ditch those losers from your portfolio, and hang onto your winners. If you can, you are unusual. Unprofitable habits afflict nearly all investors, beginners and pros alike, writes Hersh Shefrin in this intriguing study of the role of emotions in investing. Shefrin balances the jargon with plenty of real-world examples and wisely cautions you not to delude yourself into thinking that his tips will make you rich. Viewing investing through the prism of behavior finance, he analyzes emotionally-laden decisions made by private investors, money managers, bankers and other professionals handling stocks and various other forms of investments including options, foreign currency and futures. Shefrin offers juicy case histories, so his tour of behavioral finance is mostly enjoyable and useful. At times, though, the book bogs down in the author’s attempts to legitimize behavior finance, a relatively new school of thought. For instance, he charges failed investors with committing "heuristic bias" or falling prey to "representativeness." That quibble aside, getAbstract.com recommends this intriguing tome to investment decision makers on any level. Whether you are running billions or managing a retirement account (which, as Shefrin notes, most people do badly), maybe this book will buffer you against emotional investing and pocketbook pain.

Summary

Inefficient Markets

Forget any notion you may have that financial markets are efficient. Traditional financial theory teaches that investments are priced to their true value. This happens because so much information is available about stocks and so many willing buyers and sellers participate in the market. But the new school of behavioral finance - which studies the intersection of investment and psychology - disputes the old-school theory of rational markets. It says investors are prone to emotions, primarily hope and fear, although greed, regret and hubris also enter the equation. Emotions cause investors, sophisticates and novices alike, to act on faulty logic and unrealistic expectations. Feelings lead investors to hang onto losing stocks long after they should sell them or to sell winners way too quickly.

If markets truly were efficient, they probably would not have a place for value investors such as David Dreman, who trades stocks with low price-to-earnings ratios. His contrarian approach, which takes advantage of the fact that markets aren’t always efficient, has served Dreman well. Emotions make investors oversell some stocks in spite of their inherent value...

About the Author

Hersh Shefrin teaches at Santa Clara University, where he holds the Mario L. Belotti chair in finance at the Leavey School of Business.

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