tag:blogger.com,1999:blog-7366878066073177705.post55982201492962944..comments2024-02-09T18:16:45.614+00:00Comments on The Psy-Fi Blog: Do Behavioral Funds Work?timarrhttp://www.blogger.com/profile/06254802085744425067noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-7366878066073177705.post-67783770705582399042010-04-09T23:32:58.140+01:002010-04-09T23:32:58.140+01:00Yep, it isn't necessarily easier investing in ...Yep, it isn't necessarily easier investing in an inefficient market and, so far, behavioural finance doesn't make it easier. It helps explain why it all goes wrong, but it doesn't help predict what's going to happen next. Indeed it may be impossible to do so because some uncertainty is never reductible.<br /><br />The idea about peaks and troughs and zealots and so forth is more or less the one I set out in the article on shorting: when markets go up it can be very difficult to reverse them because everyone who holds stock believes it will go up and there are limits on how much risk short-side investors can bear. This asymmetric skewing of risk also applies on the downside, so it's (theoretically anyway) easier to reverse a falling market than a rising one.timarrhttps://www.blogger.com/profile/06254802085744425067noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-36132824230892021222010-04-09T12:10:53.526+01:002010-04-09T12:10:53.526+01:00Yeah, um, that's the thing: it's not an ea...Yeah, um, that's the thing: it's not an easier investing in an inefficient market. And the cognitive biases underlying much of behavioral finance are stronger than most realize. I mean, we're talking human nature here, so don't kid yourself: it's not nearly enough merely to be aware of them. I'm afraid it's gotten worse actually. Everyone still refuses to acknowledge uncertainty, ambiguity, etc. Even worse, the average Joe these days has deluded himself into thinking he is financially savvy and that education is overrated cause he now understands him some derivatives CDS contracts (they're just like insurance!).<br /><br />If you think markets are inefficient and question assumptions in your sleep, then take a breather. If you think that humans are generally irrational when making investment decisions, then fine. Go out and do some research and handpick you some winners (and screw the whole diversification bullcrap!). Unfortunately, my guess is you're destined to discover that it's no easier investing in an inefficient market. Also, be careful, and remember, no one predicted the last financial crisis, including yourself. Therefore, you won't see the next one coming either.<br /><br />Reminds me of a quote from Newton, "I can calculate the motion of heavenly bodies, but not the madness of people."Unknownhttps://www.blogger.com/profile/15636399376320983098noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-86390888752573252612010-04-07T17:45:36.230+01:002010-04-07T17:45:36.230+01:00I was just curious, can automated systems be used ...I was just curious, can automated systems be used to test the behavioral theory?<br />For example let us say we give $1 million to a particularly emotive fund manager and another to an automated investment system?<br />The fund manager is told purchase High ROE,Low Debt, Low EV and Good Growth stocks with solid cash flow(typical value criteria) in an implicit manner. For the automated fund this is coded in an explicit manner.<br />After time period x we come back and check the performances of both. The human is the experiment group and a system being emotionless is the control group? All the difference is likely to be mostly attributable to the behavior pattern of the human.<br />Do you think such a process would help in testing and identifying the impact of behavior?? Is there any research stuff on SSRN etc on this??valueinvestor2010noreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-54480832667879489332010-04-07T15:43:19.179+01:002010-04-07T15:43:19.179+01:00My view is that people over-analyze this question ...My view is that people over-analyze this question and thereby miss the obvious (yet rarely noted!) practical <b>point</b> of Behavioral Finance. The purpose of Behavioral Finance is to learn about investor irrationality and to take it into consideration when making investing decisions. Investor irrationality always evidences itself either in overvaluation or undervaluation. For investors to value stocks improperly is irrational. <b>By definition.</b> So to invest rationally one must respond in some way to the improper valuations.<br /><br />The obvious way to profit is to lower your allocation when prices are insanely high and to increase your allocation when prices are insanely low, thereby keeping your own risk profile roughly stable (this is "Staying the Course" in a meaningful way). This strategy has shockingly enough generated dramatically higher returns at dramatically less risk for as far back as we have records of U.S. stock performance (1870).<br /><br />Ssssh! Don't tell anyone!<br /><br />RobRob Bennetthttp://arichlife.passionsaving.comnoreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-31760255558956215422010-04-07T12:04:15.069+01:002010-04-07T12:04:15.069+01:00I wonder where you get "...unfortunately it s...I wonder where you get "...unfortunately it seems it may actually be quite difficult to make money by betting against the markets at peaks because the market will have been captured by zealots. It’s probably a bit easier in the troughs."<br />It seems to me to be the opposite - easier to take money off the table in roaring bull markets than to step in when the market is falling off a cliff. <br />I know many now look back comfortably to 3/9/2009 and say what a wonderful opportunity it was but at the time I recall people running for the exit. Advisors were on the phone all day long begging clients to hang in a bit longer. <br />The market very easily could have dropped another 20% at which time I believe there would have been a much more massive capitulation than we actually saw.Robert Wasilewskihttp:rwinvesting.blogspot.comnoreply@blogger.comtag:blogger.com,1999:blog-7366878066073177705.post-43708534737588339892010-04-07T06:26:10.667+01:002010-04-07T06:26:10.667+01:00Hmm...
It it one thing to posit that investors ar...Hmm...<br /><br />It it one thing to posit that investors are irrational, and that we can beat the market by avoiding (some of) their irrationality.<br /><br />It is quite a different thing to say that we can predict the timing of their irrationality, and profit from it directly.Unknownhttps://www.blogger.com/profile/11394409575254934751noreply@blogger.com