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Behavioral Portfolio Management

Thomas Howard (AthenaInvest)

Capital Market theory has passed through two distinctly different paradigms in the past 80 years – systematic securities analysis (Graham + Dodd) and then modern portfolio theory – and is experiencing the rise of a third. The currently ascendant paradigm, based on new research in the field of behavioral finance, promises to offer superior guidance to investors and advisors who hope to harness the pricing distortions created by widespread cognitive errors. To be a successful investor, you must make conscious decisions to redirect your natural impulses and focus on careful and thoughtful analysis. Staying disciplined in an emotionally charged world of round-the-clock news is a challenge.
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The Cost of Ignoring Behavioral Biases

Jay Mooreland (The Emotional Investor)

Behavioral biases influence us to think and act in certain ways. Biases are often subconscious and therefore may influence us without our knowledge. In other words, if you are a human being, you are influenced by these biases, and they may lead to costly errors. This article evaluates the recent problems at the national retailer J.C. Penney and how behavioral biases may have influenced poor decisions that led to the problems.
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In practice stock prices do not move that efficiently. Over the past few decades, the stock market has evolved and expanded in reach, giving rise to problems, anomalies, and challenges. Stock prices swing up and down without any change in the company’s fundamentals, meaning that investors move in herds and influence share prices accordingly. As a result, we need to understand how investment decisions are actually made.
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Behavioral Finance in Asset Management

Marcus Schulmerich (State Street Global Advisors)

Financial crises are taking place more frequently and their impact is spreading across the globe. Standard financial theory cannot explain that phenomenon, but behavioural finance theory offers some compelling explanations.
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The Confounding Bias for Investment Complexity

Jason Hsu, John West (Research Affiliates)

A preference for complexity is almost hardwired into investors, their agents, and asset managers because the intuition is that a complicated investment landscape requires a complex solution; a complex strategy also supports a higher fee from both agents and managers. Research shows that simple, low-turnover and complex, high-turnover strategies perform similarly on a before-fee basis, suggesting the former may have the advantage after tax. Simplicity leads to better investor outcomes not because simplicity in and of itself produces better investment returns, but because a simple strategy encourages investors to own their decisions and to less frequently overreact to short-term noise.
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