ARTICLES AND SOURCES

 

On this page are a variety of featured links to articles that we have found useful in our work and that provide information on all aspects of investment psychology and behavioral finance. Many of the sites provide a gentle introduction and overview of the most important topics in the field. But for those wishing to undertake more detailed research, the Academic Articles and Research Sources section below provides access to a wealth of information as well as to important financial databases.

 

 

GENERAL AND INTRODUCTORY BEHAVIORAL FINANCE ARTICLES

 

Errors Investors Make

A simply written guide to the many errors repeatedly made when people invest their money. These errors - known as sytematic errors because they are always repeated in the same way - often involve choice of investment (buying the wrong hot stock) or timing (investing at the top of the market). In the article, Jonathan Myers also considers what investment strategy actually means and why so many investors' strategies go awry.

 

Investor Home: Psychology and Behavioral Finance
A good introuction to the psychology of investment and behavioral finance. There are a variety of links to other pages covering stock market anomalies and value investing, which results the writers suggest, from investor's irrational overconfidence in exciting growth companies and from the fact that investors generate pleasure and pride from owning glamorous stocks. There are also links to pages which provide information about the research of high-profile individuals in the field such as Meir Statman, Richard Thaler, Robert Shiller and David Dremen. There is also a good example of how investors make decisions under uncertainty, known as Prospect Theory, developed by Daniel Kahnneman and Amos Twersky.

 

Investment Strategies and Human Behavior
This article by psychologist Jonathan Myers explains the use of several specific behaviorally based investment strategies, as well as explaining exactly how they exploit the errors made by investors in the markets. The strategies covered include: contrarian strategies, momentum strategies, earnings surprise strategies, merger strategies, and apparent risk strategies.

 

Devlin's Angle: Twersky's Legacy Revisted
A short article covering the work of Amos Twersky. His theory, known as Prospect Theory, developed with Daniel Kahnneman represents groundbreaking work that demonstrated for the first time that individuals often make irrational choices when faced with uncertain conditions and that there are mathematical principles underlying this behavior.

 

Are You Wired For Wealth?
An extremely illuminating article about how different structures within the brain cause us to make specific decisions when investing. Besides the online version here, it also appeared in the October 2002 issue of Money Magazine. This is one of the few articles that links neuroscience and financial behavior, and does it in an easy-to-read way. Well worth a look.

 

Behavioral Finance from Asian Business Watch
A basic introductory article explaining what behavioral finance is and some suggestions about how to apply it to your own investment approach.

 

Making Better Investment Decisions
In this article from Fundsupermart, some of the many errors investors repeatedly make are highlighted. These include, a reluctance to admit mistakes and aversion to loss. ABN AMRO are now using this knowledge as the basis of a new type of investment fund, as the principles that behavioral finance reveals feed directly into different types of strategies.

 

Practical Behavioral Finance
Some basic but useful facts about why fund managers don't always perform as they should when investing other people's money!

 

Behavioral Finance 101
This article first appeared in the December 2000 edition of Benefits Canada magazine and relates investing in pensions to some sytematic errors - such as 'herding' and 'mental accounting' - that members of the scheme may make, causing them to lose out.

 

Investment Psychology: A Key to Market Success
Paul Heys and Ronald E. Smith take a look at why investors don't always make as much money from mutual funds as they should. The reasons are seen as stemming from innate psychological tendencies encapsulated in the developing field of behavioral finance. Understanding oneself and self-regulation are discussed as possible ways to overcome the problem.

 

Investment Manias and Speculative Bubbles
Those who do not learn from the lessons of history are doomed to repeat it, is the old saying. This fascinating article, extracted from the book Profits Without Panic by Jonathan Myers, shows that people repeatedly do not learn from past investment manias and crashes, and that the tendency of psychological influences to affect market speculation is indeed not a new phenomenon. The article covers the infamous 17th Century Dutch tulip craze, the 18th Century South Sea bubble, and several modern-day speculative crazes, including the race for internet stocks.

 

Dean Lebaron's Investor Psychology
The notion that investment decisions are not always made rationally is hard for many people to accept. This article discusses the concept of investor irrationality in terms of what psychological research has revealed. An introduction to various theories is provided - Prospect Theory, Regret theory, Anchoring, Over- and Under-reaction. Also briefly considered is the importance of behavior research to value and contrarian strategies.

 

Beating The Market With Psychonomics
In this interview featured in The Bull & Bear, Jonathan Myers explains the new investment approach of psychonomics and how it is driven by human nature.

 

 

INVESTING AND GENDER DIFFERENCES

 

Boys will be Boys: Gender, Overconfidence, and Common Stock Investment.
Terrence Odean and Brad Barber's highly influential findings that show women often perform better than men when investing even though men, on average, deal more frequently.

 

Are Women Better Investors than Men?
Mary Rowland asks: Are women better investors than men? The article, appearing on MSN Moneycentral, considers the way in which men and women differ in their handling of investment in relation to volatile markets and the perception of financial information.

 

Sex, Conflict and Investment Style
The perrenial problem of different approaches to life that men and women have is looked at in relation to what happens when investment styles conflict. The article, by psychologist Jonathan Myers, highlights the various ways in which partners often respond to financial matters based on gender differences, considers if, at all, there is a 'best investment style', and suggests tips for change. Considering that money and investing is one of the main problems for which couples seek help from relationship counselling services, this is a very revealing article and well worth spending some time on.

 

 

ACADEMIC ARTICLES AND RESEARCH SOURCES

 

What Type Of Investor Are You?
Investor profiling and classification systems are changing the way investment advice is given. Over the last few years psychologists have been working hard to discover whether investors fall into 'types'. It appears they do, and knowing what 'type' of investor an individual is can feed into improved investment gains. Jonathan Myers examines the current state of play.

 

A Psychological Money Machine: Why it Hasn't Been Built...
Surely, with a knowledge of psychology we should understand the stockmarket better and this should help to make us richer. But psychologists, surprisingly, have not traditionally been involved in the kind of research that would be needed to acomplish this. Jonathan Myers looks at the resons why this situation has arisen and what would be needed to 'build' a psychological money machine in the future.

 

Undiscovered Managers
The Behavioral Finance Research Library on this site contains links to articles and research studies of many leading thinkers in the field, including Richard Thaler, Terence Odean, Russell Fuller and David Hirshleifer.

 

NEC Research Index
An excellent academic research site. Full text research papers may be freely viewed by hitting the required reference link and then using the 'download' or 'cached' facility at the top of the next page. Not all the papers are in the database, however, but often these papers are cross-referenced within the citation index to provide further useful information.

 

The Journal of Psychology and Financial Markets
The foremost academic journal dealing with human behavior in finance. The aim of the journal, as the editorial states, is to bring together researchers from a wide variety of scientific disciplines to create a new understanding of markets and shed light on the process of decision making in investment. Clicking on the blue computer icon - Electronic Journal Access - displays a list of volumes, from where you can then see specific article titles.

 

Kahnemann Wins Nobel Prize
2002 was a landmark year for psychological science. Though thought long overdue by many, recognition finally came to psychologist Daniel Kahnemann when he was awarded the Nobel along with economist Vernon Smith. Both have contributed to a new understanding of economics. This page at the Nobel site has links that explain what these researchers achievements mean and exactly why the prize was awarded.

 

Terrence Odean's homepage
A good source of research papers by Terrence Odean as well as many papers co-written with other leading researchers, such as Brad Barber. There are also links to press articles and streaming video interviews.

 

Human Behavior and the Efficiency of the Financial System
Robert Shiller surveys behavioral finance principles coming primarily from psychology, sociology and anthropology. These priciples include prospect theory, regret, overconfidence, over- and underreaction, and the representativeness heuristic. The site can be accessed by a small subscription but is also freely available to certain areas of the world.

 

Behavioral Portfolio Theory
Hersh Shefrin and Meir Statman present a method of portfolio construction using behavioral finance principles, and discuss its implications as an alternative to standard portfolio theory. A pdf viewer (downloadable from Adobe) is required.

 

Buy on the Rumor
An interesting paper by psychiatrist Richard Peterson suggesting how anticipatory market effects of investors - such as those based on price pattern anomalies - as well as knowledge of investor expectations, might be used as the basis of an investment strategy. The study takes a multidisciplinary approach using information from the literature on mathematics, cognitive psychology, and neuroscience.

 

Challenges to Risk Management
This site looking at AgriBiz Markets and Analysis, demostrates how, so-called, efficient markets, as well as randomness and behavioral influences are often connected. Several other links on this page will take you to papers that look at human behavior in relation to commodoties and options.

 

Behavioral Finance Group. University of Mannheim.
The 'Behavioral Finance Group' at the University of Mannheim are a team of researchers who build on psychological concepts to help explain investor behavior and other phenomena occurring in the financial markets. Their site includes several interesting research papers as well as bios of their team and details of current research interests.

 

The End of Behavioral Finance
In this well-written article Richard Thaler sums up much of the last fifteen year's behavioral finance research and suggests what should be the next logical steps for the field in order to make it more attractive to potential users of its findings. A pdf viewer (downloadable from Adobe) is required.

 

 

SITES ASSOCIATED WITH THE PSYCHOLOGY OF INVESTING

 

Physicists Attempt to Scale the Ivory Towers of Finance
In contrast to work in behavioral finance, physicists have also been doing research in financial behavior, with some overlap between the two scientific fields. This informative article, by J. Doyne Farmer, reviews developments in four areas, including empirical statistical properties of prices, random-process models for price dynamics, agent based modelling, and practical applications. A pdf viewer (downloadable from Adobe) is required. Several other articles by Farmer may also be seen at his home page.

 

A Multifractal Walk Down Wall Street
The geometry that describes the shape of coastlines and the patterns of galaxies also elucidates how stock prices soar and plummet. This article by Benoit Mandelbrot, the originator of much of chaos theory, throws light on this phenomenon and shows how market data for a stock can be simulated using a set of simple equations. The article first appeared in the February 1999 issue of Scientific American.

 

Financial Frauds and Scandals
This highly informative site covers many major frauds, scams, swindles and scandals of past years. It is a must for any student of the human psych who wants to see the multifarious effects of greed and pathological thinking on investment actions.

 

 

 

 

Psychonomics 2002. All rights reserved.