Behavioural Investing : A Practitioners Guide to Applying Behavioural Finance

by James Montier (Societe Generale)

• ISBN13: 9780470687802
• ISBN10: 0470687800
• Format: eBook
• Copyright: 2009-12-01
• Publisher: Wiley

Summary

Behavioural investing seeks to bridge the gap between psychology and investing. All too many investors are unaware of the mental pitfalls that await them. Even once we are aware of our biases, we must recognise that knowledge does not equal behaviour. The solution lies is designing and adopting an investment process that is at least partially robust to behavioural decision-making errors.Behavioural Investing: A Practitioner's Guide to Applying Behavioural Finance explores the biases we face, the way in which they show up in the investment process, and urges readers to adopt an empirically based sceptical approach to investing. This book is unique in combining insights from the field of applied psychology with a through understanding of the investment problem. The content is practitioner focused throughout and will be essential reading for any investment professional looking to improve their investing behaviour to maximise returns. Key features include: The only book to cover the applications of behavioural finance An executive summary for every chapter with key points highlighted at the chapter start Information on the key behavioural biases of professional investors, including The seven sins of fund management, Investment myth busting, and The Tao of investing Practical examples showing how using a psychologically inspired model can improve on standard, common practice valuation tools Written by an internationally renowned expert in the field of behavioural finance

Table of Contents

Preface

Acknowledgments

Common Mistakes and Basic Biases

Emotion, Neuroscience and Investing: Investors as Dopamine Addicts

Spock or McCoy?

The Primary of Emotion

Emotions: Body or Brain?

Emotion: Good, Bad of Both?

Self-Control is Like a Muscle

Hard-Wired for the Short Term

Hard-Wired to Herd

Plasticity as Salvation

Part Man, Part Monkey

The Biases We Face

I Know Better, Because I Know More

The Illusion of Knowledge: More Information Isn't Better Information

Professionals Worse than Chance!

The Illusion of Control

Big _= Important

Show Me What I Want to See

Heads was Skill, Tails was Bad Luck

I Knew it all Along

The Irrelevant has Value as Input

I Can Make a Judgement Based on What it Looks Like

That's Not the Way I Remember it

If you Tell Me it Is So, It Must be True

A Loss Isn't a Loss Until I Take It

Conclusions

Take aWalk on the Wild Side

Impact Bias

Empathy Gaps

Combating the Biases

Brain Damage, Addicts and Pigeons

What Do Secretaries' Dustbins and the Da Vinci Code have in Common?

The Limits to Learning

Self-Attribution Bias: Heads is Skill, Tails is Bad Luck

Hindsight Bias: I Knew it All Along

Skinner's Pigeons

Illusion of Control

Feedback Distortion

Conclusions

The Professionals and The Biases

Behaving Badly

The Test

The Results

Overoptimism

Confirmatory Bias

Representativeness

The Cognitive Reflection Task (CRT)

Anchoring

Framing

Loss Aversion

Keynes's beauty contest

Monty Hall Problem

Conclusions

The Seven Sins of Fund Management

A Behavioural Critique

Sin city

Forecasting (Pride)

The Illusion of Knowledge (Gluttony)

Meeting Companies (Lust)

Thinking You Can Outsmart Everyone Else (Envy)

Short Time Horizons and Overtrading (Avarice)

Believing Everything You Read (Sloth)

Group-Based Decisions (Wrath)

Alternative Approaches and Future Directions

Forecasting (Pride)

The Folly of Forecasting: Ignore all Economists, Strategists, & Analysts

Overconfidence as a Driver of Poor Forecasting

Overconfidence and Experts

Why Forecast When the Evidence Shows You Can't?

Unskilled and Unaware

Ego Defence Mechanism

Why Use Forecasts?

Debasing

What Value Analysts?

Illusion of Knowledge (Gluttony)

The Illusion of Knowledge or Is More Information Better Information?

Meeting Companies (Lust)

WhyWaste Your Time Listening to Company Management?

Managers are Just as Biased as the Rest of Us

Confirmatory Bias and Biased Assimilation

Obedience to Authority

Truth or Lie?

Conclusions

Thinking You Can Outsmart Everyone Else (Envy)

Who's a Pretty Boy Then? Or Beauty Contests, Rationality and Greater Fools

Background

The Game

The Solution

The Results

A Simple Model of Our Contest

Comparison with Other Experiments

Learning

Conclusions

Short Time Horizons and Overtrading (Avarice)

ADHD, Time Horizons and Underperformance

Believing Everything You Read (Sloth)

The Story is The Thing (or The Allure of Growth)

Scepticism is Rare or (Descartes vs Spinoza)

Cartesian Systems

Spinozan Systems

Libraries

A Testing Structure

The Empirical Evidence

Strategies to Counteract Naïve Belief

Group Decisions (Wrath)

Are Two Heads Better Than One?

Beating the Biases

Investment Process as Behavioural Defence

The Tao of Investing

The Behavioral Investor

Come Out of the Closet (or, Show Me the Alpha)

The Alpha

The Evolution of the Mutual Fund Industry

Characteristics of the Funds

The Average and Aggregate Active Share

Persistence and Performance

Conclusions

Strange Brew

The Long Run

Death of Indexing

Getting the Long Run Right

The Short Run

Tactical Asset Allocation

Equity Managers

Break the Long-Only Constraint

Add Breadth

Not Just an Excuse for Hedge Funds

Truly Alternative Investments

Conclusions

Contrarian or Conformist?

Painting by Numbers: An Ode to Quant

Neurosis or Psychosis?

Brain Damage Detection

University Admissions

Criminal Recidivism

Bordeaux Wine

Purchasing Managers

Meta-Analysis

The Good News

So Why Not Quant?

The Perfect Value Investor

High Concentration In Portfolios

They Don't Need to Know Everything, and Don't Get Caught in the Noise

A Willingness to Hold Cash

Long Time Horizons

An Acceptance of Bad Years

Prepared to Close Funds

A Blast from the Past

The Unheeded Words of Keynes and Graham

On the Separation of Speculation and Investment

On the Nature of Excess Volatility

On the Folly of Forecasting

On the Role of Governance and Agency Problems

On the Importance (and Pain) of Being a Contrarian

On the Flaws of Professional Investors

On the Limits to Arbitrage

On the Importance of the Long Time Horizon

On the Difficulty of Defining Value

On the Need to Understand Price Relative to Value

On Why Behavioural Errors don't Cancel Out

On Diversification

On the Current Juncture

On the Margin of Safety

On Beta

On the Dangers of Overcomplicating

On the Use of History

Why Not Value? The Behavioural Stumbling Blocks

Knowledge ≠ Behaviour

Loss Aversion

Delayed Gratification and Hard-Wiring for the Short Term

Social Pain and the Herding Habit

Poor Stories

Overconfidence

Fun

No, Honestly I Will Be Good

The Empirical Evidence: Value in All Its Forms

Bargain Hunter (or It Offers Me Protection)

The Methodology

Does Value Work?

The Anatomy of Value

The Siren of Growth

Growth Doesn't Mean Ignoring Valuation

The Disappointing Reality of Growth

Analyst Accuracy?

Value versus Growth

Key points

Regional Tables

Global

USA

Europe

Japan

Better Value (or The Dean Was Right!)

The Little Note that Beats the Market

The Methodology and the Data

The Results

The Little Book Works

Value Works

EBIT/EV Better than Simple PE

Quality Matters for Value

Career Defence as an Investment Strategy

What About the Long/Short View?

The Future for the Little Book

Tables and Figures

Regional Results

Improving Returns Using Inside Information

Patience is a Virtue

Using Inside Information

A Hedge Perspective

Risk or Mispricing?

Evidence for Behavioural Errors

Evidence Against the Risk View

European Evidence

Conclusions

Just a Little Patience: Part I

Just a Little Patience: Part II

Value Perspective

Growth Perspective

Growth and Momentum

Value for Growth Investors

Value and Momentum

Implications

Sectors, Value and Momentum

Value

Momentum

Sectors: Value or Growth

Stocks or Sectors

Sector-Relative FactorsWorks Best

Methodology

The Results

Conclusion

Cheap Countries Outperform

Strategy by Strategy Information

Risk, But Not as We Know It

CAPM is CRAP (or, The Dead Parrot Lives!)

A Brief History of Time

CAPM in Practice

Why Does CAPM Fail?

CAPM Today and Implications

Risk Managers or Risk Maniacs?

Risk: Finance's Favourite Four-Letter Word

The Psychology of Risk

Risk in Performance Measurement

Risk from an Investment Perspective

Bubbles and Behaviour

The Anatomy of a Bubble

Displacement

Credit Creation

Euphoria

Critical Stage/Financial Distress

Revulsion

De-bubbling: Alpha Generation

Bubbles in the Laboratory

Bubbles in the Field

Displacement: The Birth of a Boom

Credit Creation: Nurturing the Boom

Euphoria

Critical Stage/Financial Distress

Revulsion

Applications

Asset Allocation

Alpha Generation

Balance Sheets

Earnings Quality

Capital Expenditure

Long-Only Funds

Summary

Running with the Devil: A Cynical Bubble

The Main Types of Bubble

Rational/Near Rational Bubbles

Intrinsic Bubbles

Fads

Informational Bubbles

Psychology of Bubbles

Composite Bubbles and the De-Bubbling Process

Experimental Evidence: Bubble Echoes

Market Dynamics and the Investment Dangers of Near Rational Bubbles

Conclusions

Bubble Echoes: The Empirical Evidence

Conclusions

Investment Myth Busters

Belief Bias and the Zen Investing

Belief Bias and the X-System

Confidence Isn't a Proxy for Accuracy

Belief Bias and the Zen of Investing

Dividends Do Matter

Conclusions

Dividends, Repurchases, Earnings and the Coming Slowdown

Return of the Robber Barons

The Purgatory of Low Returns

How Important is the Cycle?

Have We Really Learnt So Little? (Part I - Earnings; Levels not Trends)

Some Random Musings on Alternative Assets

Hedge Funds

Commodities

Which Index?

Composition of Commodity Futures Returns

The Times They are A-Changin'

Conclusions

Corporate Governance and Ethics

Abu Ghraib: Lesson from Behavioural Finance and for Corporate Governance

Fundamental Attribution Error

Zimbardo's Prison Experiment

Milgram: The Man that Shocked the World

Conditions that Turn Good People Bad

Conclusions

Doing the Right Thing or the Psychology of Ethics

The Ethical Blindspot

The Origins of Moral Judgements

Examples of Bounded Ethicality and Unconscious Biases

Implicit Attitudes (Unconscious Prejudices)

In-Group Bias (Bias that Favours Your Own Group)

Overclaiming Credit (Bias that Favours You)

Conflicts of Interest (Bias that Favours Those Who Can Pay You)

Mechanisms Driving Poor Ethical Behaviour

Language Euphemisms

Slippery Slope

Errors in Perceptual Causation

Constraints Induced by Representations of the Self

Combating Unethical Behaviour

Unintended Consequences and Choking under Pressure: The Psychology of Incentives

Evidence from the Laboratory

Evidence from the Field

Child Care Centres

Blood Donations

Football Penalty Kicks

Basketball Players

Back to the Laboratory

Who is Likely to Crack Under Pressure?

Conclusions

Happiness

If It Makes You Happy

Top 10

Materialism and the Pursuit of Happiness

Aspiration Index

Materialism and Happiness: The Evidence

Problems of Materialism

What to Do?

Why Experiences Over Possessions?

Conclusions

References

Index

Table of Contents provided by Publisher. All Rights Reserved.