Behavioral Finance and Economics

How psychological forces move markets and economies

Investors, like the rest of us, make decisions based on a mix of emotions and well-informed, data-based, rational perspectives. In finance, emotion can mean missing opportunities or taking on unnecessary risk. In economics, the theory shows how consumer sentiment moves certain sectors, driving growth. The compendium of research below provides some of the latest insights into behavioral finance and economics.

When Factors and Behavioral Biases Meet (Robeco)

Behavioral finance studies the psychological biases of investors. Meanwhile, the science behind factor investing aims to capture these biases and quantify them.

The Perils of Volatility for Wealth Growth and Preservation (PMR)

Diversification can protect long-term wealth. It can be seen as a hedge against market volatility and correlation, both by-products of investors' fears and biases.

Stop Blaming Witchcraft: Your Portfolio Isn’t Cursed (Man Group)

A disciplined approach to capital allocation is essential for generating alpha, especially in times of heightened market volatility. However, it can be easier said than done.

Is It Time to Abandon The 60-40 Portfolio? (BNP Paribas AM)

Asset correlation is a result of investor sentiment. On the downside, it is fear of risk. On the upside, it is search for profit. Diversification can provide a cure for emotions.

Behavioral Economics and the Longevity Problem (Milliman)

Behavioral economics can shed a light on why annuities are not as popular as life insurance, despite their potential benefits for both policyholders and insurance companies.

Exploring Style Herding by Mutual Funds (Amsterdam University)

This paper seeks to answer two questions: do mutual funds herd across investment styles? If yes, what are the consequences of this herding?

Are Alternative ETFs Good Diversifiers? (Finominal)

Diversifying one's portfolio is necessary to reduce its overall risk. Are alternative ETFs efficient in this regard or should investors look elsewhere?

(Almost) 200 Years of News-Based Economic Sentiment

Sentiment is not only a driver of financial market returns but also of economic performance. This study demonstrates this with a robust data set that spans almost 200 years.