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.
Behavioral finance studies the psychological biases of investors. Meanwhile, the science behind factor investing aims to capture these biases and quantify them.
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.
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.
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 can shed a light on why annuities are not as popular as life insurance, despite their potential benefits for both policyholders and insurance companies.
This paper seeks to answer two questions: do mutual funds herd across investment styles? If yes, what are the consequences of this herding?
Diversifying one's portfolio is necessary to reduce its overall risk. Are alternative ETFs efficient in this regard or should investors look elsewhere?
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.