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The Evolution of Behavioral Finance Research

  • ,  Chief Executive |
  • 06 Jan 2020
  • Updated 07 Jan 2020

Fear and Greed. Or Nudge, Nudge?

Behavioral finance has evolved since it was first introduced as a concept in the early 1980s. At the outset, investors were often thought of as being economically 'irrational', frequently falling victim to cognitive biases in their pursuit of what standard finance calls 'rational' wants. Recent research goes further, identifying people as having 'normal' wants and how these, rather than cognitive errors and shortcuts, tend to underlie and influence many aspects of financial behavior.

Behavioral finance (and psychology) has also entered global political thinking. The Behavioral Insights Team ('Nudge Unit') was set up under the UK coalition government in 2010 with the aim of 'nudging' people towards making 'better life choices' through policy decisions, and there are now similar units in perhaps a dozen countries and international research institutions. The original concepts of behavioural finance and how it both impacts upon and influences investor behaviour are outlined in this collection of papers. Additionally, we are fortunate to collate the very latest research on the subject from Professor Meir Statman and the CFA Institute.

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Behavioral Finance: The Second Generation (CFA Institute, 2019)

This latest research by Professor Meir Statman and published in conjunction with the CFA Institute, revisits some of the original concepts of behavioural finance, identifying people as having 'normal' wants and how these, rather than cognitive errors and shortcuts, tend to unduly influence many aspects of financial behavior.

A Modern, Behavior-Aware Approach to Asset Allocation and Portfolio Construction (Newfound Research)

Newfound Research outlines their approach to portfolio construction which incorporates asset allocation designed to address some of the behavioral shortcomings of investors.

Appraising home bias exposure (FTSE Russell, 2019)

In this paper, FTSE Russell seeks to understand the impact and extent of 'home bias' in the equity allocations of five large pension fund markets over a twelve-year period.

Home bias in fixed income: Has it helped or hurt U.S. DB plans? (MSCI blog, 2019)

MSCI analyzed over a decade's worth of data to see whether global diversification or 'home-bias' helped reduce risk in the fixed income portfolios of US defined-benefit (DB) pension plans.

A Practical Introduction to Behavioural Finance (Vanguard)

In this practical introduction, Vanguard outlines key elements and biases in behavioural finance, suggesting several lessons that may be transferable into more successful investing.

The Market is Huge! Revisiting the Big Market Delusion (Aswath Damodaran, Dec 2019)

Aswath Damodaran highlights some of the behavioural finance biases that he has noticed as being to the fore in the IPO market during 2019.

A Behavioural Finance Toolkit (Aberdeen Standard, 2019)

Aberdeen Standard Investments outlines the topic of behavioural finance, identifying several traits that hinder the decision-making process and suggesting ways in which better investment choices might be made.

Using a behavioural lens to address built-in biases in real estate investment (Fidelity Intl, 2018)

For compliance reasons, this paper is only accessible in the UK & Europe

Fidelity Investments outlines why it believes that commercial real estate markets are particularly prone to many behavioural biases, and how a focused framework that recognises that market participants can act irrationally can be valuable.

The Case for Quantitative Investment Approaches in the Corporate Bond Market (Man Group, 2019)

In this paper, Man Group suggests why a strong case can be made for using systematic quant strategies in the corporate bond market.

Podcast: Quantitative Investing - the Solution to Human Bias (Alpha Architect, 2019)

In this podcast discussion, Wesley Gray of Alpha Architect explores how Quantitative Investing eliminates many of the human biases that can enter the investment decision-making process.

The role of Behavioral Finance in Advising Clients (Cerulli Associates/Charles Schwab IM, 2019)

This paper, from Cerulli Associates and Charles Schwab IM, examines what advisors can do to help mitigate behavioral biases in a market that can suffer from bouts of volatility.

Market Efficiency: Who is on the Other Side? (Michael J. Mauboussin, 2019)

Michael Mauboussin outlines several sources of market inefficiencies, including behavioral ones, that traders need to be conversant with.

Price Momentum or Information Momentum? (QMA, 2019)

QMA investigates the apparent success of price momentum as an investing strategy and whether it may be the result of various behavioural biases.

China A-Shares: Perspectives From the Inside Out (PineBridge, Dec 2019)

Pinebridge notes that despite its relative size, the China-A shares market is dominated by retail investor trading, and the 'herd' mentality can easily override any fundamentals.

The Unwinding of Globalization, Fallen Angels & Behavioral Alpha (Weiss, Jan 2019)

Jordi Visser outlines his views on what constitutes and creates, behavioural alpha.