The Weekly Stripe – 02.10.20
Finance is often perceived as a profession driven by data and mere figures. However, in the 1990s researchers uncovered a series of anomalies and biases leading to the birth of behavioral finance as an area of research. In this edition of the Weekly Stripe, we’ll explore the human aspects of finance and how behavioral theories offer a lens through which investment strategies can be interpreted.
This Economist article points out how investors often put too much weight on the past to infer the future value of their stock. Here’s what happens when investors get stuck in the past.
Based on where the stock is today, people will make an assumption about where it’s going to be in the future. Starting with a price today, investors build their sense of value based on that anchor. Also, the more difficult it is to value something, the more people tend to rely on anchors
Prospect theory has been developed by Kahneman and Tversky in 1979. It assumes that losses and gains are valued differently; individuals make decisions based on perceived gains instead of perceived losses.
The home bias puzzle is the common finding that individuals and institutions in most countries hold modest amounts of foreign equity despite the presence of large potentials gains from diversification.
According to the FT Adviser, there are a few behavioral biases which are likely to be reinforced during these times, including the tendency for people to overvalue things they own and continuing on a loss-making project to “justify” the amount of money already spent on it