Behavioral Finance

Behavioral Finance 2.0

The Journal of Portfolio Management, Summer 2012
~ Bob Jones

Over the last decade or so, the findings of behavioral and cognitive psychologists have found their way into finance. No longer do we assume that all agents are rational actors only interested in maximizing marginal utility. Instead they are just normal human beings with all our cognitive foibles and faults, including overconfidence, loss aversion, reference points, emotional responses, positive illusions, confirmatory bias, framing, illusion of control, hindsight bias, availability, representativeness, outcome bias, preference reversal and so on, and on, and on. It's amazing markets are as efficient as they are - or at least so hard to beat.   
     The implications of these well-documented behavioral tendencies have yet to be fully realized in our profession.  

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