Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing (Financial Management Association Survey and Synthesis)

Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing (Financial Management Association Survey and Synthesis)

Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing (Financial Management Association Survey and Synthesis)

Even the best Wall Street investors make mistakes. No matter how savvy or experienced, all financial practitioners eventually let bias, overconfidence, and emotion cloud their judgment and misguide their actions. Yet most financial decision-making models fail to factor in these fundamentals of human nature. In Beyond Greed and Fear, the most authoritative guide to what really influences the decision-making process, Hersh Shefrin uses the latest psychological research to help us understand the human behavior that guides stock selection, financial services, and corporate financial strategy. Shefrin argues that financial practitioners must acknowledge and understand behavioral finance–the application of psychology to financial behavior–in order to avoid many of the investment pitfalls caused by human error. Through colorful, often humorous real-world examples, Shefrin points out the common but costly mistakes that money managers, security analysts, financial planners, investment bankers, and corporate leaders make, so that readers gain valuable insights into their own financial decisions and those of their employees, asset managers, and advisors. According to Shefrin, the financial community ignores the psychology of investing at its own peril. Beyond Greed and Fear illuminates behavioral finance for today’s investor. It will help practitioners to recognize–and avoid–bias and errors in their decisions, and to modify and improve their overall investment strategies.Psychology rules the stock market, according to Hersh Shefrin. In Beyond Greed and Fear, Shefrin shows how bias, perception, and other aspects of psychology often rattle investors and move stocks. From the individual who keeps losers too long to overconfident money managers who mistakenly think they can predict financial trends, human nature foils investment returns. “Behavioral finance is everywhere that people make financial decisions. Psychology is hard to escape; it touches every corner of the financial landscape, and it’s important. Financial practitioners need to understand the impact that psychology has on them and those around them. Practitioners ignore psychology at their peril,” writes Shefrin, a finance professor at Santa Clara University. An academic volume geared toward financial professionals, the book details an emerging field known as behavioral finance, in which psychology is believed to be at least as important as market fundamentals, such as earnings and balance sheets. Shefrin describes how investors are motivated by fear, hope, overconfidence, and the need for short-term gratification. The book gives plenty of examples of investment mistakes, and analyzes them from a behavioral-finance perspective. While Beyond Greed and Fear targets professionals, individual investors will benefit from this look at an important mover of markets. –Dan Ring

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3 Comments so far »

  1. J. Michael Gallipo said,

    Wrote on April 1, 2012 @ 6:05 pm

    60 of 62 people found the following review helpful
    3.0 out of 5 stars
    Pushing Too Far?, March 30, 2001
    J. Michael Gallipo (Portsmouth, NH USA) –

    In Beyond Fear and Greed, Mr. Shefrin has written a fairly interesting account of the advances in behavioral finance. He draws heavily on previously published research (although often published in fairly esoteric sources), so people searching for lots of new insights will probably be disappointed. That said, Mr. Shefrin covers most of the common biases that we are prone to including mental accounting, loss aversion, trend following and the like. If a reader doesn’t see him or herself in at least some of his illustrations, I suspect he is not being honest with himself.

    My major problem is that in some instances I think Mr. Shefrin engages in his own form of hindsight bias. For example, in his account of wall street strategists’ market predictions I think he finds his bias after he knows the results. If the market had a strong year previously and the strategist predicted another strong year and was proved wrong, then he was guilty of trend following. If however, the same strategist predicted a weak market and proved to be wrong, then he was guilty of gambler’s fallacy (mean reversion). So basically either choice represents bias IF YOU ARE WRONG. And yet, just because you are right does not change the mental processes that went into your decision.

    However, despite the weaknesses of this book, overall it provides much food for thought for any serious investor and is probably worth at least a quick read.

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  2. Bruce_in_LA "reader_in_LA" said,

    Wrote on April 1, 2012 @ 6:40 pm

    86 of 93 people found the following review helpful
    2.0 out of 5 stars
    A slow waltz through the psychology of investing, April 17, 2000
    Bruce_in_LA “reader_in_LA” (los angeles, ca United States) –

    Amazon Verified Purchase(What’s this?)

    This book has a good heart, but I can’t recommend it so highly. The author takes several classical cognitive mistakes that humans make (some will recognize the classic names of Kahnemann and Tversky; they are one of the substrates of this book). The author applies such mistakes to a wide range of investment problems – holding on to losing stocks too long, anthropomorphizing stock decisions, and so on. The sort of psychology that makes you think that a coin that has flipped tails three times now has a 95% chance of flipping heads on the next toss. Most intelligent readers (the sort that buy Harvard Press books) could get the same points in a much briefer format, like a book chapter or a 10-page article. For example, people tend not to save enough for retirement because the future seems a long time away and they think they’ll catch up and it will work out. Well, yes. Next?

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  3. NYC said,

    Wrote on April 1, 2012 @ 7:20 pm

    17 of 17 people found the following review helpful
    4.0 out of 5 stars
    A good Overview of the Subject, May 21, 2001
    NYC (New York, NY USA) –

    Mr. Sherfin has written an entertaining, yet scholarly overview of the subject. It is pitched at the practitioner rather than the layman, so anyone wanting detailed financial planning advice or quick fire trading ideas is going to be disappointed. What you do get however is a fascinating insight into the reasons that long-term stock market anomalies continue to exist, and the forms that they take. This should finally bury the idea that markets are efficient.

    A couple of beefs though; firstly, as Sherfin points out several times “investors learn slowly” in yet most of the time series he quotes seem to be 3 to 10 years – statistically pretty insignificant in making generalizations about market behavior. Secondly, while he is rightly cynical about he money management industry (and does a good job at exposing some of its less creditable tricks), he at once dismisses active money management – “a combination of private interests and behavioral phenomena provide the basis for the existence of this active segment” – and then goes on to document the success of Fuller & Thaler Asset Management in producing considerable excess return. So which is it Mr.Sherfin?

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