Hersh Shefrin
- Published in print:
- 2002
- Published Online:
- November 2003
- ISBN:
- 9780195161212
- eISBN:
- 9780199832996
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0195161211.003.0002
- Subject:
- Economics and Finance, Financial Economics
Statistics and probability are essential concepts when it comes to risk. Yet, most people have poor intuition about statistics and probabilities. Instead of behaving like professional statisticians, ...
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Statistics and probability are essential concepts when it comes to risk. Yet, most people have poor intuition about statistics and probabilities. Instead of behaving like professional statisticians, they rely on flawed intuition, based on rules of thumb called heuristics. By using heuristics people render themselves vulnerable to errors and biases. That is why the first theme of behavioral finance is called heuristic‐driven bias. The chapter describes these biases using behavioral concepts such as availability, representativeness, anchoring‐and‐adjustment, overconfidence, and aversion to ambiguity. Examples are provided to illustrate how these concepts affect the manner in which investors form predictions.Less
Statistics and probability are essential concepts when it comes to risk. Yet, most people have poor intuition about statistics and probabilities. Instead of behaving like professional statisticians, they rely on flawed intuition, based on rules of thumb called heuristics. By using heuristics people render themselves vulnerable to errors and biases. That is why the first theme of behavioral finance is called heuristic‐driven bias. The chapter describes these biases using behavioral concepts such as availability, representativeness, anchoring‐and‐adjustment, overconfidence, and aversion to ambiguity. Examples are provided to illustrate how these concepts affect the manner in which investors form predictions.
Hersh Shefrin
- Published in print:
- 2002
- Published Online:
- November 2003
- ISBN:
- 9780195161212
- eISBN:
- 9780199832996
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0195161211.003.0001
- Subject:
- Economics and Finance, Financial Economics
Behavioral finance consists of three themes: (1) heuristic‐driven bias; (2) frame dependence; and (3) inefficient markets. These themes are ubiquitous and germane, touching every corner of the ...
More
Behavioral finance consists of three themes: (1) heuristic‐driven bias; (2) frame dependence; and (3) inefficient markets. These themes are ubiquitous and germane, touching every corner of the financial landscape: portfolio selection, corporate finance, asset pricing, and options. Notably all the preceding areas have been recognized through the awarding of Nobel prizes in Economics. Indeed, behavioral finance was explicitly recognized with the 2002 award to Daniel Kahneman, one of the psychologists upon whose work behavioral finance is built. A key lesson for financial practitioners is to appreciate that successful investing requires taking the psychological propensities of others into account. Historically, behavioral psychologists first laid the groundwork for behavioral finance by developing the underlying psychological framework. In the 1980s a few financial economists began to apply this framework to finance. Debates with proponents of the traditional approach soon followed.Less
Behavioral finance consists of three themes: (1) heuristic‐driven bias; (2) frame dependence; and (3) inefficient markets. These themes are ubiquitous and germane, touching every corner of the financial landscape: portfolio selection, corporate finance, asset pricing, and options. Notably all the preceding areas have been recognized through the awarding of Nobel prizes in Economics. Indeed, behavioral finance was explicitly recognized with the 2002 award to Daniel Kahneman, one of the psychologists upon whose work behavioral finance is built. A key lesson for financial practitioners is to appreciate that successful investing requires taking the psychological propensities of others into account. Historically, behavioral psychologists first laid the groundwork for behavioral finance by developing the underlying psychological framework. In the 1980s a few financial economists began to apply this framework to finance. Debates with proponents of the traditional approach soon followed.
Hersh Shefrin
- Published in print:
- 2002
- Published Online:
- November 2003
- ISBN:
- 9780195161212
- eISBN:
- 9780199832996
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0195161211.003.0012
- Subject:
- Economics and Finance, Financial Economics
Misframing and heuristic‐driven bias combine to confuse investors about the relative contributions of skill and luck in fund performance. Investors invariably attribute excessive weight to skill, and ...
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Misframing and heuristic‐driven bias combine to confuse investors about the relative contributions of skill and luck in fund performance. Investors invariably attribute excessive weight to skill, and consequently they tend to overweight the importance of an individual fund's track record. Moreover, open‐end mutual funds companies tend to play to investors' weaknesses by inducing opaque frames.Less
Misframing and heuristic‐driven bias combine to confuse investors about the relative contributions of skill and luck in fund performance. Investors invariably attribute excessive weight to skill, and consequently they tend to overweight the importance of an individual fund's track record. Moreover, open‐end mutual funds companies tend to play to investors' weaknesses by inducing opaque frames.
