- Series: Financial Management Association Survey and Synthesis
- Hardcover: 408 pages
- Publisher: Oxford University Press; 2nd edition (September 26, 2002)
- Language: English
- ISBN-10: 0195161211
- ISBN-13: 978-0195161212
- Product Dimensions: 9.5 x 1.5 x 6.4 inches
- Shipping Weight: 1.7 pounds
- Average Customer Review: 25 customer reviews
- Amazon Best Sellers Rank: #651,054 in Books (See Top 100 in Books)
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Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing 2nd Edition
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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 --This text refers to the Paperback edition.
From Library Journal
Behavioral finance is defined by Shefrin (finance, Santa Clara Univ.) as "a rapidly growing area that deals with the influence of psychology on the behavior of financial practitioners." This comprehensive study is aimed primarily at practitionersAportfolio managers, analysts, and financial advisersAwho, according to Shefrin, "need to know that because of human nature, they make particular types of mistakes." Shefrin provides a historical background of finance theory, studies of behavioral analysis, and a review of major contributions to the literature. The book is divided into six parts: behavioral finance, the stock market, individual investors, money managers, corporate executives, and options, futures, and foreign exchange. In addition to numerous case studies, Shefrin utilizes statistical charts and tables to illustrate his central theories and concepts. Important and thought-provoking, this study is recommended for academic faculty and students as well as finance practitioners.ALucy T. Heckman, St. John's Univ. Lib., NY
Copyright 1999 Reed Business Information, Inc. --This text refers to the Paperback edition.
Top customer reviews
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Heuristic-driven Bias is one of them. It includes
Availability Bias, Hindsight Bias, Familiarity Bias,
Rule of 5, 1/n-rule (naive diversification), Over-confidence
Aversion to Loss and Aversion to Ambiguity; representative-
ness, Consevatism due to Anchoring-and-(lack of) adjustment,
Illusion to Validity are also discussed in this book.
I do not agree with the Gamblers' Fallacy in the stock
market. The stock market was compared to the tossing of
a coin. They are different. As the market rises, the risks
of a correction or a bear definitely increases whereas the
probability of tossing a coin to land a head of tail is
constant all the time.
Hindsight Bias was not well defined in this book. This book
said there are more male traders than women (75% to 25%).
Surprisingly, women make better traders, albeit only slightly.
By the next edition, I look forward to more 'meat' in the book.
Practical application ideas seem insufficient here. It is
a book more for you to understand human behaviour in the
stock market. A worthwhile read.
For example, in chapter 6 Prof. Shefrin attempts to discredit contrarian sentiment indicators. For all I know they may be worthy of discredit. Unfortunately for his argument, the data he chooses to display, Figures 6-1 and 6-3, appear to support the value of these indicators.
He declares the practice of investing in companies one knows to be "familiarity bias". While this is apt for employees with all funds in the company stock, he also applies it to Peter Lynch. According to Shefrin, Lynch beat the market 11 out of 13 years, and beat his nearest competitor by 6%(!) per year. Shefrin grudgingly admits there may have been some skill involved, but goes on to inform us that _investors_ "attribute too much of that success to skill rather than luck". Uh-huh.
In his chapter on public offerings, Prof. Shefrin declares that existing shareholders are being ripped off, because dramatic gains at the start of trading demonstrate the IPO could have sold at a higher price. Apparently Prof. Shefrin is unaware that underwriters enter into an obligation to support the aftermarket, and would be unlikely proceed without a good chance of an aftermarket pop, nor would subscribers purchase.
The chapter on closed end fund discounts is interesting. Unfortunately Prof. Shefrin fails to include the net present value of future management fees in his discussion.
Perhaps there will be a much revised and improved second edition.
Shefrin's main advice for investors is absolutely correct, and would improve the asset positions of many poor souls with idiotic notions of stock dynamics. His advice is that if you are not a gifted and dedicated stock expert, you should invest in a low-maintenance cost array of mutual funds, and above all, do not churn your stocks. It doesn't help to be smart, lucky, a stud with the girls, or blessed by God. Moreover, if you think you have one of the "gifted analysts" for a broker, you are to be counted as among the suckers who are never given an even break.
Shefrin has another thesis which he presents with great verve, but which is on very shakey grounds. This is that "gifted stock analysts" can on average, significantly out-perform the market. He believes this MUST be the case if a significant fraction of investors are behaving irrationality. However, there is another possibility, which is that stock brokers as a group gain from the excessive churning that irrational investors permit or ask them to do, but that it is impossible to "beat the market" except by pure luck or by personally studying firm fundamentals and future prospects.
Shefrin's data in favor of the "gifted analyst" is episodic and anecdotal, and there is plenty of data on the other side. For instance, in Malkiel's classic "Random Walk Down Wall Street", he relates the evidence that chimps throwing darts do as well as major brokerage houses. Sheffrin presents contrary evidence for a more recent period in which "gifted experts" outperform the random darts. New evidence, collected by Money magazine, shows that a group of experts did far worse than the darts in 2003. All of this evidence is spotty and anecdotal. The plural of anecdote is not data.
I am not convinced by this book that the efficient markets hypothesis, applied to final returns to investors (after payments to stock brokers and other transactions costs), is not correct. I think the author makes a mistake taking so strong a position when the evidence is so weak on this account. I am certainly not convinced that Malkiel's analysis is in any way overturned by new evidence.
However, if Shefrin convinces a few investors to act more sanely, he will have fulfilled an important social function.
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